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Index to Financial Statements

As filed with the SEC on September 20, 2007

Registration No. 333-[              ]

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM SB-2

REGISTRATION STATEMENT

UNDER THE

SECURITIES ACT OF 1933

 


PIEDMONT COMMUNITY BANK GROUP, INC.

(Name of Small Business Issuer in Its Charter)

6021

(Primary Standard Industrial Classification Code Number)

 

Georgia   110 Bill Conn Parkway
Gray, Georgia 31032
(478) 986-5900
  20-8264706
(State of Jurisdiction
of Incorporation or
Organization)
  (Address, and Telephone Number
of Principal Executive Offices
and Principal Place of Business)
  (I.R.S. Employer
Identification
Number)

 


R. Drew Hulsey

Chief Executive Officer

110 Bill Conn Parkway

Gray, Georgia 31032

(478) 986-5900

(Name, Address, and Telephone Number of Agent for Service)

 


Copies of all communications, including copies of all communications sent to agent for service, should be sent to:

 

Michael P. Marshall, Jr., Esq.

Miller & Martin PLLC

1170 Peachtree Street, N.E., Suite 800

Atlanta, Georgia 30309

(404) 962-6442

 

J. Brennan Ryan, Esq.

Nelson Mullins Riley & Scarborough LLP

999 Peachtree Street, N.E., Suite 1400

Atlanta, Georgia 30309

(404) 817-6000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨              .

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨              .

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨              .

If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   ¨              .

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class Of
Securities To Be Registered
 

Number of Shares

To Be
Registered

 

Proposed
Maximum

Offering Price

Per Share

 

Proposed
Maximum

Aggregate
Offering Price

 

Amount of

Registration Fee

Common Stock

  [_____]   $[___]   $6,000,000   $184.20
 
 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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Index to Financial Statements

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PIEDMONT COMMUNITY BANK GROUP, INC.

Prospectus

Up To [              ] Shares of

Common Stock

(Minimum Purchase: 250 shares)

Piedmont Community Bank Group, Inc. is selling up to [              ] shares of its common stock for $[              ] per share. The minimum purchase for any investor is 250 shares and the maximum purchase for any investor is [              ] shares, unless we, in our sole discretion, accept subscriptions for a lesser or greater amount. This offering will terminate 120 days following the date of this prospectus (i.e., [              ], 2007) or when all of the shares of common stock are sold, whichever occurs first. At our discretion, we may extend the offering to a subsequent date that we determine at the time of the extension, but in no event beyond [              ], 2007.

The shares will be sold by our directors and officers and by our sales agent, SAMCO Capital Markets, Inc. SAMCO has also agreed to serve as the qualifying broker-dealer in those states in which we elect to sell shares that require sales to be made through a registered broker-dealer. SAMCO will act on a “best efforts” basis and will not have any obligation or commitment to sell any specific dollar amount or number of shares or to acquire any shares for its own account or with a view to their distribution.

There is no minimum number of shares we must sell in this offering. The proceeds from this offering will be immediately available to us regardless of the number of shares we sell. There is no established market for our common stock and we do not expect an established market to develop following this offering.

 

     Per Share    

Maximum Total

[_____] shares

Public Offering Price

   $ [___ ]   $ 6,000,000

Sales Agency Fee (1)

   $ [___ ]   $ 360,000

Proceeds to Piedmont Community Bank Group, Inc.(2)

   $ [___ ]   $ 5,640,000

 

(1) The sales agency fee will be 4% of the gross offering proceeds with respect to sales to investors who are not introduced to us by SAMCO and 6% of the gross offering proceeds with respect to sales to investors who are introduced to us by SAMCO. The total sales agency fee in this table is calculated based on a 6% fee on the [              ] shares that we are offering.

 

(2) These amounts are net of the sales agency fee but before other offering expenses, which are not expected to exceed $200,000.

 


Investing in our common stock involves a high degree of risk which is described in the “ Risk Factors ” section beginning on page 5 of this prospectus.

 


These securities are not deposits, accounts or other obligations of a bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is [              ], 2007


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Index to Financial Statements

TABLE OF CONTENTS

 

     Page

Summary

   1

Piedmont Community Bank Group, Inc.

   1

Market and Competition

   1

Growth Strategy

   1

Management

   2

Lending Policy

   2

Deposits

   2

The Offering

   2

Minimum Purchase Amount

   3

Selected Consolidated Financial Information

   3

Risks

   4

Risk Factors

   5

Cautionary Statement about Forward-Looking Statements

   9

The Offering

   10

Maximum Offering/Minimum and Maximum Investment

   10

Purchases by Directors and Officers

   10

Subscription

   10

Company Discretion

   10

Offering Period

   10

Plan of Distribution

   10

How to Subscribe

   11

Use of Proceeds

   11

Capitalization

   12

Market for our Common Equity and Related Shareholder Matters

   12

Market Information

   12

Equity Compensation Plan Information

   13

Dividend Policy

   14

Dilution

   14

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15

Critical Accounting Policies

   16

Overview

   16

Results of Operations for the Six Months Ended June 30, 2007 and 2006

   16

Financial Condition at December 31, 2006 and 2005

   20

Results of Operations For The Years Ended December 31, 2006 and 2005

   22

Asset/Liability Management

   24

Selected Financial Information and Statistical Data

   25

Distribution of Assets, Liabilities, and Shareholders’ Equity: Interest Rates and Interest Differentials

   26

Investment Portfolio

   28

Loan Portfolio

   29

Summary of Loan Loss Experience

   31

Deposits

   32

Return on Assets and Stockholders’ Equity

   32

Business

   33

Piedmont Community Bank Group, Inc.

   33

Piedmont Community Bank

   33

Market Area

   33

Growth Strategy

   34

Management

   34

Industry and Competition

   34

Internet Website

   35

Types of Loans

   35

Unsecured Loans

   36

Loan Participations

   37

Management’s Policy for Determining the Loan Loss Allowance

   37

Management’s Policy for Investing in Securities

   38

Deposit Services

   38

Other Banking Services

   39

Marketing and Advertising

   39

 

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Properties

   39

Employees

   40

Legal Proceedings

   40

Supervision and Regulation

   40

Piedmont Community Bank Group, Inc.

   40

Piedmont Community Bank

   42

Capital Adequacy

   45

Payment of Dividends

   45

Restrictions on Transactions with Affiliates

   46

Privacy

   46

Consumer Credit Reporting

   46

Anti-Terrorism and Money Laundering Legislation

   47

Proposed Legislation and Regulatory Action

   47

Directors and Executive Officers

   47

Classification of Board of Directors

   50

Executive Compensation

   50

Summary Compensation Table

   50

Outstanding Equity Awards at December 31, 2006

   51

Employment Agreement with R. Drew Hulsey, Jr.

   51

Employment Agreement with Mickey C. Parker

   52

Employment Agreement with M. Cole Davis

   52

Stock Option Plan

   53

Compensation of Directors

   54

Security Ownership of Certain Beneficial Owners and Management

   54

Security Ownership of Certain Beneficial Owners

   54

Security Ownership of Management

   55

Related Party Transactions

   57

Description of Capital Stock

   57

General

   57

Shares Held by Affiliates

   57

Certain Provisions of our Articles of Incorporation and Bylaws

   57

Staggered Terms for Board of Directors

   57

Action by Written Consent

   58

Limitation of Liability

   58

Indemnification

   58

Legal Matters

   59

Experts

   59

Where You Can Find Additional Information

   59

Index to Consolidated Financial Statements

   F-1

 

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Summary

The summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements, before making an investment decision.

Piedmont Community Bank Group, Inc.

Piedmont Community Bank Group, Inc. is a holding company for Piedmont Community Bank, a Georgia state-chartered bank. Piedmont Community Bank is a community-oriented, full service commercial bank with four locations. We seek to be the premier community bank servicing the greater middle Georgia region.

Piedmont Community Bank received its Georgia banking charter in 2002 and opened for business on July 22, 2002. Piedmont Community Bank Group, Inc. was incorporated in 2006 as a Georgia corporation to serve as the holding company for 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 between Piedmont Community Bank and PCB Interim Corporation, a wholly-owned subsidiary of Piedmont Community Bank Group, Inc. that was created to facilitate the reorganization of Piedmont Community Bank into a holding company structure. Piedmont Community Bank Group, Inc. is a bank holding company within the meaning of the Bank Holding Company Act of 1956 and the Georgia Bank Holding Company Act. Piedmont Community Bank Group, Inc. owns 100% of the outstanding capital stock of Piedmont Community Bank.

Our executive office is located at 110 Bill Conn Parkway, Gray, Georgia 31032. Our telephone number is (478) 986-5900. The main office of our bank subsidiary is located at the same location. 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 branches in Houston and Monroe Counties during 2008. The proposed Houston County location is 401 S. Houston Lake Rd., Warner Robbins, Georgia 31088. The proposed Monroe County location is at the corner of N. Harris and E. Johnson St. in Forsyth, Georgia 31029. Our bank’s website address is www.piedmontcommunitybank.com . Information on the website does not constitute part of this prospectus. You should rely only on information contained in this prospectus in deciding whether to invest in our common stock.

Market and Competition

Our service area covers various counties located in the middle and eastern part of Georgia including Baldwin, Bibb, Greene, Houston, Jones, Monroe, and Putnam Counties. We encounter vigorous competition from other commercial banks, savings and loan associations and other financial institutions and intermediaries in our service area. We compete with other banks in our primary service area in obtaining new deposits and accounts, making loans, obtaining branch banking locations and providing other banking services. Many of the interstate financial organizations that compete in our market engage in regional, national or international operations and have substantially greater financial resources than we do. We expect that competition will remain intense in the future. However, we believe that our personalized service enables us to compete favorably with larger financial institutions in our target market of small- to medium-sized businesses and individuals.

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, pending regulatory approval. We have also identified the need for a downtown Macon presence and the possibility of another branch office within middle Georgia. 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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Index to Financial Statements

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:

 

   

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.

 

   

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 and joined us as President in 2002. He graduated from Mercer University in Macon, Georgia with degrees in Political Science and Business Administration.

 

   

Julie Simmons, our CFO, grew up in Milledgeville, Georgia and 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.

 

   

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.

Lending Policy

Our lending business consists principally of making loans to small- and medium-sized businesses and to their owners, officers and employees; loans to independent single-family residential contractors; and loans to individual consumers. As of June 30, 2007, our loan portfolio consisted of 54.3% commercial real estate loans, 25.1% construction real estate loans, 9.8% real estate mortgage loans, 9.3% commercial loans and 1.5% consumer installment and other loans.

Deposits

Our primary sources of local deposits are residents of, and businesses located in Baldwin, Bibb, Greene, Houston, Jones, Monroe, and Putnam Counties. As of June 30, 2007, our deposit mix consisted of 57.9% time deposits, 37.5% interest-bearing demand and savings, and 4.6% non interest-bearing demand deposits.

The Offering

 

Common stock offered by us

   Up to [_______] shares.

Common stock outstanding after this offering*

   Up to [__________] shares (based on the number of shares outstanding as of the date of this prospectus).

Use of proceeds

   We intend to use the net proceeds of this offering for general corporate purposes, including working capital to expand our business. See “Use of Proceeds” (page [__]). Because there is no minimum number of shares that must be sold in this offering, all funds collected will be immediately available to us.

* The number of shares that will be outstanding after the offering is based on the actual number of shares outstanding as of the date of this prospectus and assumes that we will sell [              ] shares in this offering. It excludes outstanding options to purchase 380,705 shares of common stock at a weighted-average exercise price of $11.68 per share.

 

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Index to Financial Statements

Minimum Purchase Amount

Any investor must purchase at least 250 shares of common stock to participate in this offering. However, we may, in our sole discretion, accept a subscription for a lesser number of shares.

Selected Consolidated Financial Information

The following summary presents selected financial information as of and for the six months ended June 30, 2007 and 2006 and as of and for the years ended December 31, 2006 and 2005. We have derived the financial information from our financial statements and the notes to those financial statements. We reorganized into a holding company structure on February 7, 2007. All financial information prior to our reorganization represents the financial position and results of operations of our bank. The summary selected financial data should be read in conjunction with our financial statements and the related notes.

 

       AS OF AND FOR THE PERIOD ENDED  
     JUNE 30,     DECEMBER 31,  
     2007     2006     2006     2005  

STATEMENT OF OPERATIONS:

        

Net interest income

   $ 2,609,894     $ 1,879,353     $ 4,065,304     $ 2,721,508  

Provision for loan losses

     318,000       175,272       356,092       370,600  

Non-interest income

     168,789       244,149       404,699       508,237  

Non-interest expense

     1,933,956       1,308,978       2,967,877       2,023,471  

Income before taxes and minority interest

     526,727       639,252       1,146,034       835,674  

Income tax expense (benefit)

     235,531       211,869       410,581       (232,869 )

Income before minority interest

     291,196       427,383       735,453       1,068,543  

Minority interest in net income of subsidiary

     —         (6,228 )     (3,894 )     (22,935 )

Net income

     291,196       421,155       731,559       1,045,608  

COMMON SHARE SUMMARY:

        

Basic earnings per share

   $ 0.18     $ 0.26     $ 0.45     $ 0.83  

Diluted earning per share

   $ 0.17     $ 0.26     $ 0.44     $ 0.83  

Book value per share

   $ 10.13     $ 9.57     $ 9.90     $ 9.27  

Weighted average shares - basic

     1,630,753       1,630,972       1,630,866       1,266,475  

Weighted average shares - diluted

     1,665,700       1,645,584       1,660,535       1,266,475  

BALANCE SHEET SUMMARY:

        

Total assets

   $ 177,976,683     $ 110,877,239     $ 141,044,039     $ 92,875,457  

Loans, net of allowance for loan losses

     147,820,188       94,840,887       117,692,476       79,286,742  

Securities

     11,503,698       7,179,694       7,574,881       6,028,440  

Non interest-bearing deposits

     7,176,474       5,063,803       5,187,150       3,836,726  

Total deposits

     145,213,704       85,398,034       112,084,842       71,852,973  

Shareholders’ equity

     16,518,863       15,600,317       16,150,924       15,159,030  

CAPITAL RATIOS:

        

Total risk-based capital ratio

     10.9 %     15.5 %     12.8 %     18.4 %

Tier 1 risk-based capital ratio

     10.0 %     14.6 %     11.9 %     17.4 %

Tier 1 leverage ratio

     9.4 %     14.6 %     12.8 %     17.2 %

Shareholders’ equity to total assets

     9.3 %     14.1 %     11.5 %     16.3 %

 

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The following summary presents selected asset quality data and selected financial ratios as of, and for the six months and years ended, June 30, 2007 and 2006 and December 31, 2006 and 2005. The summary selected asset quality data and selected financial ratios should be read in conjunction with our financial statements and the related notes.

AS OF AND FOR THE PERIOD ENDED

     JUNE 30,     DECEMBER 31,  
     2007     2006     2006     2005  
     (DOLLARS IN THOUSANDS)  

SELECTED ASSET QUALITY DATA:

        

Loans past due 90 days or more and still accruing interest

   —       —       —       —    

Non-accrual loans

   —       2     —       —    

Total non-performing loans

   —       —       —       —    

Other real estate owned and other foreclosed assets

   —       —       —       —    

SELECTED FINANCIAL RATIOS:

        

Return on average assets (1)

   0.35 %   0.83 %   0.65 %   1.38 %

Return on average shareholders’ equity(1)

   3.58 %   5.50 %   4.66 %   10.07 %

Efficiency ratio

   69.60 %   61.82 %   66.45 %   63.10 %

Net interest margin

   3.49 %   3.88 %   3.83 %   3.75 %

Allowance for loan losses as a percentage of:

        

total loans

   1.04 %   1.10 %   1.04 %   1.10 %

total non-performing loans

   —       —       —       —    

Non-performing loans to total loans

   —       —       —       —    

Non-performing assets to total assets

   —       —       —       —    

Net charge-offs to average loans

   —       —       —       0.06 %

 

(1) Six month periods have been annualized.

Risks

An investment in our common stock involves a significant degree of risk due to factors such as:

 

   

our limited operating history;

 

   

our establishment of the offering price of $[              ] per share;

 

   

our common stock not being actively traded; and

 

   

our never declaring or paying cash dividends on our common stock and our lack of assurance that we will be able to declare and pay cash dividends in the foreseeable future.

Prior to making an investment decision, you should read carefully the “Risk Factors” section that follows for a discussion of specific risks related to an investment in our common stock.

 

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Index to Financial Statements

Risk Factors

An investment in our common stock involves a significant degree of risk. In determining whether to make an investment, you should consider carefully all of the information set forth in this prospectus and, in particular, the following “risk factors.” Our business, financial condition and results of operations could be harmed by any of the following risks, or other risks which have not been identified or which we believe are immaterial or unlikely.

If we do not maintain profitability, you may lose all or part of your investment.

2004 was the first year in which we earned a profit. Through December 31, 2006 we had incurred a cumulative profit of approximately $400,000. New banks generally incur substantial start-up expenses and are rarely profitable in the early stages of their existence. We are no exception. Although we started to earn profits in 2004, we may not be able to continue this trend. Any failure on our part to maintain profitability on a sustained basis would have a material and adverse effect on the value of your investment.

The markets for our services are highly competitive and we face substantial competition.

The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms primarily soliciting business from residents of and businesses located in Baldwin, Bibb, Greene, Houston, Jones, Monroe, and Putnam Counties in Georgia. Many of these competing institutions have greater resources than we have. Specifically, many of our competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence or more accessible branch office locations, the ability to offer additional services, more favorable pricing alternatives and lower origination and operating costs. We are also subject to lower lending limits than our larger competitors. Increased competitive pressures has been one effect of the Gramm-Leach-Bliley Act described below under “Business-Supervision and Regulation” (page [__]). This competition could result in a decrease in loans we originate and could negatively affect our results of operations.

In attracting deposits, we compete with insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Traditional banking institutions, as well as entities intending to transact business solely online, are increasingly using the Internet to attract deposits without geographic or physical limitations. In addition, many non-bank competitors are not subject to the same extensive regulations that govern us. These competitors may offer higher interest rates than we offer, which could result in either attracting fewer deposits or increasing our interest rates in order to attract deposits. Increased deposit competition could increase our cost of funds and could affect adversely our ability to generate the funds necessary for our lending operations, which would negatively affect our results of operations.

Changes in interest rates could have an adverse effect on our income.

Our profitability depends to a large extent upon our net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Changes in interest rates can also affect the value of our loans. An increase in interest rates could adversely affect our borrowers’ ability to pay the principal or interest on our loans. This may lead to an increase in our non-performing assets and could have a material and negative effect on our results of operations.

Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply and other factors beyond our control may also affect interest rates. Fluctuations in market interest rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

Because a significant portion of our loan portfolio is secured by real estate, any negative developments affecting real estate may harm our business.

A significant portion of our loan portfolio consists of commercial loans that are secured by various types of real estate as collateral, as well as real estate loans on commercial properties. Because these loans rely on real estate as collateral, either totally in the case of real estate loans or partially in the case of commercial loans secured by real estate, they are sensitive to economic conditions and interest rates. Real estate lending also presents additional credit related risks, including a borrower’s inability to pay and deterioration in the value of real estate held as collateral.

 

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Index to Financial Statements

We have a significant amount of construction loans. These loans are subject to additional risks unique to the building industry that could negatively affect our net income.

Historically, our loan portfolio has included a significant number of construction loans consisting of one-to-four family residential construction loans, commercial construction loans and land loans for residential and commercial development. As of June 30, 2007, approximately 65.6% of our total loan portfolio was in acquisition and development and construction loans. In addition to the risk of nonpayment by borrowers, construction lending poses additional risks in that:

 

   

land values may decline;

 

   

developers or builders may fail to complete or develop projects;

 

   

municipalities may place moratoriums on building;

 

   

developers may fail to sell the improved real estate;

 

   

there may be construction delays and cost overruns;

 

   

collateral may prove insufficient; or

 

   

permanent financing may not be obtained in a timely manner.

Any of these conditions could negatively affect our net income and our financial condition.

Additionally, these loans are generally paid off once the project is completed and the property is sold. For this reason, we must continue to generate new loans in this market at a growing rate in order to grow the size of our construction loan portfolio. If we are unable to do this, our construction loan portfolio could decrease in size and our net income could be negatively affected.

We occasionally purchase non-recourse loan participations from other banks based on information provided by the selling bank.

From time to time we will purchase loan participations from other banks in the ordinary course of business, usually without recourse to the selling bank. This may occur during times when we are experiencing excess liquidity in an effort to improve our profitability. As of June 30, 2007, we had purchased $20.5 million in loan participations. The total principal amount of these participations comprised approximately 13.7% of our loan portfolio. When we do purchase loan participations we apply the same underwriting standards as we would to loans that we directly originate and seek to purchase only loans that would satisfy these standards. In applying these standards, we rely to some extent on information provided to us by the selling bank. Therefore, to the extent this information does not accurately reflect the value of any collateral or the financial status of the borrower, we may experience a loss on these loans. In such cases we will take commercially reasonable steps to minimize our loss.

If our allowance for loan losses is not adequate to cover actual losses, our net income may decrease.

We are exposed to the risk that our customers will be unable to repay their loans in a timely fashion and that collateral securing the payment of loans may be insufficient to assure repayment. Borrowers’ inability to repay their loans could erode our bank’s earnings and capital. We maintain an allowance for loan losses to cover loan defaults. We base our allowance for loan losses on various assumptions and judgments regarding the collectability of loans, including our prior experience with loan losses, as well as an evaluation of the risks in our loan portfolio. We maintain this allowance at a level we consider adequate to absorb anticipated losses. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control. We do not currently anticipate any material increase in loan losses over the remainder of this year. The allowance, however, is maintained at a level management feels is adequate given known circumstances and could be inadequate in the event of prolonged local economic stress.

 

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Actual losses may exceed our estimates and we may have to increase the allowance for loan losses. This would cause us to increase our provision for loan losses, which would decrease our net income. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and our allowance for loan losses. Regulators, when reviewing our loan portfolio, may require us to increase our allowance for loan losses, which would negatively affect our net income. There may be unidentified risk present in our loan portfolio due to its rapid growth and relatively young age.

Since opening, our bank’s net loan portfolio has grown from zero to $147.8 million as of June 30, 2007. Continued rapid growth in the loan portfolio of this magnitude has the potential to strain our bank’s administrative capabilities, which may result in losses that are, at present, unidentified. Also, given the relatively young age of our loan portfolio, there may be unidentified risk since problems related to loan collections typically do not become evident until some degree of seasoning occurs.

If economic conditions in Baldwin, Bibb, Greene, Houston, Jones, Monroe, and Putnam Counties in Georgia deteriorate, our business may be negatively affected.

Our success depends on the general economic conditions of the markets we serve. Our operations are concentrated in Baldwin, Bibb, Greene, Houston, Jones, Monroe, and Putnam Counties in Georgia. If economic conditions in our market area are unfavorable or deteriorate, the number of borrowers that are unable to repay their loans on a timely basis could increase. This is particularly true for us because a number of our borrowers are small businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Consequently, their ability to repay loans may be especially adversely affected during economic down-turns. This could lead to higher rates of loss and loan payment delinquencies. Moreover, the value of the real estate or other collateral that may secure our loans could be adversely affected if economic conditions deteriorate.

We may not be able to successfully expand into new markets.

We have opened or are in process of opening several new branches. Specifically, since July 2006 we have opened two branches in Macon and a branch in the Lake Oconee area and, subject to regulatory approval, intend to open branches in Houston and Monroe Counties during 2008. We may not be able to successfully manage this growth with sufficient human resources, training and operational, financial and technological resources. Any such failure could have a material adverse effect on our operating results and financial condition.

Losing key personnel will negatively affect us.

Competition for personnel is stronger in the banking industry than in many other industries, and we may not be able to attract or retain the personnel we require to compete successfully. We currently depend heavily on the services of our chief executive officer, R. Drew Hulsey, Jr., and our president, Mickey C. Parker. Messrs. Hulsey and Parker are bound by employment agreements that have remaining terms of two years with automatic extensions of one day for each day that passes during the term unless either party gives notice otherwise. However, nothing in these contracts prevent either executive from leaving us. Losing either’s services or those of other members of senior management could affect us in a material and adverse way. Our success will also depend on attracting and retaining additional qualified management personnel.

You could have difficulty selling your shares since our stock is thinly traded and there is no assurance that our stock will continue to be traded on the OTC Bulletin Board.

In March 2006, Samco Capital Markets began as the market maker for our common stock, which is traded on the OTC Bulletin Board under the symbol “PCBN.” Prior to March 2006 there was no established public trading market for our common stock. Therefore, management was furnished with only limited information concerning trades of our stock. Our common stock is thinly traded and there is no assurance that our common stock will continue to be traded on the OTC Bulletin Board. Therefore, an active trading market is not likely to develop after the offering. For this reason, you may not be able to sell your shares at or above the price at which these shares are being offered to the public. You should carefully consider the limited liquidity of your investment before purchasing any shares of common stock in this offering.

The offering price was arbitrarily determined and therefore may not be indicative of resale value.

The offering price of $[              ] was arbitrarily determined by the board of directors based on a number of factors including current information regarding our financial conditions and prospects, and may not be indicative of resale value. Our common stock’s recent trading prices were considered. However, because our common stock has only been thinly traded, this was only one of several factors that the board of directors considered in establishing the offering price.

 

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This offering may negatively affect our return on equity.

Our 2007 return on equity will likely be inversely related to the size of this offering. This is primarily caused by the delay between the time that we receive capital through the sale of common stock and the time that our bank can successfully deploy the capital into earning assets such as loans.

We have not paid cash dividends on our common stock.

We have never declared or paid cash dividends on our common stock. Instead, we have applied all earnings to developing and expanding our business. We cannot assure that we will be able to pay cash dividends in the future. In addition, our ability to pay cash dividends is subject to regulatory limitations.

We have a limited operating history.

We opened for business in July 2002. Although we have grown very rapidly, we have a relatively short operating history and we may not continue to perform as well in the future as we have in the past.

We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.

Our directors and executive officers own a significant amount of our common stock.

As of July 20, 2007, our directors and executive officers beneficially owned 618,774 shares (approximately 34% of our outstanding common stock), including unexercised options. Our directors and executive officers intend to purchase approximately [              ] shares in this offering. Therefore, we expect that our directors and executive officers will beneficially own approximately [              ]% of our outstanding stock if we sell all of the shares we are offering. As a result of such ownership, the ability of other subscribers as a group to effectively exercise control over the election of directors and thereby exercise control over the supervision of the management or our business is limited.

We are subject to significant government regulations, including new legislation, that affect our operations and may result in higher operating costs or increased competition for us.

Our success will depend not only on competitive factors, but also on state and federal regulations affecting banks and bank holding companies generally. Regulations now affecting us may change at any time, and these changes may adversely affect our business. We are subject to extensive regulation by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Georgia Department of Banking and Finance. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than shareholders. These agencies examine bank holding companies and commercial banks, establish capital and other financial requirements and approve new branches, acquisitions or other changes of control. Our ability to establish new branches or make acquisitions is conditioned on receiving required regulatory approvals from the applicable regulators.

We are also subject to various federal securities laws, including corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002. In particular, we will be required to include a management report on internal controls as part of our annual report for the year ending December 31, 2007 pursuant to Section 404 of the Sarbanes-Oxley Act. We have already begun the process of evaluating our controls, including compliance with the SEC rules on internal controls, and expect to spend significant amounts of time and money on compliance with these rules. We may not be able to complete our assessment of our internal controls in a timely manner. Our failure to comply with these internal control rules may materially and adversely affect our ability to obtain the necessary certifications to our financial statements, and the values of our securities.

 

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We believe that changes in legislation and regulations will continue to have a significant impact on the banking industry. Although some of the legislative and regulatory changes may benefit us and our bank, others will increase our costs of doing business and could assist our competitors, some of which are not subject to similar regulation.

Our directors and employees may exercise their options to purchase common stock, which would dilute your proportionate ownership interest.

We have a stock option plan pursuant to which we may grant options to acquire an additional 383,502 shares of our common stock on a discretionary basis at an exercise price at least equal to the market price on the date of the grant. As of June 30, 2007, there have been 380,705 options granted under the plan to purchase our common stock at a weighted average exercise price of $11.68. The exercise of existing and future stock options will dilute your proportionate ownership interest. In addition, holders of the stock options will be able to profit, at the expense of other shareholders, from any rise in the market value of our common stock or any increase in our net worth. The existence of the stock options could also adversely affect the terms on which we are able to obtain additional capital.

We may not be able to raise additional capital on terms favorable to us.

In the future, should we need additional capital to support our business, expand our operations or maintain our minimum capital requirements, we may not be able to raise additional funds through the issuance of additional shares of common stock or other securities. Even if we are able to obtain capital through the issuance of additional shares of common stock or other securities, the sale of these additional shares could significantly dilute your ownership interest and may be made at prices lower than the price at which we are selling shares in this offering. In addition, the holders of options could exercise them at a time when we could otherwise obtain capital by offering additional securities on terms more favorable to us than those provided by the options.

Our board of directors is authorized to issue additional shares of common stock which, if issued, may dilute your ownership interest and reduce the market price of our common stock.

Our board of directors is authorized by our articles of incorporation to issue additional shares of common stock without the consent of our shareholders and without first offering these shares to our existing shareholders. If we issue additional shares of common stock after the close of the offering, your percentage interest would be diluted and the market price of the common stock might be reduced. Other than the issuance of common stock subject to options, we do not have any current plans to issue shares of common stock after the close of the offering.

Cautionary Statement about Forward-Looking Statements

This prospectus contains certain forward-looking statements, including or related to our future results, including certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this prospectus, the words “estimate,” “project,” “intend,” “believe” and “expect” and similar expressions identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this prospectus, you should not regard the inclusion of this information as our representation that we will achieve any strategy, objectives or other plans. The forward-looking statements contained in this prospectus speak only as of the date of this prospectus as stated on the front cover and we have no obligation to update or revise any of these forward-looking statements.

These and other statements, which are not historical facts, are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by forward-looking statements. These risks and uncertainties include, among other things, the risks and uncertainties described in “Risk Factors” (page 3).

 

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The Offering

Maximum Offering/Minimum and Maximum Investment

We will offer a maximum of [              ] shares of common stock in this offering. The minimum purchase for any investor is 250 shares of common stock, unless we, in our sole discretion, accept a subscription for a lesser number of shares. The maximum purchase for any investor is [              ] shares of common stock, unless we, in our sole discretion, accept a subscription for a greater number of shares.

Purchases by Directors and Officers

Our directors and officers intend to purchase approximately [              ] shares in this offering. Our directors and officers have represented to us that their purchases will be for investment intent.

Subscription

As indicated below under “How to Subscribe,” upon execution and delivery of a subscription agreement for shares of the common stock, subscribers will be required to deliver to us a check in an amount equal to $[              ] times the number of shares subscribed for. All subscriptions are subject to immediate acceptance in our discretion.

Company Discretion

We reserve the right, in our sole discretion, to accept or reject any subscription in whole or in part. In determining which subscriptions to accept, we intend to give preference to investors who have indicated an interest in becoming bank customers. We also reserve the right to accept subscriptions on a pro rata basis if we receive subscriptions for more than [              ] shares. We will notify all subscribers whether their subscriptions have been accepted. With respect to any subscriptions that we do not accept in whole or in part, the notification will be accompanied by the unaccepted portion of the subscription funds, without interest.

Offering Period

The offering period for the shares will terminate 120 days following the date of this prospectus (i.e., [              ], 2007) or when all of the shares of common stock are sold, whichever occurs first. At our discretion, we may extend the offering to a subsequent date that we determine at the time of the extension, but in no event beyond [              ], 2007. The date on which this offering ends is referred to in this prospectus as the “expiration date.” We also reserve the right to end the offering at any time if we determine that the total amount of subscriptions will provide adequate capitalization for us and our banking subsidiary.

Plan of Distribution

Offers and sales of the common stock will be made by our directors and officers and by SAMCO Capital Markets, Inc. as our placement agent. Our directors and officers will offer and sell the common stock on a “best efforts” basis without compensation. Our officers and directors intend to market the shares directly to our existing shareholders, customers of our subsidiary bank, and personal contacts. Our officers and directors plan to market these parties through personal and telephonic contact and by delivering offering information through the mail. We may also place a so-called “tombstone” advertisement in one or more local newspapers.

We believe these officers and directors will not be deemed to be brokers or dealers under the Securities Exchange Act of 1934 due to Rule 3a4-1 because they will not receive compensation for these efforts, their activities in connection with the offering will be in addition to their other duties, and they will satisfy the other requirements of Rule 3a4-1. We also believe that these officers and directors will not be deemed to be statutory underwriters under Section 2(a)(11) of the Securities Act of 1933.

We have also entered into an agreement with SAMCO to act as our sales agent for this offering. SAMCO is a registered broker-dealer and a member of the Financial Industry Regulatory Authority, Inc. SAMCO will act on a “best efforts” basis and will not have any obligation or commitment to sell any specific dollar amount or number of shares or to acquire any shares for its own account or with a view to their distribution. We have agreed to pay SAMCO a sales commission fee equal to 4% of the gross proceeds of all sales to investors who are not introduced to us by SAMCO, and 6% of the gross offering proceeds of all sales to investors who are introduced to us by SAMCO. We will pay no sales commission fees to SAMCO for sales made to our current directors and officers. We have also agreed to pay SAMCO consulting fees during the offering on a monthly basis which we estimate to be $100,000. Upon completion of the offering, these consulting fees will be offset against the fees paid at closing. In addition, we will reimburse SAMCO for reasonable expenses.

 

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SAMCO has also agreed to serve as the qualifying broker-dealer in those states in which we elect to sell shares that require all sales to be made through a registered broker-dealer. We have agreed to pay SAMCO $10,000 for the first state and $2,500 for each additional state.

SAMCO has not prepared any report or opinion constituting a recommendation to us or to any subscribers for our common stock. However, SAMCO did prepare a valuation of our common stock in August 2007 to assist in our determination of our offering price. We paid SAMCO $7,500 for the valuation.

We have agreed to indemnify SAMCO, and persons who control SAMCO, against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments that SAMCO may be required to make in respect of these liabilities.

How to Subscribe

Each prospective investor who desires to purchase at least 250 shares must:

 

  1. Complete, date and execute the subscription agreement that is attached as Exhibit “A” to this prospectus (a loose form is also provided for your convenience).

 

  2. Make a check payable to “Piedmont Community Bank Group, Inc.” in an amount equal to $[            ] multiplied by the number of shares subscribed for.

 

  3. Return the completed subscription agreement and check as follows:

By U.S. Mail to:

Piedmont Community Bank Group, Inc.

P.O. Box 1669

Gray, Georgia 31032

Attention: R. Drew Hulsey, Chief Executive Officer

By hand or overnight delivery to:

Piedmont Community Bank Group, Inc.

110 Bill Conn Parkway

Gray, Georgia 31032

Attention: R. Drew Hulsey, Chief Executive Officer

 

  4. Upon our receipt and acceptance of payment for the shares subscribed for, the subscription agreement will become final, binding and irrevocable.

Use of Proceeds

We will use the proceeds from the sale of shares of the common stock offered by this prospectus to pay the sales agent’s fee, which we estimate to be $360,000 (assuming the maximum number of shares are sold to investors introduced to us by SAMCO), and to pay other expenses of this offering, which are not expected to exceed $200,000. The net proceeds of this offering will be used for working capital to expand our business. Expansion covers the growth of our assets at our existing locations and the building of new branch offices to serve existing and new markets. We have opened two new branch offices in the second quarter of 2007, and subject to regulatory approval, we intend to open two new branches in Houston and Monroe Counties in the second half of 2008. The proposed Houston County location is 401 S. Houston Lake Rd., Warner Robbins, Georgia 31088. The proposed Monroe County location is at the corner of N. Harris and E. Johnson St. in Forsyth, Georgia 31029. We have purchased the land for each of these branches and we intend to commence construction in the first half of 2008. We may also explore the possibility of opening new offices in other areas in eastern and middle Georgia, although no further plans have been established at this time.

 

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Capitalization

The following table sets forth our capitalization as of June 30, 2007. The table also sets forth our pro forma capitalization as of the completion of the offering assuming that [              ] shares are sold (100% of the total offering), [              ] shares are sold (75% of the total offering), [              ] shares are sold (50% of the total offering), and [              ] shares are sold (25% of the total offering).

 

    

Actual as of

June 30,

2007

   

100%
As

Adjusted

   

75%

As

Adjusted

   

50%

As

Adjusted

   

25%

As

Adjusted

 

Total debt (1)

   $ 15,162,000     $ 15,162,000     $ 15,162,000     $ 15,162,000     $ 15,162,000  

Shareholders’ equity:

          

Common stock, no par value 10,000,000 shares authorized (1,630,734 shares issued and outstanding as of 6/30/07; [              ], [              ], [              ] and [              ] shares would be issued and outstanding assuming 100%, 75%, 50% and 25% of the offering is sold, respectfully) (2)

   $ 15,950,782     $ [_______ ]   $ [_______ ]   $ [_______ ]   $ [_______ ]

Retained earnings

   $ 695,832       ($[_______])       ($[_______])       ($[_______])       ($[_______])  

Accumulated other comprehensive loss

   $ (127,751 )     ($_______)       ($_______)       ($_______)       ($_______)  
                                  

Total shareholders’ equity

   $ 16,518,863       $[_______]       $[_______]       $[_______]       $[_______]  
                                        

 

(1) Consists of Federal Home Loan Bank advances and Federal funds purchased. All other liabilities, including deposit liabilities, have been excluded.

 

(2) Proceeds reduced by estimated sales agent fee of $360,000 if 100% of the shares are sold, $270,000 if 75% of the shares are sold, $180,000 if 50% of the shares are sold and $90,000 if 25% of the shares are sold. Proceeds are also reduced by estimated other offering expenses of $200,000.

Market for our Common Equity and Related Shareholder Matters

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 2005 and 2006, the first two quarters of 2007, and through July 20 for the third quarter of 2007, 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

 

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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 prospectus, have been adjusted to reflect a 1.2-for-one stock split paid on May 10, 2007.

 

     Number of shares
traded
   High selling
price
   Low selling price

2007

        

Third Quarter (through July 20, 2007)

   2,700    $ 15.00    $ 14.99

Second Quarter

   22,062    $ 15.50    $ 15.01

First Quarter

   30,126    $ 15.63    $ 15.13

2006

        

First Quarter

   —        —        —  

Second Quarter

   26,230    $ 13.33    $ 11.67

Third Quarter

   38,909    $ 13.75    $ 13.33

Fourth Quarter

   8,754    $ 15.83    $ 13.75

2005

        

First Quarter

   —        —        —  

Second Quarter

   7,800    $ 10.00    $ 10.00

Third Quarter

   30,180    $ 11.67    $ 10.42

Fourth Quarter

   9,690    $ 11.67    $ 10.42

At July 20, 2007, 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.

Equity Compensation Plan Information

The following table sets forth information relating to our outstanding options as of December 31, 2006. These options were originally granted by our bank subsidiary and assumed by us when the bank reorganized into a holding company structure in February 2007.

 

     Number of
common shares to
be issued upon the
exercise of
outstanding
options
   Weighted-average
exercise price of
outstanding
options
   Number of
common shares
remaining
available for future
issuance

Equity compensation plans approved by security holders

   380,705    $ 11.68    2,792

Equity compensation plans not approved by security holders

   —        —      —  

Total

   380,705    $ 11.68    2,792

 

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Dividend Policy

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.

Dilution

If you invest in our common stock, your interest will be diluted to the extent the public offering price per share of our common stock exceeds the pro forma net tangible book value per share of our common stock after this offering. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering.

Our net tangible book value as of June 30, 2007, was approximately $16.5 million, or $10.13 per share of common stock. After giving effect to our sale of the [              ] shares of common stock offered by this prospectus at a public offering price of $[              ] per share, and after deducting estimated sales agency fees and other estimated offering expenses, our adjusted net tangible book value as of June 30, 2007 would have been approximately $[              ] million, or $[              ] per share, and an immediate dilution to new investors of $[              ] per share. The following table illustrates the per share dilution to new investors both without and with the effect of our outstanding options on a pro forma basis as of June 30, 2007. The table presents the pro forma dilution assuming that [              ] shares are sold (100% of the total offering), [              ] shares are sold (75% of the total offering), [              ] shares are sold (50% of the total offering) and [              ] shares are sold (25% of the total offering).

 

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     100%     75%     50%     25%  

Public offering price per share

   $ [___ ]   $ [___ ]   $ [___ ]   $ [___ ]

Without effect of options *:

        

Net tangible book value per share before remaining offering

   $ 10.13     $ 10.13     $ 10.13     $ 10.13  

Increase per share attributable to remaining offering

   $ [___ ]   $ [___ ]   $ [___ ]   $ [___ ]

Net tangible book value per share after the offering

   $ [___ ]   $ [___ ]   $ [___ ]   $ [___ ]

Dilution per share to new investors in this offering

     ($[___])       ($[___])       ($[___])       ($[___])  

With the effect of options**:

        

Net tangible book value per share before remaining offering

   $ [___ ]   $ [___ ]   $ [___ ]   $ [___ ]

Increase per share attributable to remaining offering

   $ [___ ]   $ [___ ]   $ [___ ]   $ [___ ]

Net tangible book value per share after the offering

   $ [___ ]   $ [___ ]   $ [___ ]   $ [___ ]

Dilution per share to new investors in this offering

     ($[___])       ($[___])       ($[___])       ($[___])  

 

* Does not consider the effect of our outstanding options.

 

** Assumes that all of our outstanding options are exercised.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

The following is a discussion of our financial condition at June 30, 2007 and 2006 and at December 31, 2006 and 2005 and the results of operations for the periods 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 2006 and 2005 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.

 

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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.

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 the footnotes to the December 31, 2006 financial statements, which are part of this prospectus.

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 2006 results were highlighted by continued growth in our primary market areas of Jones, Baldwin, Bibb, Monroe, Putnam, Houston and Greene counties. From December 31, 2005 to December 31, 2006 our total assets grew 52%. Our growth in assets continued into the first half of 2007. At June 30, 2007 we had total assets of approximately $178 million and total loans of approximately $148 million (net of allowance for loan losses). As of June 30, 2007, we were cumulatively profitable with undivided profits of $695,832. We expect that loan and deposit growth will continue to be significant during 2007 with continued growth of the three new branches that we have opened since July 2006.

Results of Operations for the Six Months Ended June 30, 2007 and 2006

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results for the six month periods ended June 30, 2007 and 2006.

Financial condition

Our total assets grew by 26.2% during the first six months of 2007. Deposit growth of $33.1 million and additional Federal Home Loan Bank borrowings of $4.0 million were used to fund total loan growth of $30.4 million. Loan demand continues to be strong in our primary market areas of Jones, Baldwin, Bibb, Monroe, Houston, Greene, and Putnam counties. Our loan to deposit ratio has decreased from approximately 106% at December 31, 2006 to approximately 103% at June 30, 2007 as our deposit growth outpaced our loan growth during the first half of the year. Stockholders’ equity increased during the first six months of 2007 by approximately $368,000 due to net income of approximately $291,000 and recognition of stock-based employee compensation cost, which is credited to stockholders’ equity, of approximately $138,000. These increases were offset somewhat by increases in unrealized losses on investment securities of approximately $61,000.

 

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Liquidity

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 us on short notice, if needed. At June 30, 2007 and December 31, 2006 we had $2,062,000 and $1,977,500, respectively, in Federal Funds purchased.

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 ratios at June 30, 2007 were 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 June 30, 2007, we had unused available Federal Fund lines of $10,438,000 and unused Federal Home Loan Bank borrowing capacity of approximately $584,619. We are not aware of any events or trends likely to result in a material change in our liquidity.

As of June 30, 2007 we had an increased liquidity position as total cash and due from banks amounted to $5.8 million, representing 3.26% of total assets as compared to 1.18% as of December 31, 2006. Investment securities available-for-sale amounted to $9.0 million and interest-bearing deposits in banks amounted to $3.1 million, representing 5.0% and 1.8% 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 six-month period ended June 30, 2007, total deposits increased from $112.1 million at December 31, 2006 to $145.2 million at June 30, 2007. Management is committed to maintaining capital at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements. The table below illustrates our regulatory capital ratios at June 30, 2007.

 

     Bank     Regulatory
Minimum
Requirement
 

Leverage capital ratios

   9.44 %   4.00 %

Risk-based capital ratios:

    

Tier one capital

   10.00 %   4.00 %

Total capital

   10.93 %   8.00 %

Net interest income

Our profitability is determined by our ability to effectively manage interest income and expense, to minimize loan and security losses, to generate non-interest income, and to control operating expenses. Because interest rates are largely determined by market forces and economic conditions beyond our control, our ability to generate net interest income depends upon our ability to obtain an adequate net interest spread between the rate paid on interest-bearing liabilities and the rate earned on interest-earning assets. The increase in net interest income is due primarily to the increased volume of average loans outstanding. Our net interest margin was 3.49% for the six months ended June 30, 2007 compared to 3.88% for the same period in 2006, a decrease of 39 basis points. Our yield on interest-earning assets was 8.14% for the first six months of 2007 as compared to 7.62% for the first six months of 2006, an increase of 52 basis points. Our cost of funds, however, increased to 4.98% for the first six months of 2007 as compared to 4.22% for the same period in 2006. We continue to experience growth in loans and deposits while maintaining our competitive pricing.

Provision for loan losses

The provision for loan losses is based on management’s evaluation of the economic environment, the history of charged-off loans and recoveries, size and composition of the loan portfolio, non-performing and past due loans, and other aspects of the loan portfolio. Management reviews the allowance for loan loss on a quarterly basis and makes

 

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provisions as necessary. The allowance for loan losses increased $318,000 from $1,235,044 as of December 31, 2006 to $1,553,044 as of June 30, 2007. The increase is due to provisions recorded in the first six months of 2007 from the increase in loan volume. There were no charge-offs or recoveries in the first six months of 2007. Management believes our allowance for loan loss is adequate to meet any potential losses in the loan portfolio.

At June 30, 2007 and 2006, non-accrual, past due and restructured loans were as follows:

 

     June 30,
     2007    2006
     (Dollars in thousands)

Total non-accruing loans

     —      $ 2

Loans contractually past due ninety days or more as to interest or

principal payments and still accruing

     —        —  

Loans, the terms of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower

     —        —  

Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms

   $ 60    $ 11

Information regarding the allowance for loan losses data through June 30, 2007 and 2006 is set forth in the following table.

 

    

Six Months Ended

June 30,

 
     2007     2006  
     (Dollars in thousands)  

Average amount of loans outstanding

   $ 133,513     $ 88,913  
                

Balance of allowance for loan losses at beginning of period

     1,235       879  
                

Loans charged off

    

Commercial and financial

     —         —    

Real estate

     —         —    

Installment

     —         —    
                
     —         —    
                

Loans recovered

    

Commercial and financial

     —      

Real estate

     —      

Installment

     —         2  
                
     —         2  
                

Net (charge-offs) recoveries

     —         2  
                

Additions to allowance charged to operating expense

during period

     318       175  
                

Balance of allowance for loan losses at end of period

   $ 1,553     $ 1,056  
                

Ratio of net loan (charge-offs) recoveries during the period to average loans outstanding

     0.000 %     (0.002 )%
                

 

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Non-interest income

Non-interest income decreased by approximately $47,515 and $75,360 for the second quarter and the first six months of 2007, respectively, as compared to the same periods in 2006. Decreases in mortgage origination income accounted for the majority of the decreases and was due to a slowdown in the residential housing market during the first six months of 2007. The increase in other components of noninterest income is attributable to our overall growth in deposits and branch expansion.

Non-interest expense

Noninterest expenses increased by approximately $284,977 or 39.86% for the three months ended June 30, 2007 compared to the same period in 2006. The increase is due largely to an increase in salaries and employee benefits expense of $106,934 associated with the opening of the Bass Road, Forsyth Road and Lake Oconee locations and normal increases in salaries and benefits. Net equipment and occupancy expenses and other operating expenses increased $43,988 and $134,055, respectively, for the three month period due to opening new branches. Non-interest expenses increased by $624,978, or 47.75%, for the six months ended June 30, 2007 compared to the same period in 2006. The increase consists of increases in salaries and employee benefits expense of $279,191, net equipment and occupancy expenses of $81,092, and other operating expenses of $264,695. The salary and employee benefit increases were due to an increase in the number of full time equivalent employees from 25 at June 30, 2006 to 36 at June 30, 2007, in addition to normal increases in salaries and benefits. The increases in other operating expenses were primarily attributable to growth and expenses related to the opening of our new branches in the past year.

Income Taxes

We have recorded a provision for income taxes of $107,400 and $235,531 for the three and six months ended June 30, 2007, respectively. This represents 37.57% and 44.72% of income before provision for income taxes for the three and six months ended June 30, 2007, respectively. The comparable effective tax rates for the same periods in 2006 were 29.07% and 33.14%, respectively. The increase in the effective tax rate and provision for income taxes for the six months ended June 30, 2007 includes an adjustment of $32,945 related to the prior year.

Net income

Net income decreased by $129,959 for the six-month period ended June 30, 2007 compared to the six-month period ended June 30, 2006, a decrease of approximately 31%. The decrease in net income is primarily due to a drop in non-interest income, an increase in non-interest expenses, and an increase in the provision for income taxes, as discussed above.

 

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Financial Condition at December 31, 2006 and 2005

The following is a summary of our balance sheets as of the dates indicated:

 

     December 31,
     2006    2005
     (Dollars in Thousands)

Cash and due from banks

   $ 1,660    $ 898

Interest-bearing deposits in banks

     1,584      1,584

Federal funds sold

     3,762      557

Securities available for sale

     6,163      5,443

Securities held to maturity

     645      212

Restricted equity securities

     767      374

Loans, net

     117,692      79,287

Premises and equipment

     6,832      3,508

Other assets

     1,939      1,012
             
   $ 141,044    $ 92,875
             

Total deposits

   $ 112,085    $ 71,853

Other borrowings

     9,100      5,000

Other liabilities

     1,731      809

Federal funds purchased

     1,977      —  

Minority interest in subsidiary

     —        54

Stockholders’ equity

     16,151      15,159
             
   $ 141,044    $ 92,875
             

As of December 31, 2006, we had total assets of $141.0 million. Growth of deposits, other borrowings and federal funds purchased of $40.2 million, $4.1 million and $2.0 million, respectively, were primarily used to fund net loan growth of $38.4 million. The remaining funds were used to increase securities by $1.2 million and purchase premises and equipment totaling $3.3 million. Four 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 92% of our loan portfolio collateralized by real estate. Our real estate mortgages and construction portfolio consists of loans collateralized by one- to four-family residential properties (11%), construction loans to build one- to four-family residential properties (21%) and nonresidential properties consisting primarily of small business commercial properties (61%). 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

   80 %

Construction loans on one- to four-family residential properties

   80 %

Nonresidential property

   90 %

The remaining 7% 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. Currently, we believe that real estate values and employment trends in our market area are stable with no indications of a significant downturn in the general economy.

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 generally prohibiting loan relationships that exceed 25% of the bank’s statutory capital, as defined by state law. Our legal lending limit, as of December 31, 2006, was approximately $4.0 million.

 

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Liquidity and Capital Resources

The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals, and our other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth, the maturity structure of liabilities, and accessibility to market sources of funds.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price deposits to meet asset/liability objectives consistent with local market conditions.

Our liquidity and capital resources are monitored on a periodic basis by management and regulatory authorities. As determined under guidelines established by regulatory authorities and internal policy, our liquidity is considered satisfactory.

At December 31, 2006, our bank was considered well-capitalized based on regulatory minimum capital requirements. Our stockholders’ equity increased during 2006 by $992,000 due to net income of $732,000, stock based employee compensation cost of $278,000 (under accounting rules the amount of the expense for stock-based compensation is credited to stockholders’ equity), and a decrease in unrealized loss on securities of $26,000 offset by redemption of common stock of $44,000.

Banking regulations limit the amount of the dividends that may be paid without prior approval of the bank’s regulatory agency. As of December 31, 2006, dividends of approximately $379,000 could be paid by the bank without regulatory approval.

The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the actual capital ratios for us as of December 31, 2006 are as follows:

 

     Piedmont
Community Bank
    Regulatory
Requirements
(Well Capitalized)
 

Leverage capital ratios

   12.8 %   5.0 %

Risk-based capital ratios:

    

Tier 1 capital

   11.9 %   6.0 %

Total capital

   12.8 %   10.0 %

These ratios should increase as proceeds from this offering are raised and may decline as asset growth continues. Overall, we expect to exceed the regulatory minimum requirements.

We believe that our liquidity and capital resources are adequate and will meet our foreseeable short-term needs. If needed, we have the ability on a short-term basis to borrow and purchase federal funds from other financial institutions. At December 31, 2006, we had arrangements with three commercial banks for short-term advances of $7,650,000. We anticipate that we will have sufficient funds available to meet current loan commitments and to fund or refinance, on a timely basis, our other material commitments and liabilities.

Management is not aware of any known trends, events or uncertainties, other than those discussed above, that will have or that are reasonably likely to have a material effect on our liability, capital resources or operations. Management is also not aware of any current recommendations by the regulatory authorities that, if they were implemented, would have such an effect.

Off-Balance Sheet Arrangements

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates, the majority at variable rates, for a specific period of time. At December 31, 2006, we had issued commitments to extend credit of $30,596,000 through various types of lending arrangements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

 

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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, including interest, and the periods in which payments are due. The amounts and time periods are measured from December 31, 2006.

Payments due by period (in thousands)

 

     Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Other borrowings

   $ 9,100    $ —      $ —      $ —      $ 9,100

Operating lease obligations

     63      31      32      —        —  

Time deposits

     85,562      72,320      11,724      1,518      —  

Construction commitments

     379      379      —        —        —  
                                  

Total

   $ 95,104    $ 72,730    $ 11,756    $ 1,518    $ 9,100
                                  

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 our 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, 2006 and 2005

The following is a summary of our operations for the years indicated:

 

     Year Ended
December 31, 2006
    Year Ended
December 31, 2005
 
     (Dollars in Thousands)  

Interest and dividend income

   $ 8,385     $ 4,707  

Interest expense

     (4,320 )     (1,985 )
                

Net interest income

     4,065       2,722  

Provision for loan losses

     (356 )     (371 )

Other income

     405       508  

Other expenses

     (2,968 )     (2,023 )
                

Pretax income

     1,146       836  

Income tax (expense) benefit

     (410 )     233  

Minority interest

     (4 )     (23 )
                

Net income

   $ 732     $ 1,046  
                

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 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 totaled $90.6 million. At December 31, 2006, the rate

 

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earned on average interest-earning assets was 7.79% and the rate paid on average interest-bearing liabilities was 4.77%, which resulted in a net interest spread, the difference between the rate we earn on interest-earning assets and the rate we pay on interest-bearing liabilities, of 3.14%. The net interest margin, net interest income divided by average interest-earning assets, was 3.83%.

During 2005, average loans were $65.2 million, average securities were $5.1 million and average federal funds sold were $0.7 million. Average interest-bearing liabilities totaled $61.3 million. At December 31, 2005, the rate earned on average interest-earning assets was 6.48% and the rate paid on average interest-bearing liabilities was 3.24%, which resulted in a net interest spread, the difference between the rate we earn on interest-earning assets and the rate we pay on interest-bearing liabilities, of 3.24%. The net interest margin, which is net interest income divided by average interest-earning assets, was 3.83%.

The increase in our yield on interest earning assets and our net yield on interest earning assets is primarily the result of the increases in the yield on loans, which increased 148 basis points from 2005 to 2006. The increase in net yield on average interest-earning assets is the result of being asset sensitive in the current interest rate environment.

Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses

Our provision for loan losses was $356,000 and $371,000 in 2006 and 2005, respectively. The amounts provided were due primarily to the growth of the portfolio and to our assessment of the inherent risk in the portfolio. We had no net charge-offs in 2006 as compared to $40,000 for 2005. As of December 31, 2006 and 2005, we had no nonperforming loans or assets. Based upon our evaluation of the loan portfolio, we believe our allowance for loan losses to be adequate to absorb losses on existing loans that may become uncollectible. Our evaluation considers significant factors relative to the credit risk and loss exposure in the loan portfolio, including past due and classified loans, historical experience, underlying collateral values, concentrations and current economic conditions that may affect the borrower’s ability to repay. The allowance for loan losses is evaluated by segmenting the loan portfolio into risk grade categories. An estimated loss percentage is applied to each risk grade category based upon our experience specifically and the historical experience of the banking industry generally. Classified loans, including impaired loans, are analyzed individually in order to establish a specific allowance for loan losses. As of December 31, 2006, we had no specific loss allocations against specific loans in our evaluation of the allowance for loan losses. In addition, we also maintain an unallocated component in our allowance evaluation to cover uncertainties that could affect our estimate of probable losses. The allowance for loan losses as a percentage of total loans was 1.04% at December 31, 2006 as compared to 1.10% at December 31, 2005. The decrease in this percentage is primarily the result of having more of our own historical experience on which to base our evaluation of the adequacy of the allowance for loan losses combined with the significant growth of the loan portfolio.

Non-interest Income

Other income consists of service charges on deposit accounts, mortgage loan origination fees and other miscellaneous income. Other income decreased $103,000 to $405,000 in 2006 as compared to $508,000 in 2005. The decrease is primarily due to a decrease of $8,000 in service charges on deposit accounts from $92,000 in 2005 to $84,000 in 2006, which is the result of a decline in fees for non-sufficient funds, and from a decrease of $97,000 in mortgage loan origination fees from $378,000 in 2005 to $281,000 in 2006. This decrease was due to an overall decline in market conditions and a decrease in the number of applicants.

Non-interest Expense

Other expenses for 2006 and 2005 consist of salaries and employee benefits of $1,677,000 and $1,040,000, equipment and occupancy expenses of $362,000 and $225,000, and other operating expenses of $929,000 and $758,000, respectively. The increase in salaries and employee benefits of $637,000 over 2005 is primarily due to the addition of seven full-time employees plus $278,000 in compensation cost due to the implementation of new accounting standards regarding stock options. The increase in equipment and occupancy expenses of $137,000 over 2005 is due primarily to increased depreciation of $51,000, increased service contract expense of $40,000, increased rental costs of $29,000 and increased utilities expense of $15,000. The increase in other operating expenses of $171,000 over 2005 is due primarily to increased data processing expense of $41,000, increased city and county property taxes of $12,000, increased director committee expense of $51,000, increased mileage and other travel reimbursements of $31,000, increased advertising and other marketing expenses of $22,000 and increased stationery and supplies of $23,000. The increase in other operating expenses is directly related to our overall growth and the opening of our branch office in July 2006.

 

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Income Tax

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 details.

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 provisions in the consolidated statement of income.

We have recorded on our consolidated balance sheet net deferred tax assets of $442,000, which consists primarily of loan loss reserves. We believe there will be sufficient taxable income in the future to allow us to recover these deferred tax assets.

We recorded an income tax benefit of $233,000 for the year ended December 31, 2005 due to a reduction in the valuation allowance. The valuation allowance was eliminated as it was more likely than not that deferred tax items would be realized in the near term.

For the year ended December 31, 2006, we recorded a provision for income tax expense of $411,000, which represents 35.8% of our income before the provision for income taxes.

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, 2006, 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.

 

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     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

   $ 3,762    $ —       $ —      $ —       $ 3,762

Interest bearing deposits in banks

     —        —         1,584      —         1,584

Securities

     495      494       3,528      3,058       7,575

Loans

     71,963      24,081       20,642      2,306       118,992
                                    
     76,220      24,575       25,754      5,364       131,913
                                    

Interest-bearing liabilities:

            

Interest-bearing demand deposits and savings

     21,336      —         —        —         21,336

Time deposits

     15,924      55,864       13,774      —         85,562

Federal funds purchased

     1,978      —         —        —         1,978

Other borrowings

     —        —         —        9,100       9,100
                                    
     39,238      55,864       13,774      9,100       117,976
                                    

Interest rate sensitivity gap

   $ 36,982    $ (31,289 )   $ 11,980    $ (3,736 )   $ 13,937
                                    

Cumulative interest rate sensitivity gap

   $ 36,982    $ 5,693     $ 17,673    $ 13,937    
                                

Interest rate sensitivity gap ratio

     1.94      0.44       1.87      0.59    
                                

Cumulative interest rate sensitivity gap ratio

     1.94      1.06       1.16      1.12    
                                

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 stockholders’ 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.

 

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Table of Contents
Index to Financial Statements

Distribution of Assets, Liabilities, and Shareholders’ Equity: Interest Rates and Interest Differentials

Average Balance Sheet:

Condensed average balance sheets for the dates indicated are presented below in thousands:

 

     December 31,  
     2006     2005  

Assets

    

Cash and due from banks

   $ 1,086     $ 913  

Interest-bearing deposits in banks

     1,584       1,234  

Taxable securities

     6,508       5,164  

Securities valuation account

     (174 )     (84 )

Federal funds sold

     967       695  

Restricted equity securities

     612       358  

Loans (1)

     96,390       65,192  

Allowance for loan losses

     (1,042 )     (681 )

Other assets

     6,100       3,080  
                
   $ 112,031     $ 75,871  
                

Total interest-earning assets

   $ 106,061     $ 72,643  
                

Liabilities and Stockholders’ Equity

    

Deposits:

    

Noninterest-bearing demand

   $ 4,889     $ 3,841  

Interest-bearing demand and savings

     12,407       6,195  

Time

     69,472       50,466  
                
     86,768       60,502  

Other borrowings

     8,744       4,598  

Other liabilities

     804       383  
                
     96,316       65,483  

Stockholders’ equity

     15,715       10,388  
                
   $ 112,031     $ 75,871  
                

Total interest-bearing liabilities

   $ 90,623     $ 61,259  
                

 

(1) There were no nonaccrual loans included in average loans for 2006 and 2005.

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.

 

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Table of Contents
Index to Financial Statements
     Years Ended December 31,  
     2006     2005  
     Interest    Average
Rate
    Interest    Average
Rate
 

INTEREST INCOME:

          

Interest and fees on loans (1)

   $ 7,959    8.26 %   $ 4,421    6.78 %

Interest on taxable securities

     270    4.15 %     197    3.81 %

Interest on federal funds sold

     48    4.96 %     21    3.02 %

Interest on deposits in banks

     77    4.86 %     53    4.29 %

Interest on other investments

     31    5.07 %     15    4.19 %
                  

Total interest income

     8,385    7.91 %     4,707    6.48 %
                  

INTEREST EXPENSE:

          

Interest on interest-bearing demand deposits and savings

     529    4.26 %     116    1.87 %

Interest on time deposits

     3,355    4.83 %     1,709    3.39 %

Interest on other borrowings

     436    4.99 %     160    3.48 %
                  

Total interest expense

     4,320    4.77 %     1,985    3.24 %
                  

NET INTEREST INCOME

   $ 4,065      $ 2,722   
                  

Net interest spread

      3.14 %      3.24 %

Net yield on average interest-earning assets

      3.83 %      3.75 %

 

(1) Interest and fees on loans includes $227,000 and $92,000 of loan fee income for the years ended December 31, 2006 and 2005, respectively. Interest income recognized on nonaccrual loans during 2006 and 2005 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.

 

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Index to Financial Statements
    

Year Ended December 31, 2006 vs.

Year Ended December 31, 2005

Changes Due To:

    
     Rate     Volume    Total
     (Dollars in Thousands)

Increase (decrease) in:

       

Income from interest-earning assets:

       

Interest and fees on loans

   $ 1,108     $ 2,430    $ 3,538

Interest on taxable securities

     19       54      73

Interest on federal funds sold

     17       10      27

Interest on deposits in banks and other

     8       16      24

Interest on other investments

     15       1      16
                     

Total interest income

     1,167       2,511      3,678
                     

Expense from interest-bearing liabilities:

       

Interest on interest-bearing demand deposits and savings

     231       182      413

Interest on time deposits

     872       774      1,646

Interest on other borrowings

     90       186      276
                     

Total interest expense

     1,193       1,142      2,335
                     

Net interest income

   $ (26 )   $ 1,369    $ 1,343
                     

Investment Portfolio

Types of Investments

The carrying amounts of securities held-to-maturity at December 31, 2006 and 2005 are summarized as follow:

 

     December 31,
     2006    2005
     (Dollars in Thousands)

State and county municipal bonds

   $ 645    $ 212

The carrying amounts of securities available-for-sale at December 31, 2006 and 2005 are summarized as follows:

 

     December 31,
     2006    2005
     (Dollars in Thousands)

Government sponsored agencies

   $ 4,486    $ 3,468

Mortgage-backed securities

     1,677      1,975
             
   $ 6,163    $ 5,443
             

Maturities

The amounts of debt securities, including the weighted average yield in each category as of December 31, 2006 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.

 

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Index to Financial Statements
    

One Year or

Less

   

After One Year

through Five
Years

   

After Five Years
through Ten

Years

    After Ten Years    Total  
     Amount    Yield(1)     Amount    Yield(1)     Amount    Yield(1)     Amount    Yield(1)    Amount    Yield(1)  

Government sponsored agencies

   $ 989    3.85 %   $ 2,504    4.41 %   $ 993    5.50 %   $ 0    0.00%    $ 4,486    4.53 %

State and county municipal

     0    0.00 %     193    3.34 %     202    3.86 %     250    3.00%      645    3.70 %

Mortgage-backed securities

     0    0.00 %     831    4.35 %     846    5.01 %     0    0.00%      1,677    4.69 %
                                                 
   $ 989      $ 3,528      $ 2,291      $ 250       $ 6,808    4.49 %
                                                 

 

(1) The weighted average yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security.

Loan Portfolio

Types of Loans

The amount of loans outstanding is shown in the following table according to the type of loan.

 

     December 31,  
     2006     2005  
     (Dollars in Thousands)  

Commercial

   $ 6,946     $ 3,735  

Real estate-construction

     25,002       12,318  

Real estate-mortgage

     12,847       10,456  

Real estate-commercial

     72,088       51,781  

Consumer installment and other

     2,109       1,912  
                
     118,992       80,202  

Deferred loan fees

     (65 )     (36 )

Allowance for loan losses

     (1,235 )     (879 )
                

Loans, net

   $ 117,692     $ 79,287  
                

Maturities and Sensitivities of Loans to Changes in Interest Rates

Total loans as of December 31, 2006 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.

 

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Index to Financial Statements
     (Dollars in Thousands)

Commercial and commercial real estate:

  

One year or less

   $ 50,077

After one year through five years

     25,995

After five years

     2,492
      
     78,564
      

Construction:

  

One year or less

     22,600

After one year through five years

     2,402

After five years

     —  
      
     25,002
      

Other:

  

One year or less

     4,216

After one year through five years

     5,615

After five years

     5,595
      
     15,426
      
   $ 118,992
      

The following table summarizes loans at December 31, 2006 with the due dates after one year that have predetermined and floating or adjustable interest rates.

 

     (Dollars in Thousands)

Predetermined interest rates

   $ 31,808

Floating or adjustable interest rates

     10,291
      
   $ 42,099
      

Risk Elements

Information with respect to nonaccrual, past due, and restructured loans is as follows:

 

     December 31
     2006    2005
     (Dollars in Thousands)

Nonaccrual loans

   $ 0    $ 0

Loans contractually past due ninety days or more as to interest or principal payments and still accruing

     0      0

Restructured loans

     0      0

Potential problem loans

     0      0

Interest income that would have been recorded on nonaccrual and restructured loans under original terms

     0      0

Interest income that was recorded on nonaccrual and restructured loans

     0      0

 

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Index to Financial Statements

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.

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 period; 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 period to average loans.

 

     Years Ended December 31,  
     2006     2005  
     (Dollars in Thousands)  

Average amount of loan outstanding

   $ 96,390     $ 65,192  
                

Balance of allowance for loan losses at beginning of year

   $ 879     $ 548  
                

Loans charged off Installment loans

     (2 )     (41 )

Loans recovered Installment loans

     2       1  
                

Net charge-offs

     —         (40 )
                

Additions to allowance charged to operating expense during year

     356       371  
                

Balance of allowance for loan losses at end of year

   $ 1,235     $ 879  
                

Ratio of net loans charged off during the year to average loans outstanding

     —   %     .06 %
                

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. Please see a further discussion of our evaluation of the allowance for loan losses under the caption “Provision for Loan Losses, Net Charge-offs and Allowance for Loan Losses” included in this discussion. Management considers the allowance for loan losses adequate to cover possible loan losses on the loans outstanding.

 

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Index to Financial Statements

As of December 31, 2006 and 2005, 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,  
     2006     2005  
     Amount    Percent of
loans in
each category
to Total Loans
    Amount    Percent of
loans in
each category
to Total Loans
 
     (Dollars in Thousands)  

Commercial

   $ 74    6 %   $ 44    5 %

Real estate - construction

     259    21 %     132    15 %

Real estate - mortgage

     136    11 %     114    13 %

Real estate - commercial

     741    60 %     563    64 %

Consumer installment

     25    2 %     26    3 %
                          
   $ 1,235    100 %   $ 879    100 %
                          

Deposits

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,  
     2006 (1)     2005 (1)  
     Amount    Percent     Amount    Percent  
     (Dollars in Thousands)  

Noninterest-bearing demand deposits

   $ 4,889    —       $ 3,841    —    

Interest-bearing demand deposits and savings

     12,407    4.26 %     6,195    1.87 %

Time Deposits

     69,472    4.83 %     50,466    3.39 %
                  
   $ 86,768      $ 60,502   
                  

 

(1) Average balances were determined using the daily average balances during the year.

The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2006 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

   $ 8,230

Over three months through six months

     8,447

Over six months through twelve months

     11,315

Over twelve months

     4,708
      

Total

   $ 32,700
      

We had brokered deposits of $9,354,000 and $10,251,000 at December 31, 2006 and 2005, respectively.

Return on Assets and Stockholders’ Equity

The following rate of return information for the year indicated is presented below.

 

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Index to Financial Statements
     Year Ended December 31,  
     2006     2005  
     (Dollars in Thousands)  

Return on assets (1)

   0.65 %   1.38 %

Return on equity (2)

   4.66 %   10.07 %

Dividend payout ratio (3)

   —   %   —   %

Equity to assets ratio (4)

   14.03 %   13.69 %

 

(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.

Business

Piedmont Community Bank Group, Inc.

We were 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 branches in Houston and Monroe Counties during 2008. The proposed Houston County location is 401 S. Houston Lake Rd., Warner Robbins, Georgia 31088. The proposed Monroe County location is at the corner of N. Harris and E. Johnson St. in Forsyth, Georgia 31029.

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.

 

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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, 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.

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:

 

   

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.

 

   

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 and joined us as President in 2002. He graduated from Mercer University in Macon, Georgia with degrees in Political Science and Business Administration.

 

   

Julie Simmons, our CFO, grew up in Milledgeville, Georgia and 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.

 

   

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.

Industry and Competition

Our marketing strategy emphasizes our local nature and involvement in the communities located in our service area. Over the last 10 years numerous interstate acquisitions involving Georgia-based financial institutions have been announced or consummated. Though interstate banking has resulted in significant changes in the structure of financial institutions in the southeastern region, including our service areas, we do not feel that such changes have had or will have a significant impact upon our operations.

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.

Our bank must 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.

 

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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.

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 prospectus.

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.

Construction and Development Loans

We make residential construction and development loans to customers in our market area. Loans are granted for both speculative projects and those being built with end buyers 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 make up approximately 73% 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.

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 may

 

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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.

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:

 

   

home equity loans – open and closed end;

 

   

automobile, RV and boat financing;

 

   

loans secured by deposits;

 

   

overdraft protection lines; and

 

   

secured and unsecured personal loans.

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.

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, 2006, we had approximately $2,761,000 in unsecured loans, which represented 2.3% of our total loan portfolio. As of December 31, 2005, we had approximately $1,327,000 in unsecured loans, which represented 1.7% of our total loan portfolio.

 

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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, 2006 we had sold a total of $15 million in loan participations for an amount that equaled 13% 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, 2006, we had purchased $33 million in loan participations. The total principal amount of these participations comprised 27% of our total loan portfolio on December 31, 2006.

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:

 

   

the asset quality of individual loans;

 

   

changes in the national and local economy and business conditions/development, including underwriting standards, collections, charge off and recovery practices;

 

   

changes in the nature and volume of the loan portfolio;

 

   

changes in the experience, ability and depth of the lending staff and management;

 

   

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;

 

   

possible deterioration in collateral segments or other portfolio concentrations;

 

   

historical loss experience (when available) used for pools of loans (i.e. collateral types, borrowers, purposes, etc.);

 

   

changes in the quality of our loan review system and the degree of oversight by the bank’s board of directors;

 

   

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

 

   

off-balance sheet credit risks.

These factors are evaluated at least quarterly and changes in the asset quality of individual loans are evaluated more frequently and as needed.

All of our loans are assigned individual loan grades when underwritten. Following guidelines promulgated by the FDIC and the State of Georgia Department of Banking and Finance, we have established minimum general reserves based on the asset quality grade of the loan. General reserve factors applied to each rating grade are based upon management’s experience and common industry and regulatory guidelines.

 

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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 2006. In 2005, our net loan losses to average total loans was 0.06%. Historical performance 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:

 

   

provide an investment medium for funds which are not needed to meet loan demand, or deposit withdrawal;

 

   

optimize income generated from the investment account consistent with the stated objectives for liquidity and quality standards;

 

   

meet regulatory standards;

 

   

provide collateral which the financial institution is required to pledge against public monies;

 

   

provide an investment medium for funds which may be needed for liquidity purposes; and

 

   

provide an investment medium which will balance market and credit risk for other assets and our liability structure.

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

 

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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.

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.

Properties

The table and text below provides certain information about the properties that we own or lease.

 

Property Description

 

Property Location

   Own or
Lease?
   Mortgage
or Liens
   Date
Built

Main Office

 

110 Bill Conn Parkway

Gray, Georgia 31032

   Own    None    2003

Branch Office

 

1611 Bass Road

Macon, Georgia 31210

   Own    None    2006

Branch Office

 

4511 Forsyth Road

Macon, Georgia 31210

   Own    None    2006

Branch Office

 

1040 Founder’s Row, Suite C

Greensboro, Georgia 30642

   Lease    None    N/A

Land for Branch Office (branch opening subject to regulatory approval)

 

401 S. Houston Lake Rd.

Warner Robbins, Georgia 31088

   Own    None    Pending

Land for Branch Office (branch opening subject to regulatory approval)

 

Corner of N. Harris and E. Johnson St.

Forsyth, Georgia 31029

   Own    None    Pending

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.

 

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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 construction planned to begin in late 2007 or early 2008 on these additional locations. The Houston County land is located at 401 S. Houston Lake Rd., Warner Robbins, Georgia 31088. The Monroe County land is located at the corner of N. Harris and E. Johnson St. in Forsyth, Georgia 31029. Our opening of these additional branches is subject to regulatory approval.

Employees

As of June 30, 2007, we had 39 total employees including 37 full-time equivalent employees. We are not a party to any collective bargaining agreement.

Legal Proceedings

We are subject to claims and litigation in the ordinary course of business. We believe that any pending claims and litigation will not have a material adverse effect on our consolidated position. As of December 31, 2006, we are not a party to any proceeding to which any director, officer or affiliate of the issuer, any owner of more than 5% of its voting securities is a party adverse to us.

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:

 

   

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;

 

   

acquiring all or substantially all of the assets of any bank; or

 

   

merging or consolidating with any other bank holding company.

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 limited

 

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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:

 

   

the bank holding company has registered securities under Section 12 of the Exchange Act; or

 

   

no other person owns a greater percentage of that class of voting securities immediately after the transaction.

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:

 

   

banking or managing or controlling banks; and

 

   

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.

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:

 

   

factoring accounts receivable;

 

   

making, acquiring, brokering or servicing loans and usual related activities;

 

   

leasing personal or real property;

 

   

operating a non-bank depository institution, such as a savings association;

 

   

trust company functions;

 

   

financial and investment advisory activities;

 

   

conducting discount securities brokerage activities;

 

   

underwriting and dealing in government obligations and money market instruments;

 

   

providing specified management consulting and counseling activities;

 

   

performing selected data processing services and support services;

 

   

acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

 

   

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.

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:

 

   

lending, trust and other banking activities;

 

   

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;

 

   

providing financial, investment, or advisory services;

 

   

issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

 

   

underwriting, dealing in or making a market in securities;

 

   

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;

 

   

foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;

 

   

merchant banking through securities or insurance affiliates; and

 

   

insurance company portfolio investments.

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.

 

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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, 2006, 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%.

 

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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.

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:

 

   

Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

   

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;

 

   

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

   

Fair Credit Reporting Act of 1978, governing the use and provisions of information to credit reporting agencies;

 

   

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

 

   

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

 

   

rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

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.

 

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The deposit operations of our bank are subject to:

 

   

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

 

   

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.

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, 2006 our consolidated ratio of total capital to risk-weighted assets was 12.76% and the ratio of Tier 1 Capital to risk-weighted assets was 11.93%.

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, 2006, our leverage ratio was 12.76%. 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.

 

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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, 2006, our bank could pay cash dividends of approximately $379,000 without prior regulatory approval.

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:

 

   

a bank’s loans or extensions of credit to affiliates;

 

   

a bank’s investment in affiliates;

 

   

assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

 

   

loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and

 

   

a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

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 to use 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:

 

   

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

 

   

a requirement for mortgage lenders to disclose credit scores to consumers.

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.

Directors and Executive Officers

The following table and text provide certain information about our directors and executive officers. Each of our directors has served as a director since our incorporation in 2006 and each director other than R. Drew Hulsey, Jr. has served as a director of Piedmont Community Bank since its opening in 2002. Mr. Hulsey joined the bank’s board in 2003 when he became chief executive officer. All of our directors other than Mr. Hulsey and Mickey C. Parker, who are also executive officers, qualify as “independent” directors as defined by Nasdaq Marketplace Rule 4200(a)(15).

 

Name

   Age    Year Term
Expires
  

Position(s)

Christine A. Daniels

   57    2008    Director of both institutions; Secretary of both institutions

M. Cole Davis

   51    N/A    Executive Vice President of Retail Banking

Franklin J. Davis

   46    2008    Director of both institutions

Joseph S. Dumas

   57    2009    Director of both institutions

Terrell L. Fulford

   57    2009    Director of both institutions; Vice Chairman of both institutions

Arthur J. Goolsby

   64    2010    Director of both institutions

James R. Hawkins

   44    2008    Director of both institutions

Dr. John A. Hudson

   66    2010    Director of both institutions; Chairman of both institutions

R. Drew Hulsey, Jr.

   44    2008    Director of both institutions; CEO of both institutions

 

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Name

   Age    Year Term
Expires
  

Position(s)

Robert C. McMahan

   66    2010    Director of both institutions

Mickey C. Parker

   52    2010    Director of both institutions; President of both institutions

Zelma A. Redding

   64    2009    Director of both institutions

Angela M. Tribble

   45    2009    Director of both institutions

Set forth below is certain biographical information regarding our directors and executive officers, including their recent business experience:

CHRISTINE A. DANIELS – Mrs. Daniels is a lifelong resident of Jones County. She recently retired from Wachovia Securities where she had spent the past six years employed as a registered sales associate. Prior to that she spent 33 years in the insurance industry (all with CIGNA Insurance Company). During her career Mrs. Daniels received a degree in management from the Insurance Institute of America and worked for ACE Property and Casualty (formerly CIGNA P&C) where she was the Office Manager for the company’s Macon location. Mrs. Daniels has been involved with several organizations, including the American Heart Association, Jones County Little League, the American Cancer Society’s Relay for Life and the Bradley Baptist Church.

M. COLE DAVIS – Mr. Davis has served as our Executive Vice President and Macon City Executive since 2005. Prior to joining us he served from 1997 to 2005 as Regional Retail Banking Manager of BB&T in Macon where he was responsible for the sales and service program for 41 branches. Mr. Davis graduated with a BBA in Business Management from Georgia College and State University in 1978. He is also an alumnus of the Georgia Banking School at University of Georgia. He began his banking career in 1979 with stints of service at BankSouth and First Liberty Bank (now BB&T).

FRANKLIN J. DAVIS – Mr. Davis was born and raised in Jones County. He is a graduate of Georgia College and State University with a degree in accounting. From 1996 to 2000 Mr. Davis was the owner of Frank J. Davis, CPA firm. From 2001 through 2006 he was a principal partner of Davis, Merritt & Cleveland CPAs. From January 1, 2007 to the present he has been a principal partner of Davis & Cleveland, CPAs. The CPA firm has offices in Gray and Milledgeville, Georgia.

JOSEPH S. DUMAS – Mr. Dumas grew up in Hillsboro, Georgia. He is a graduate of Monticello High School and the University of Georgia where he received his Bachelor of Business Administration major in real estate and urban development. Mr. Dumas has been accepted as a Member of the Appraisal Institute (MAI) and is a Certified General Appraiser of the State of Georgia. He is a past Macon-Bibb County Planning and Zoning Commissioner and former Trustee and officer of the Stratford Academy Board of Trustees. He is past president of the Middle Georgia Chapter of Real Estate Appraisers. Mr. Dumas has been the owner and president of Southland Appraisals, Inc. for over 26 years. His company does agricultural, timber and commercial real estate appraisals over the entire state of Georgia.

TERRELL L. FULFORD – Mr. Fulford was born in Macon, Georgia. He moved to Jones County in 1963 and graduated from Jones County High School in 1967. He started Fulford and Sons Construction Company in 1972, worked for Georgia Power for several years and formed Fulford and Willis Construction Company in 1982. In 1987 Mr. Fulford purchased Roof Truss Company of which he is the current president and co-owner. He is a member of Sincerity Lodge #430, member and past president of the Lions Club of Jones County, charter treasurer and member of the Jones County Exchange Club, member and former director of the Jones County/Gray Chamber of Commerce, a member of the American Heart Association of Jones County of which he has held both the president and vice president position for several years. Mr. Fulford is active in local government, having served as District Three Representative on the Gray City Council.

ARTHUR J. GOOLSBY – Mr. Goolsby is a lifelong resident of Jones County. He attended both Middle Georgia College and the University of Georgia, graduating with a degree in geology. Mr. Goolsby was employed in the kaolin industry for several years working in General Refractories and U.S. Borax. In the late 1960s and early 1970s he was employed by the State Environmental Division and Reynolds Aluminum. He has been self employed in the land and timber business since the late 1970s. Mr. Goolsby is a partner in James Emory, Inc. and Penmain Head, LLC and owner of Jones Central, LLC, all land oriented businesses.

 

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JAMES R. HAWKINS – Mr. Hawkins is a resident of Bibb County. Since 1982, Mr. Hawkins has been self employed in various ventures such as construction, land and timber and aviation. He is currently owner of Siteco, which is an earthmoving and grading company that primarily serves Middle Georgia. He also owns Fairmont Equipment, LLC, an equipment company, and is involved in various commercial and residential real estate partnerships. Mr. Hawkins is an Airline Transport rated commercial pilot with approximately 6,000 hours of flight experience.

JOHN A. HUDSON – A resident of Jones County, Mr. Hudson was born in Bremen, Georgia and lived there until his family moved to Missouri. He graduated from high school in Clinton, Missouri. Dr. Hudson attended the University of Missouri and earned AB and MD degrees. He obtained his post graduate training in internal medicine, cardiology, and critical care medicine in California; first at the U.S. Naval Hospital, San Diego and then at Mercy Hospital, also in San Diego. He joined the Mercer University School of Medicine Faculty before that school opened in 1982. In addition to clinical practice and teaching Dr. Hudson has served in several administrative capacities at the Mercer Medical School and the Medical Center of Central Georgia. These include: Director of Medical Education, Associate Dean for Clinical Education, Executive Associate Dean and Chairman of the Department of Internal Medicine. He presently serves as a Professor of Internal Medicine and Chief of the Division of Cardiology, a position he has held since 2000.

R. DREW HULSEY, JR. , – Mr. Hulsey graduated with a BBA in Finance from Georgia Southern University. He is also an alumnus of the Graduate School of Banking at Louisiana State University. Mr. Hulsey has been in banking since 1985. Before joining the Bank as CEO in 2003 he most recently served as Regional Business Banking Manager at BB&T in Macon. He also served as City Executive for BB&T in Tifton, GA, and has commercial and retail banking experience with Commercial Banking Company in Valdosta, SunTrust Bank and Bank of America. Mr. Hulsey is a board member for a local charitable foundation and is a member of the Executive Board for the Central Georgia Boy Scout Council.

ROBERT C. McMAHAN – Mr. McMahan has been President and CEO of Golden Point Group, Inc., a company specializing in small business investments, since December 1994. Mr. McMahan is the former Chairman and CEO of Decatur Federal and DFSoutheastern, Inc. headquartered in Decatur, Georgia. With the merger of First Union and Decatur Federal, he was appointed Vice Chairman. He is currently a member of the Board of Directors for Cotton States Insurance, Mountain Heritage Bank, UCB Financial Group, Inc. and its subsidiary Atlanta Business Bank and is the Vice Chairman of Greater Atlanta Christian School and Secretary of Greater Atlanta Christian School Foundation and board member of Georgia Agape, Inc. He has previously served on the Board of Directors of Citizens Trust, First Union National Bank of Georgia, and First Union Corporation of Georgia. Mr. McMahan is the former Vice Chairman of the Savings and Community Banks of America. A native of Sevierville, Tennessee, Mr. McMahan is a graduate of the University of Tennessee and an alumnus of the Graduate School of Savings and Loan at the University of Indiana. Mr. McMahan and his wife, Judy, have two adult children and two grandchildren.

MICKEY C. PARKER – Mr. Parker was born and raised in Thomaston, Georgia. In 1973 he entered Mercer University in Macon and started his banking career with Citizens & Southern National Bank. Mr. Parker graduated from Mercer with degrees in Political Science and Business Administration. Mr. Parker’s experience with C&S (and what is now Bank of America) includes Regional Cashier, Regional Personnel Officer, Ingleside Branch Manager, Commercial Lending Officer and manager of Professional & Executive Banking. 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 February 2001 and became our President in 2002. Mr. Parker has been very active in civic and community organizations. Positions he has held include: president of Bank Administration Institute, education director for Middle Georgia American Institute of Banking, president of Middle Georgia Computer Club, treasurer of Western Little League, a member of the Macon Exchange Club, vice president of the Jones County Little League, former President of the Jones/Gray Chamber of Commerce and charter president of the Jones County Exchange Club. He is a member of the Jones County Development Authority, the Middle Georgia Workforce Investment Board, Jones County Exchange Club, and the Gray Station Better Hometown Board.

ZELMA A. REDDING – Mrs. Redding was born in Macon, Georgia. She is a graduate of Crandall Business College where she received her business degree. In 1961, Mrs. Redding married the late Otis Redding, Jr. and has been actively involved in the music and publishing industry since his death in 1967. Mrs. Redding was a leading agent for Paragon Booking Agency for 14 years. She took on an entrepreneur’s role in 1970 by owning a music store and a night club in downtown Macon. In 1994, Mrs. Redding, along with her daughter Karla Redding Andrews, opened an upscale shoe boutique in downtown Macon. In March 2005 she opened Dreams, a fine ladies clothing boutique. She continues to maintain the estate of her late husband, which includes overseeing the use and rights to songs, photographs and film footage pertaining to his image and likeness. She established the Otis Redding Memorial Fund in her husband’s honor which aides in the preservation of the Otis Redding Statue along the Ocmulgee Heritage Trail. It also provides scholarships and educational opportunities to children and young adults involved in the music and the arts.

 

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ANGELA M. TRIBBLE – Mrs. Tribble is a lifelong resident of Jones County. She graduated magna cum laude from Georgia College & State University in 1983 upon completion of a Bachelor of Science Degree in mathematics and a minor in Computer Information Systems. Mrs. Tribble worked in computer software programming for 14 years and for the last 12 years has devoted her energies full-time as a partner with her husband in various businesses. These businesses include Old Clinton Gas & Groceries and The Palms Car Wash in Gray. Mrs. Tribble assists in the management and accounting of various real estate companies. She is involved in many activities at Tattnall Square Academy where her two daughters attend school. Mrs. Tribble has coached several girls softball and basketball teams. She is a past board member of the Jones County/Gray Chamber of Commerce.

Classification of Board of Directors

Our articles of incorporation divide the board of directors into three classes: Class I, Class II and Class III. Each class is as nearly equal in number as possible. The directors in each class hold office for staggered terms of three years each after initial terms of one year, two years, and three years, respectively. Each director also serves until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. If the number of directors is modified, any increase or decrease in directorships would be apportioned among the classes so as to make all classes as nearly equal in number as possible. The Class I directors consist of Arthur Goolsby, Dr. John A. Hudson, Robert C. McMahan and Mickey C. Parker. The Class II directors consist of Christine A. Daniels, Franklin J. Davis, James R. Hawkins and R. Drew Hulsey, Jr. The Class III directors consist of Joseph S. Dumas, Terrell L. Fulford, Zelma A. Redding, and Angela Tribble. The applicable provisions of the Georgia Business Corporation Code provide that, in the absence of a provision for staggered terms for directors, the terms of all directors expire at the next annual shareholders meeting following their election.

Executive Compensation

Summary Compensation Table

The table below provides information concerning the compensation paid to our chief executive officer and our two most highly compensated executive officers (other than our CEO) for services in all capacities for the year ended December 31, 2006.

 

Name and

Principal Position

   Year    Salary ($)    Bonus ($)    Stock
Awards ($)
   Option
Awards ($) 1
   Non-Equity
Incentive Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings ($)
   All Other
Compensation
($) 2
   Total ($)

R. Drew Hulsey, Jr.
CEO

   2006    140,587    47,439    —      70,041    —      —      19,118    277,185

Mickey C. Parker
President

   2006    115,343    25,414    —      27,242    —      —      24,045    192,044

M. Cole Davis
EVP

   2006    108,215    23,719    —      30,159    —      —      19,472    181,565

 

1 The figures in this column represent the dollar amount recognized for financial statement reporting purposes for 2006. For a discussion of the assumptions that were used in determining these amounts please refer to footnote 10 to the audited financial statements that are included with this proxy.

 

2 The amounts in this column include, with respect to Messrs. Hulsey and Parker, personal use of bank automobile, bank-paid insurance premiums and $3,550 in director fees for each individual. With respect to Mr. Davis, the amount in this column consists of bank-paid insurance premiums.

 

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Outstanding Equity Awards at December 31, 2006

The following table provides information concerning unvested options, unexercised options, and equity incentive plan awards for each of our named executive officers as of December 31, 2006.

 

     Option Awards
     Number of
Securities
Underlying
Unexercised
Options
(#)
  

Number of
Securities
Underlying
Unexercised
Options

(#)

   Option
Exercise
Price
($)
   Option
Expiration
Date

Name

   Exercisable    Unexercisable  1      

R. Drew Hulsey, Jr.

CEO

   49,382
—  
   —  
32,157
   11.67
11.67
   2/15/2015
2/15/2016

Mickey C. Parker

President

   49,382
—  
   —  
26,797
   11.67
11.67
   2/15/2015
2/15/2016

M. Cole Davis

EVP

   4,938
—  
   14,814
12,863
   11.67
11.67
   6/15/2015
2/15/2016

1

The unexercisable options for Messrs. Hulsey and Parker vest in three equal annual installments beginning February 15, 2007. The 14,814 unexercised options for Mr. Davis vest as follows: 4,938 on June 12, 2007; 4,938 on June 12, 2008 and 4,938 on June 12, 2009. The 12,863 unexercised options for Mr. Davis vest in three equal annual installments beginning February 15, 2007.

Employment Agreement with R. Drew Hulsey, Jr.

In February 2005, Piedmont Community Bank entered into a Second Amended and Restated Employment Agreement with R. Drew Hulsey, Jr. whereby Mr. Hulsey is employed as the bank’s Chief Executive Officer. The term of the agreement is for two years with automatic extensions of one day for each day that passes during the term so that the term always remains at an additional two years unless either party gives written notice to the other that the term will not be extended further.

During the term of his employment Mr. Hulsey will be entitled to (a) such incentives and discretionary bonuses as may be authorized, declared and paid by the board of directors; (b) health and dental (including dependents), disability and life insurance, including term life insurance in an amount at least equal to three times his base salary; and (c) membership in social, professional and civic clubs as determined by the board of directors. Mr. Hulsey will also be reimbursed for expenses reasonably incurred by him in the performance of his responsibilities and duties for the bank.

Mr. Hulsey’s employment agreement will be terminated by his death or disability. It may also be terminated by the discharge by the bank of Mr. Hulsey for “cause”, as defined in the employment agreement. If Mr. Hulsey is terminated without cause, or if Mr. Hulsey leaves for “good reason” (as defined in the employment agreement) then the bank will pay Mr. Hulsey severance compensation in an amount equal to two times his annual base salary then in effect, which will be paid in installments over a 24-month period, and the bank will continue all insurance benefits for Mr. Hulsey and his dependents which were in effect at the time of the termination for a period of 24 months following termination or, if shorter, until Mr. Hulsey is employed by another employer. Assuming a hypothetical not-for-cause termination as of December 31, 2006, the bank would have had to pay Mr. Hulsey $294,000 over a 24-month period and would have had to continue insurance benefits during that period.

In the event of a “change in control” (as defined in Mr. Hulsey’s employment agreement) of the bank during the term of employment, then the bank will pay Mr. Hulsey severance compensation in a lump sum equal to 150% of his base salary then in effect. If the bank had experienced a change in control as of December 31, 2006 then it would have had to pay Mr. Hulsey $220,500.

Mr. Hulsey’s employment agreement provides that he will not participate in the control or management of another bank within 25 miles of the bank’s location in Gray, Georgia for a period of one year after the termination, for any reason, of his employment agreement. He is also prohibited from soliciting bank customers for the purpose of selling to them products or services that are competitive with products and services of the bank for a period of one year

 

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following the termination of his employment agreement. The agreement also provides that he will not use or disclose the bank’s confidential information during the term of his employment and for a period of one year after the termination of employment and he is restricted from disclosing or using the bank’s trade secrets at all times.

Employment Agreement with Mickey C. Parker

In February 2005 Piedmont Community Bank entered into an Amended and Restated Employment Agreement with Mickey C. Parker whereby Mr. Parker is employed as the bank’s President. The term of the agreement is for two years with automatic extensions of one day for each day that passes during the term so that the term always remains at an additional two years unless either party gives written notice to the other that the term will not be extended further.

During the term of his employment Mr. Parker will be entitled to (a) such incentives and discretionary bonuses as may be authorized, declared and paid by the board of directors; (b) health and dental (including dependents), disability and life insurance, including term life insurance in an amount at least equal to three times his base salary; (c) use of a bank owned vehicle; and (d) membership in social, professional and civic clubs as determined by the board of directors. Mr. Parker will also be reimbursed for expenses reasonably incurred by him in the performance of his responsibilities and duties for the bank.

Mr. Parker’s employment agreement will be terminated by his death or disability. It may also be terminated by the discharge by the bank of Mr. Parker for “cause,” as defined in the employment agreement. If Mr. Parker is terminated without cause, or if Mr. Parker leaves for “good reason” (as defined in the employment agreement) then the bank will pay Mr. Parker severance compensation in an amount equal to two times his annual base salary then in effect, which will be paid in installments over a 24-month period, and the bank will continue all insurance benefits for Mr. Parker and his dependents which were in effect at the time of the termination for a period of 24 months following termination or, if shorter, until Mr. Parker is employed by another employer. Assuming a hypothetical not-for-cause termination as of December 31, 2006, the bank would have had to pay Mr. Parker $226,250 over a 24-month period and would have had to continue insurance benefits during that period.

In the event of a “change in control” (as defined in Mr. Parker’s employment agreement) of the bank during the term of employment, then the bank will pay Mr. Parker severance compensation in a lump sum equal to 100% of his base salary then in effect. If the bank had experienced a change in control as of December 31, 2006 then it would have had to pay Mr. Parker $113,125.

Mr. Parker’s employment agreement provides that he will not participate in the control or management of another bank within 25 miles of the bank’s location in Gray, Georgia for a period of one year after the termination, for any reason, of his employment agreement. He is also prohibited from soliciting bank customers for the purpose of selling to them products or services that are competitive with products and services of the bank for a period of one year following the termination of his employment agreement. The agreement also provides that he will not use or disclose the bank’s confidential information during the term of his employment and for a period of one year after the termination of employment and he is restricted from disclosing or using the bank’s trade secrets at all times.

Employment Agreement with M. Cole Davis

In June 2005 Piedmont Community Bank entered into an Employment Agreement with M. Cole Davis whereby Mr. Davis is employed as the bank’s Executive Vice President – Macon City Executive. The term of the agreement is for two years with automatic extensions of one day for each day that passes during the term unless either party gives written notice to the other that the term will not be extended further.

During the term of his employment Mr. Davis will be entitled to such incentives and discretionary bonuses as may be authorized, declared and paid by the board of directors. Mr. Davis will also be reimbursed for expenses reasonably incurred by him in the performance of his responsibilities and duties for the bank.

Mr. Davis’ employment agreement will be terminated by his death or disability. It may also be terminated by the discharge by the bank of Mr. Davis for “cause,” as defined in the employment agreement. If Mr. Davis is terminated without cause, or if Mr. Davis leaves for “good reason” (as defined in the employment agreement) then the bank will pay Mr. Davis severance compensation in an amount equal to two times his annual base salary then in effect, which will be paid in installments over a 24-month period, and the bank will continue all insurance benefits for Mr. Davis and his dependents which were in effect at the time of the termination for a period of 24 months following termination or, if shorter, until Mr. Davis is employed by another employer. Assuming a hypothetical not-for-cause termination as of December 31, 2006, the bank would have had to pay Mr. Davis $221,000 over a 24-month period and would have had to continue insurance benefits during that period.

 

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In the event of a “change in control” (as defined in Mr. Davis’ employment agreement) of the bank during the term of employment, then the bank will pay Mr. Davis severance compensation in a lump sum equal to 100% of his base salary then in effect. If the bank had experienced a change in control as of December 31, 2006 then it would have had to pay Mr. Davis $110,500.

Mr. Davis’s employment agreement provides that he will not participate in the control or management of another bank within 25 miles of the bank’s location in Macon, Georgia for a period of one year after the termination, for any reason, of his employment agreement. He is also prohibited from soliciting bank customers for the purpose of selling to them products or services that are competitive with products and services of the bank for a period of one year following the termination of his employment agreement. The agreement also provides that he will not use or disclose the bank’s confidential information during the term of his employment and for a period of one year after the termination of employment and he is restricted from disclosing or using the bank’s trade secrets at all times.

Stock Option Plan

We have a stock option plan that is intended to advance our interests and our shareholders’ interest by: (i) assisting us in securing and retaining key employees and directors of outstanding ability by making it possible to offer them an increased incentive to join or continue in our service; and (ii) increasing our key employees’ and directors’ efforts for our welfare by participating in our ownership and growth. The stock options granted under the plan may either be incentive stock options or non-qualified stock options.

The compensation committee of our board of directors will have complete authority to interpret the stock option plan, make grants, and determine terms and conditions within the context of the stock option plan.

Options granted under the plan will be exercisable in whole or in part, from time to time, before their termination, by paying the full option price in cash, in shares of our common stock previously held by the optionee, or a combination thereof. Any option that is granted under the plan will expire not later than the date that is 10 years from the date the option is granted or such earlier date as will be set by the board of directors when an option is granted.

Incentive stock options will not be granted to any individual pursuant to the plan if the effect of such grant would be to permit such person to first exercise options, in any calendar year, for the purchase of shares having a fair market value in excess of $100,000 (determined at the time of the grant of the options). An optionee may exercise options for the purchase of shares valued in excess of $100,000 (determined at the time of the grant of the options) in a calendar year, but only if the right to exercise such excess options first become available in prior calendar years.

No optionee owning more than 10% of the combined voting power of all classes of our capital stock then outstanding may purchase our common stock pursuant to incentive stock options under the plan for less than one hundred ten percent (110%) of its fair market value on the date of grant nor may any option granted to such a person be exercisable on a date later than five years from the date of grant.

The total number of shares on which options may be granted under the plan and option rights (both as to the number of shares and the option price) will be appropriately adjusted for any increase or decrease in the number of outstanding shares of our common stock resulting from a stock dividend, stock split, reorganization, merger, consolidation, combination or exchange of shares. Upon dissolution or liquidation of the Bank, each option granted under the plan will terminate. The grant of an option pursuant to the plan will not in any way affect our right or power to make adjustments, reclassifications, or changes of our capital or business structure, or to merge or consolidate, or to dissolve or liquidate, or to sell or transfer all or any part of its business or assets.

Our board of directors will have the right at any time to amend or terminate the plan. The plan is scheduled to terminate on February 15, 2015. However, no amendments may be made to the plan without the approval of our shareholders (except for amendments resulting from changes in our capitalization) which:

 

   

increase the total number of shares for which options may be granted under the plan;

 

   

change the minimum purchase price for the options;

 

   

affect any outstanding option or any unexercisable right thereunder;

 

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extend the option period; or

 

   

extend the termination date of the plan.

Compensation of Directors

The following table provides information concerning the compensation of our directors for 2006. The table omits R. Drew Hulsey, Jr. and Mickey C. Parker since they are also named executive officers and their compensation for services as a director is fully reflected in the summary compensation table above.

 

Name

  

Fees Earned or
Paid in Cash

($)

  

Stock Awards

($)

  

Option Awards 1

($)

  

Non-Equity
Incentive Plan
Compensation

($)

  

Nonqualified
Deferred
Compensation
Earnings

($)

  

All Other
Compensation

($)

  

Total

($)

Christine A. Daniels

   3,550    —      7,018    —      —      —      10,568

Franklin J. Davis

   4,400    —      14,237    —      —      —      18,637

Joseph S. Dumas

   4,200    —      14,029    —      —      —      18,229

Terrell L. Fulford

   4,300    —      5,845    —      —      —      10,145

Arthur Goolsby

   3,800    —      20,946    —      —      —      24,746

James R. Hawkins

   3,600    —      4,674    —      —      —      8,274

Dr. John A. Hudson

   4,250    —      9,358    —      —      —      13,608

Robert C. McMahan

   3,550    —      14,029    —      —      —      17,579

Zelma A. Redding

   4,450    —      12,162    —      —      —      16,612

Angela Tribble

   4,350    —      24,789    —      —      —      29,139

1

The figures in this column represent the dollar amount recognized for financial statement reporting purposes for 2006. For a discussion of the assumptions that were used in determining these amounts please refer to footnote 10 to the audited financial statements that are included with this prospectus. For each director, the total number of options outstanding as of December 31, 2006, on a post-split adjusted basis, were as follows: Christine A. Daniels - 8,280; Franklin J. Davis - 16,804; Joseph D. Dumas - 16,560; Terrell L. Fulford - 6,900; Arthur Goolsby - 24,728; James R. Hawkins - 5,520; Dr. John A. Hudson - 11,040; Robert C. McMahan - 16,560; Zelma A Redding - 14,352; and Angela Tribble - 29,258.

The board of directors typically has 11 regular meetings each year. Committees of the board generally meet no less frequently than 4 times each year. During 2006 and the first half of 2007, the board members were compensated as follows: Chairman received $600 per meeting attended, all other board members received $500 per meeting attended; loan committee members who are outside directors received $50 per meeting attended; all other outside directors who served on other committees received $50 per meeting attended if the meeting was held on a day that was not the day of the regular board meeting. Effective July 1, 2007, the compensation structure of the board was changed as follows: Chairman receives $700 per meeting attended, the Secretary receives $650 per meeting attended and all other board members receive $600 per meeting attended, committee chairmen receive $75 per meeting attended; outside director committee members receive $50 per meeting attended.

Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners

The following table sets forth the beneficial ownership of our common stock as of July 20, 2007 by each person, other than our directors and executive officers, who is known to us to be the beneficial owner of more than 5% of our common stock.

 

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Index to Financial Statements

Name and address

of beneficial owner

   Number of shares of common
stock beneficially owned 1
    Percentage  

Dory Wiley

Service Capital Partners, LP

Service Capital Advisors, LLC

1700 Pacific Avenue, Suite 2000

Dallas, Texas 75201

   161,443 2   9.9 %

1

The information shown above is based upon information furnished by the named persons and based upon “beneficial ownership” concepts set forth in rules promulgated under the Exchange Act. Under such rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any security of which that person has the right to acquire beneficial ownership within 60 days. In accordance with SEC rules, percentages were calculated based on the amount of outstanding shares plus, for each such person or group, any shares that person or group has the right to acquire within 60 days through stock options or other rights.

 

2

Based on a holdings report on Schedule 13G filed pursuant to the Exchange Act which indicates that Service Capital Partners is a Texas limited partnership, Service Capital Advisors is a Texas limited liability company, and Dory Wiley is the principal of Service Capital Advisors and is a United States citizen. Service Equity Partners, LP and Service Equity Partners (QP), LP are the record owners, in aggregate, of the shares of the common stock being reported. Service Capital Partners is the general partner of each of Service Equity Partners, LP and Service Equity Partners (QP), LP. Service Capital Advisors is the general partner of Service Capital Partners, and Dory Wiley is the principal of Service Capital Advisors. Therefore, Service Capital Partners, Service Capital Advisors, and Dory Wiley indirectly have the power to vote and dispose of the shares being reported, and accordingly, may be deemed the beneficial owners of such shares.

Security Ownership of Management

The following table sets forth the beneficial ownership of our common stock as of July 20, 2007 by each director and each executive officer named in the summary compensation table above. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law. The address of each of our directors and named executive officers is c/o Piedmont Community Bank Group, Inc., 110 Bill Conn Connector, Gray, Georgia 31032.

 

Name

   Positions Held   Shares Owned 1     Percentage  

Christine A. Daniels

   Director

(Secretary)

  20,761 2   1.27 %

M. Cole Davis

   EVP   18,004 3   1.10 %

Franklin J. Davis

   Director   37,925 4   2.33 %

Joseph S. Dumas

   Director   56,521 5   3.47 %

Terrell L. Fulford

   Director

(Vice Chairman)

  17,901 6   1.10 %

 

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Index to Financial Statements

Name

   Positions Held   Shares Owned 1     Percentage  

Arthur Goolsby

   Director   88,284 7   5.41 %

James R. Hawkins

   Director   13,841 8   0.85 %

Dr. John A. Hudson

   Director

(Chairman)

  39,681 9   2.43 %

R. Drew Hulsey, Jr.

   Director

CEO

  68,519 10   4.20 %

Robert C. McMahan

   Director   38,521 11   2.36 %

Mickey C. Parker

   Director

President

  89,195 10,12   5.47 %

Zelma A. Redding

   Director   45,432 13   2.79 %

Angela Tribble

   Director   71,314 14   4.34 %

All directors and executive officers as a group (13 persons)

     618,774 15   34.09 %

1

The information shown above is based upon information furnished by the named persons and based upon “beneficial ownership” concepts set forth in rules promulgated under the Exchange Act. Under such rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any security of which that person has the right to acquire beneficial ownership within 60 days. In accordance with SEC rules, percentages were calculated based on the amount of outstanding shares plus, for each such person or group, any shares that person or group has the right to acquire within 60 days through stock options or other rights.

 

2

Includes 18,000 shares held jointly with Ms. Daniels’ spouse and 2,760 shares that she may acquire by virtue of her exercise of options.

 

3

Includes 9,266 shares that may be acquired by virtue of his exercise of options.

 

4

Includes 18,000 shares held jointly with Mr. Davis’ spouse and 5,601 shares that he may acquire by virtue of his exercise of options.

 

5

Includes 30,000 shares held jointly with Mr. Dumas’ spouse and 5,520 shares that he may acquire by virtue of his exercise of options.

 

6

Includes 15,000 shares held jointly with Mr. Fulford’s spouse and 2,300 shares that he may acquire by virtue of his exercise of options.

 

7

Includes 7,875 shares held individually by Mr. Goolsby’s spouse, 6,000 shares owned jointly by Mr. Goolsby and his spouse, and 8,243 shares that he may acquire by virtue of his exercise of options.

 

8

Includes 1,840 shares that he may acquire by virtue of his exercise of options.

 

9

Includes 36,000 shares held jointly with Dr. Hudson’s spouse and 3,680 shares that he may acquire by virtue of his exercise of options.

 

10

The figures for Messrs. Hulsey and Parker each include 60,101 shares that they may acquire by virtue of their exercise of options.

 

11

Includes 5,520 shares that he may acquire by virtue of his exercise of options.

 

12

Includes 4,800 shares held jointly with Mr. Parker’s spouse and 276 shares that are owned by Mr. Parker’s spouse.

 

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Index to Financial Statements

13

Includes 4,784 shares that she may acquire by virtue of her exercise of options.

 

14

Includes 60,960 shares held jointly with spouse and 9,753 shares that she may acquire by virtue of her exercise of options.

 

15

Includes 179,429 shares that may be acquired by virtue of their exercise of options.

Related Party Transactions

We have followed a policy of granting various types of loans to executive officers, directors, to their family members, and to certain entities in which they have an interest. However, the loans have been made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with our other customers, and do not involve more than the normal risk of collectability, or present other unfavorable features. Otherwise, we have not during the last two years entered into, nor is there proposed, any transaction in which any director, executive officer, director nominee, or principal shareholder, or any member of their immediate family, had a direct or indirect material interest. As of July 31, 2007 our directors and executive officers and entities with which they are affiliated were indebted to the bank in the aggregate amount of $3,290. The total outstanding commitments to directors and executive officers, as of July 31, 2007, was $3,386,927.

Description of Capital Stock

General

Our articles of incorporation authorize us to issue up to 10,000,000 shares of our common stock, which has no par value. As of July 15, 2007, we had 1,630,734 shares outstanding. This excludes outstanding options to purchase 380,705 shares of common stock at a weighted average exercise price of $11.68. If all of the shares being offered by this prospectus are sold, and without considering shares that may be issued in connection with the exercise of outstanding options, a maximum of [              ] shares would be outstanding.

All shares of our common stock will be entitled to share equally in dividends when, as and if our board of directors declares dividends, and on our liquidation or dissolution, whether voluntary or involuntary, to share equally in all of our assets available for distribution to our shareholders. We cannot assure that we will pay any cash dividends on our common stock in the near future. See “Dividend Policy.” Each holder of our common stock will be entitled to one vote for each share owned on all matters submitted to our shareholders. Holders of our common stock will not have any preemptive right to acquire authorized but unissued capital stock. There is no cumulative voting, redemption right, sinking fund provision or right of conversion with respect to our common stock. All shares of our common stock issued in accordance with the terms of this offering as described in this prospectus will be fully paid and non-assessable.

Shares Held by Affiliates

All shares sold in this offering will be freely tradable without restriction or registration under the Securities Act of 1933, as amended, except for shares our officers and directors purchase. Our officers and directors are affiliates under the securities laws and, as a result, their shares will be subject to certain resale restrictions.

An active public market for our common stock may not exist at any time after this offering. As a result, investors who may wish or who need to dispose of all or a part of their investment in our common stock may not be able to do so except in an illiquid market or by private direct negotiations with third parties, assuming that third parties are willing to purchase our common stock.

Certain Provisions of our Articles of Incorporation and Bylaws

Staggered Terms for Board of Directors

Our articles of incorporation provide that our board of directors will be divided into three classes: Class I, Class II and Class III. Each class is as nearly equal in number as possible. The directors in each class hold office for staggered terms of three years each after initial terms of one year, two years and three years, respectively. For more information regarding the classification of our directors, including a listing of directors by class, please see “Classification of Board of Directors” at page [          ].

 

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Index to Financial Statements

Action by Written Consent

Our shareholders are permitted to take any action which is otherwise required to be taken at a meeting of the shareholders without a meeting, if a written consent is signed by shareholders holding shares representing not less than the minimum number of shares that would be necessary to authorize or take such action at a meeting.

Limitation of Liability

Article 8 of our articles of incorporation, subject to certain exceptions, eliminates the potential personal liability of a director for monetary damages to us and to our shareholders for breach of a duty as a director. There is no elimination of liability for:

 

   

a breach of duty involving appropriation of our business opportunities;

 

   

an act or omission not in good faith or involving intentional misconduct or a knowing violation of law;

 

   

a transaction from which the director receives an improper personal benefit; or

 

   

the types of liability set forth in Section 14-2-832 of the Georgia Business Corporation Code, which deal with unlawful distributors of corporate assets to shareholders.

Article 11 does not eliminate or limit our right or our shareholders’ right to seek injunctive or other equitable relief not involving monetary damages.

We adopted certain provisions of the Georgia Business Corporation Code that allow Georgia corporations, with the approval of their shareholders, to include in their articles of incorporation a provision eliminating or limiting the liability of directors, except in the circumstances described above. We included these provisions to encourage qualified individuals to serve and remain as our directors. While we have not experienced any problems in locating directors, we could experience difficulty in the future as our business activities increase and diversify. We also included these provisions to enhance our ability to obtain liability insurance for our directors at a reasonable cost. While we have obtained liability insurance covering actions our directors take in their capacities as directors, our board of directors believes that the current directors’ liability insurance environment, and the environment for the foreseeable future, is characterized by increasing premiums, reduced coverage and an increasing risk of litigation and liability. Our board of directors believes that our limitation of directors’ liability will enable us to obtain such insurance in the future on terms more favorable than if such a provision were not included in our articles of incorporation.

Indemnification

Our bylaws contain certain indemnification provisions that provide that our directors, officers, employees and agents will be indemnified against expenses they actually and reasonably incur if they are successful on the merits of a claim or proceeding. When a case or dispute is not determined ultimately on its merits, the indemnification provisions provide that we will indemnify directors when they meet the applicable standard of conduct. A director meets the applicable standard of conduct if the director acted in a manner he or she reasonably believed to be in or not opposed to our best interests and, with respect to any criminal action or proceeding, if the director had no reasonable cause to believe his or her conduct was unlawful. Our board of directors, our shareholders or our independent legal counsel determines whether the applicable standard of conduct has been met in each specific case.

Our bylaws also provide that the indemnification rights are not exclusive of other indemnification rights to which a director may be entitled under any bylaw, resolution or agreement, either specifically or in general terms approved by the affirmative vote of the holders of a majority of the shares entitled to vote. We can also provide for greater indemnification than that described in our bylaws if we choose to do so, subject to our shareholders’ approval. We may not, however, indemnify a director for liability arising out of circumstances that constitute exceptions to limitation of a director’s liability for monetary damages.

The indemnification provisions of our bylaws specifically provide that we may purchase and maintain insurance on behalf of any director against any liability asserted against such person and incurred by him in any such capacity, whether or not we would have had the power to indemnify against such liability.

We are not aware of any pending or threatened action, suit or proceeding involving any of our directors or officers for which such directors or officers may seek indemnification from us.

 

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Index to Financial Statements

We have been advised that in the opinion of the Securities and Exchange Commission, indemnification of directors, officers and controlling persons for violations of the Securities Act of 1933 is against public policy and is therefore unenforceable. In the event that a claim for indemnification against such liabilities other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether indemnification is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

Legal Matters

Miller & Martin PLLC, Atlanta, Georgia will pass upon the validity of our common stock being offered by this prospectus.

Experts

Our financial statements as of, and for the years ended, December 31, 2006 and 2005, set forth herein have been so included in reliance on the report of Mauldin & Jenkins, LLC, registered independent public accounting firm, given on the authority of that firm as experts in accounting and auditing.

Where You Can Find Additional Information

We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to us and our common stock, reference is made to the registration statement and the exhibits. The registration statement may be examined at, and copies of the registration statement may be obtained at prescribed rates from the Securities and Exchange Commission’s public reference room at 100 F Street, NE, Washington, D.C. 20549. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The address of such site is http://www.sec.gov .

As of the date of this prospectus we are a reporting company subject to the full informational requirements of the Securities Exchange Act of 1934. We will fulfill our obligations with respect to these requirements by filing periodic reports containing audited financial statements and with quarterly reports for the first three quarters of each fiscal year containing unaudited summary financial information. Our fiscal year is the calendar year.

 

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Index to Financial Statements

Index to Consolidated Financial Statements

 

       Page

Annual Financial Statements (audited):

  

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2006 and 2005

   F-3

Consolidated Statements of Income and Other Comprehensive Income for the Years Ended December 31, 2006 and 2005

   F-4

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2006 and 2005

   F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006 and 2005

   F-6

Notes to Consolidated Financial Statements

   F-7

Interim Financial Statements (unaudited):

  

Consolidated Balance Sheet at June 30, 2007

   F-21

Consolidated Statements of Income and Comprehensive Income for the Three and Six Month Periods Ended June 30, 2007 and 2006

  

F-22

Consolidated Statements of Cash Flows for the Six Month Periods Ended June, 2007 and 2006

   F-23

Notes to Consolidated Financial Statements

   F-24

 

F-1


Table of Contents
Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Piedmont Community Bank and Subsidiary

Gray, Georgia

We have audited the consolidated balance sheets of Piedmont Community Bank and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income and other comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Piedmont Community Bank and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Mauldin & Jenkins, LLC

Atlanta, Georgia

March 27, 2007, except for Note 15 as to which the date is April 19, 2007

 

F-2


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Index to Financial Statements

PIEDMONT COMMUNITY BANK

AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2006 and 2005

 

       2006     2005  

ASSETS

    

Cash and due from banks

   $ 1,659,993     $ 898,199  

Interest-bearing deposits in banks

     1,584,000       1,584,000  

Federal funds sold

     3,762,000       557,000  

Securities held to maturity, at cost (fair value of $636,543 and $205,580, respectively)

     644,912       212,000  

Securities available for sale, at fair value

     6,162,724       5,442,740  

Restricted equity securities, at cost

     767,245       373,700  

Loans, less allowance for loan losses of $1,235,044 and $878,845, respectively

     117,692,476       79,286,742  

Accrued interest receivable

     1,376,236       654,243  

Premises and equipment, net

     6,831,779       3,507,781  

Other assets

     562,674       359,052  
                

Total assets

   $ 141,044,039     $ 92,875,457  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Noninterest-bearing

   $ 5,187,150     $ 3,836,726  

Interest-bearing

     106,897,692       68,016,247  
                

Total deposits

     112,084,842       71,852,973  

Accrued interest payable

     941,498       396,093  

Federal Home Loan Bank advances

     9,100,000       5,000,000  

Federal funds purchased

     1,977,500       —    

Minority interest in subsidiary

     —         54,081  

Other liabilities

     789,275       413,280  
                

Total liabilities

   $ 124,893,115     $ 77,716,427  
                

Stockholders’ equity:

    

Common stock, par value $5.00 per share, 10,000,000 shares authorized; 1,630,762 and 1,362,127 shares issued and outstanding, respectively

     6,794,840       6,810,635  

Capital surplus

     9,017,451       8,767,883  

Undivided profits (accumulated deficit)

     405,061       (326,498 )

Accumulated other comprehensive loss

     (66,428 )     (92,990 )
                

Total stockholders’ equity

     16,150,924       15,159,030  
                

Total liabilities and stockholders’ equity

   $ 141,044,039     $ 92,875,457  
                

See accompanying report of independent registered public accounting firm and notes to consolidated financial statements.

 

F-3


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Index to Financial Statements

PIEDMONT COMMUNITY BANK

AND SUBSIDIARY

Consolidated Statements of Income and Other Comprehensive Income

Years Ended December 31, 2006 and 2005

 

     2006     2005  

Interest and dividend income:

    

Loans, including fees

   $ 7,958,505     $ 4,421,233  

Securities available for sale

     255,901       189,441  

Securities held to maturity

     13,949       7,415  

Interest-bearing deposits in banks

     77,087       52,935  

Federal funds sold

     48,344       21,251  

Dividends

     31,616       14,877  
                
     8,385,402       4,707,152  
                

Interest expense:

    

Deposits

     3,884,734       1,825,130  

Other borrowings

     435,364       160,514  
                
     4,320,098       1,985,644  
                

Net interest income

     4,065,304       2,721,508  

Provision for loan losses

     356,092       370,600  
                

Net interest income after provision for loan losses

     3,709,212       2,350,908  
                

Noninterest income:

    

Service charges on deposit accounts

     83,601       91,691  

Income from mortgage operations

     280,632       377,669  

Other

     40,466       38,877  
                
     404,699       508,237  
                

Noninterest expense:

    

Salaries and employee benefits

     1,677,163       1,040,219  

Equipment and occupancy

     361,660       224,773  

Other operating

     929,054       758,479  
     2,967,877       2,023,471  
                

Income before provision for income taxes (benefits) and minority interest in net income of subsidiary

     1,146,034       835,674  

Provision for income taxes (benefits)

     410,581       (232,869 )
                

Income before minority interest in net income of subsidiary

     735,453       1,068,543  

Minority interest in net income of subsidiary

     (3,894 )     (22,935 )
                

Net income

     731,559       1,045,608  

Other comprehensive income (loss):

    

Unrealized gain (loss) on securities available for sale arising during period, net of tax expense (benefits) of $7,620 and ($47,903), respectively

     26,562       (54,692 )
                

Comprehensive income

   $ 758,121     $ 990,916  
                

Income per share:

    

Basic

   $ 0.45     $ 0.83  
                

Diluted

   $ 0.44     $ 0.83  
                

See accompanying report of independent registered public accounting firm and notes to consolidated financial statements.

 

F-4


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Index to Financial Statements

PIEDMONT COMMUNITY BANK

AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2006 and 2005

 

     Common Stock    

Capital

Surplus

    (Accumulated
Deficit)
Undivided
Profits
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
     Shares     Par Value          

Balance, December 31, 2004

   783,155     $ 3,915,775     $ 3,887,354     $ (1,372,106 )   $ (38,298 )   $ 6,392,725  

Net income

   —         —         —         1,045,608       —         1,045,608  

Sale of common stock

   578,972       2,894,860       5,210,748       —         —         8,105,608  

Stock issuance costs

   —         —         (330,219 )     —         —         (330,219 )

Other comprehensive loss

   —         —         —         —         (54,692 )     (54,692 )
                                              

Balance, December 31, 2005

   1,362,127       6,810,635       8,767,883       (326,498 )     (92,990 )     15,159,030  

Net income

   —         —         —         731,559       —         731,559  

Redemption of common stock

   (3,159 )     (15,795 )     (28,431 )     —         —         (44,226 )

Stock based employee compensation cost

   —         —         277,999       —         —         277,999  

Other comprehensive income

   —         —         —         —         26,562       26,562  
                                              

Balance, December 31, 2006

   1,358,968     $ 6,794,840     $ 9,017,451     $ 405,061     $ (66,428 )   $ 16,150,924  
                                              

See accompanying report of independent registered public accounting firm and notes to consolidated financial statements.

 

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Index to Financial Statements

PIEDMONT COMMUNITY BANK

AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2006 and 2005

 

     2006     2005  

Cash flow from operating activities:

    

Net income

   $ 731,559     $ 1,045,608  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     190,465       146,671  

Provision for loan losses

     356,092       370,600  

Share based compensation cost

     277,999       —    

Deferred taxes

     (156,532 )     (245,499 )

Increase in accrued interest receivable

     (721,993 )     (379,062 )

Increase in accrued interest payable

     545,405       259,991  

Net other operating activities

     267,204       211,566  
                

Net cash flow provided by operating activities

     1,490,199       1,409,875  
                

Cash flow from investing activities:

    

Net increase in loans

     (38,761,826 )     (26,536,050 )

Net increase in interest-bearing deposits in banks

     —         (495,000 )

Net (increase) decrease in federal funds sold

     (3,205,000 )     792,000  

Purchases of restricted equity securities

     (393,545 )     (62,500 )

Purchases of securities available for sale

     (1,001,529 )     (1,529,123 )

Proceeds from maturities of securities available for sale

     315,727       338,128  

Purchase of securities held to maturity

     (451,723 )     —    

Proceeds from maturities of securities held to maturity

     18,811       68,000  

Purchases of premises and equipment and software

     (3,514,463 )     (1,884,950 )
                

Net cash flow used in investing activities

     (46,993,548 )     (29,309,495 )
                

Cash flow from financing activities:

    

Net increase in deposits

     40,231,869       20,870,939  

Redemption of common stock

     (44,226 )     —    

Net proceeds from sale of common stock

     —         7,975,633  

Net increase in Federal funds purchased

     1,977,500       —    

Proceeds from Federal Home Loan Bank advances

     9,100,000       1,500,000  

Repayment of Federal Home Loan Bank advances

     (5,000,000 )     (2,000,000 )
                

Net cash flow provided by financing activities

     46,265,143       28,346,572  
                

Net increase in cash and due from banks

     761,794       446,952  

Cash and due from banks at beginning of period

     898,199       451,247  
                

Cash and due from banks at end of period

   $ 1,659,993     $ 898,199  
                

Supplemental schedule of noncash investing and financing activities-

    

Change in accumulated other comprehensive loss

   $ 26,562     $ (54,692 )
                

Supplemental disclosures of cash flow information -

    

Cash paid for:

    

Interest

   $ 3,774,693     $ 1,725,653  
                

Income taxes

   $ 25,430     $ —    
                

See accompanying report of independent registered public accounting firm and notes to consolidated financial statements.

 

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PIEDMONT COMMUNITY BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Piedmont Community Bank (the “Bank”) is a commercial bank with locations in Gray, Jones County, Georgia and Macon, Bibb County Georgia. The Bank provides a full range of banking services in its primary market areas of Jones, Baldwin, Bibb, Monroe, Houston, Greene and Putnam counties. The Bank operated a mortgage origination office through a limited liability company, Piedmont Community Mortgage, LLC. The Bank owned 51% of the limited liability company. Effective November 1, 2006, the Bank dissolved Piedmont Community Mortgage, LLC.

Basis of Presentation

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Bank and its subsidiary. Significant intercompany transactions and balances have been eliminated in consolidation.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, deferred income taxes, the valuation of foreclosed assets and contingent assets and liabilities. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed assets, management obtains independent appraisals for significant collateral.

Cash, Due From Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from interest bearing deposits in banks, loans, federal funds purchased and sold and deposits are reported net.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive loss. Equity securities including restricted equity securities without a readily determinable fair value are classified as available for sale and recorded at cost.

The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date. Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans

Loans are reported at their outstanding principal balances less net deferred loan origination fees and costs and the allowance for loan losses. Interest income is accrued on the outstanding principal balance. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield over the life of the loan using a method which approximates a level yield.

 

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The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is recognized on the cash-basis or cost-recovery method, until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured.

A loan is considered impaired when it is probable, based on current information and events, the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either loss, doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation, computed principally by the straight-line method over the following estimated useful lives of the assets.

 

Asset Type

   Useful Life

Land improvements

   15 years

Buildings

   10-40 years

Furniture and equipment

   3-10 years

Computer software

   3 years

Foreclosed Assets

Foreclosed assets represent properties acquired through or in lieu of loan foreclosure and is initially recorded at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs relating to holding foreclosed assets and subsequent adjustments to the value are expensed. There were no amounts of foreclosed assets as of December 31, 2006 and 2005.

 

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Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is recorded for those deferred tax items for which it is more likely than not, that realization will not occur in the near term.

Stock Compensation Plan

The Bank has a stock-based employee/director compensation plan which is more fully described in Note 10. Prior to January 1, 2006, the Bank accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees , and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation . In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting (SFAS) No. 123(R) (revised 2004), Share-Based Payment , which revises SFAS No. 123, Accounting for Stock-Based Compensation , and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees . SFAS No. 123(R) requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on a grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Effective January 1, 2006, the Bank adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes compensation cost for all share-based payments granted prior to but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and compensation cost for all share-based payments granted or modified subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Accordingly, during the year ended December 31, 2006, the Bank recognized $277,999 in share based compensation cost associated with these options. Results for prior periods have not been restated.

Stock Compensation Plan

As a result of adopting SFAS 123R on January 1, 2006, the Bank’s income before income taxes and net income for the year ended December 31, 2006, were $277,999 and $215,814 lower, respectively, than if it had continued to account for share-based compensation under the provisions of APB Opinion No. 25. Basic and diluted earnings per share for the year ended December 31, 2006 would have been $.58 and $.57, respectively, if the Bank had not adopted SFAS 123R, compared to reported basic and diluted earnings per share of $.45 and $.44, respectively.

The following table illustrates the effect on net income and earnings per share if the Bank had applied the fair value recognition provisions of SFAS No. 123(R) to options granted under the Bank’s stock option plan for the year ended December 31, 2005.

 

     Year Ended
December 31, 2005
 

Net income as reported

   $ 1,045,608  

Additional expense had the Company adopted SFAS 123

     (320,939 )

Related tax benefit

   $ 121,109  
        

Pro forma net income

   $ 845,778  
        

Earnings per share:

  

Basic – as reported

   $ 0.83  
        

Basic – pro forma

   $ 0.67  
        

Diluted – as reported

   $ 0.83  
        

Diluted – pro forma

   $ 0.67  
        

 

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SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options and warrants (excess tax benefits) to be classified as financing cash flows. The Bank had no cash flows resulting from excess tax benefits for the years ended December 31, 2006 and 2005.

Earnings per Common Share

SFAS No. 128, Earnings Per Share , establishes standards for computing and presenting basic and diluted earnings per share. In this regard, the Bank is required to report earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants on the face of the statements of income. Earnings per common share are based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per share. Additionally, the Bank must reconcile the amounts used in the computation of both basic earnings per share and diluted earnings per share. Presented below is a summary of the components used to calculate basic and diluted earnings per common share.

Earnings per Common Share

 

     December 31,
     2006    2005

Basic earnings per share:

     

Weighted average common shares outstanding

     1,630,866      1,266,475
             

Net income

   $ 731,559    $ 1,045,608
             

Basic earnings per share

   $ 0.45    $ 0.83
             

Diluted earnings per share:

     

Weighted average common shares outstanding

     1,630,866      1,266,475

Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the period

     29,669      —  
             

Total weighted average common shares and common stock equivalents outstanding

     1,660,535      1,266,475
             

Net income

   $ 731,559    $ 1,045,608
             

Diluted earnings per share

   $ 0.44    $ 0.83
             

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Reclassifications

Certain reclassifications have been made to the December 31, 2005 consolidated balance sheet, with no effect on total assets, to be consistent with the classifications adopted for the year ended December 31, 2006 consolidated financial statements.

Recent Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 . SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and resolves issues in Statement No. 133 Implementation Issue No. D1, Application of Statement 133 to

 

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Beneficial Interests in Securitized Financial Assets . The provisions of SFAS No. 155 are effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material impact on the financial condition or the results of operations of the Bank.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140 . SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. SFAS No. 156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. The adoption of this standard is not expected to have a material impact on the financial condition or the results of operations of the Bank.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the financial condition or the results of operations of the Bank.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), to clarify the accounting for uncertain tax positions in accordance with SFAS No. 109, Accounting for Income Taxes . FIN 48 defines a minimum recognition threshold that a tax position must meet to be recognized in an entity’s financial statements. Additionally, FIN 48 provides guidance on derecognition, measurement, classification, interim period accounting, disclosure and transition requirements in accounting for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this interpretation is not expected to have a material impact on the financial condition or the results of operations of the Bank.

NOTE 2.        SECURITIES

The amortized cost and fair value of securities are summarized as follows:

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Available for Sale

          

December 31, 2006:

          

Government sponsored agencies

   $ 4,537,792    $ 1,927    $ (53,272 )   $ 4,486,447

Mortgage backed securities

     1,731,643      —        (55,366 )     1,676,277
                            
   $ 6,269,435    $ 1,927    $ (108,638 )   $ 6,162,724
                            

December 31, 2005:

          

Government sponsored agencies

   $ 3,543,800    $ —      $ (76,239 )   $ 3,467,561

Mortgage backed securities

     2,039,833      —        (64,654 )     1,975,179
                            
   $ 5,583,633    $ —      $ (140,893 )   $ 5,442,740
                            

Held to Maturity

          

December 31, 2006:

          

State and county municipals

   $ 644,912    $ 1,896    $ (10,265 )   $ 636,543
                            

December 31, 2005:

          

State and county municipals

   $ 212,000    $ —      $ (6,420 )   $ 205,580
                            

 

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The market value of investment securities is based on quoted market values and is significantly affected by the interest rate environment. At December 31, 2006 and 2005, all unrealized losses in the investment securities portfolio were for debt securities. These unrealized losses are considered temporary because of acceptable investment grades and our ability to hold these securities until a market price recovery or maturity.

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time individual securities have been in a continuous loss position, follows:

 

     Less Than 12 Months     12 Months or More     Total  
    

Fair

Value

   Unrealized
Losses
   

Fair

Value

   Unrealized
Losses
   

Fair

Value

   Unrealized
Losses
 

December 31, 2006:

               

Government sponsored agencies

   $ 499,300    $ (336 )   $ 3,230,633    $ (52,936 )   $ 3,729,933    $ (53,272 )

State and county municipals

     245,000      (5,000 )     187,985      (5,265 )     432,985      (10,265 )

Mortgaged-backed securities

     —        —         1,431,618      (55,366 )     1,431,618      (55,366 )
                                             
   $ 744,300    $ (5,336 )   $ 4,850,236    $ (113,567 )   $ 5,594,536    $ (118,903 )
                                             

December 31, 2005:

               

Government sponsored agencies

   $ 1,016,661    $ (13,092 )   $ 2,450,900    $ (63,147 )   $ 3,467,561    $ (76,239 )

State and county municipals

     205,580      (6,420 )     —        —         205,580      (6,420 )

Mortgaged-backed securities

     952,051      (23,151 )     1,023,128      (41,503 )     1,975,179      (64,654 )
                                             
   $ 2,174,292    $ (42,663 )   $ 3,474,028    $ (104,650 )   $ 5,648,320    $ (147,313 )
                                             

The amortized cost and fair value of debt securities available for sale as of December 31, 2006 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale    Held to Maturity
     Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Due in one year or less

   $ 1,002,875    $ 989,150    $ —      $ —  

Due from one to five years

     2,536,128      2,504,072      193,250      187,985

Due from five to ten years

     998,789      993,225      201,662      203,558

Due after ten years

     —        —        250,000      245,000

Mortgage-backed securities

     1,731,643      1,676,277      —        —  
                           
   $ 6,269,435    $ 6,162,724    $ 644,912    $ 636,543
                           

There were no sales of securities for the years ended December 31, 2006 and 2005.

Investment securities with a carrying amount of $652,152 and $4,886 at December 31, 2006 and 2005, respectively, were pledged as collateral on public deposits and for other purposes as required by law.

 

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NOTE 3.        LOANS

The composition of loans is summarized as follows:

 

     December 31,  
     2006     2005  

Commercial

   $ 6,946,346     $ 3,735,110  

Real estate – construction

     25,002,006       12,317,616  

Real estate – mortgage

     12,846,584       10,455,891  

Real estate – commercial

     72,088,049       51,781,444  

Consumer installment and other

     2,108,892       1,911,995  
     118,991,877       80,202,056  

Deferred loan fees

     (64,357 )     (36,469 )

Allowance for loan losses

     (1,235,044 )     (878,845 )
                

Loans, net

   $ 117,692,476     $ 79,286,742  
                

Changes in the allowance for loan losses are as follows:

 

     Years Ended December 31,  
     2006     2005  

Balance, beginning of year

   $ 878,845     $ 548,063  

Provision for loan losses

     356,092       370,600  

Loans charged off

     (1,567 )     (40,863 )

Recoveries of loans previously charged off

     1,674       1,045  
                

Balance, end of year

   $ 1,235,044     $ 878,845  
                

There was no recorded investment in impaired loans at December 31, 2006 and 2005. The average recorded investment in impaired loans for 2006 and 2005 was $— and $15,813, respectively. Interest income on impaired loans recognized for cash payments received was not material for the years ended 2006 and 2005, respectively. There were no loans past due ninety days or more and still accruing interest at December 31, 2006 or 2005.

In the ordinary course of business, the Bank has granted loans to certain related parties, including executive officers, directors and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2006 are as follows:

 

Balance, beginning of year

   $ 1,850,078  

Advances

     2,150,827  

Repayments

     (399,485 )
        

Balance, end of year

   $ 3,601,420  
        

 

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NOTE 4.        PREMISES AND EQUIPMENT

Premises and equipment is summarized as follows:

 

     December 31,  
     2006     2005  

Land and land improvements

   $ 3,468,058     $ 2,252,246  

Buildings

     2,749,091       835,220  

Construction in process

     —         76,550  

Furniture and equipment

     1,012,799       579,251  

Computer software

     207,059       179,280  
                
     7,437,007       3,922,547  

Accumulated depreciation and amortization

     (605,228 )     (414,766 )
                
   $ 6,831,779     $ 3,507,781  
                

NOTE 5.        DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2006 and 2005 was $32,700,155 and $22,384,639, respectively. The scheduled maturities of time deposits at December 31, 2006 are as follows:

 

2007

   $ 72,320,043

2008

     8,116,752

2009

     3,607,330

2010

     649,171

2011

     868,734
      
   $ 85,562,030
      

The Bank had brokered deposits of $9,354,000 and $10,251,000 at December 31, 2006 and 2005, respectively.

NOTE 6.        FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances as of December 31, 2006 and 2005 are summarized as follows:

 

          December 31,
    

Maturity Date

   2006    2005

4.20% Fixed rate

  

October 3, 2016

   $ 9,100,000    $ —  

4.44% Variable rate

  

August 21, 2006

     —        5,000,000
                
      $ 9,100,000    $ 5,000,000
                

The advances from the FHLB are secured by certain qualifying loans of $12,670,189 and FHLB stock of $595,300. In addition, the Bank has available unused lines of credit with various financial institutions totaling $5,672,500 at December 31, 2006.

 

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NOTE 7.        INCOME TAXES

Income taxes consists of the following:

 

     Years Ended December 31,  
     2006     2005  

Current

   $ 567,113     $ 368,856  

Deferred

     (156,532 )     (81,046 )

Change in valuation allowance

     —         (520,679 )
                

Income taxes

   $ 410,581     $ (232,869 )
                

The Bank’s income tax differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences as of December 31, 2006 and 2005 is as follows:

 

     Years Ended December 31,  
     2006     2005  

Tax provision at federal statutory rate

   $ 388,328     $ 276,331  

Tax-free income

     (4,743 )     (3,907 )

Disallowed interest expense

     1,034       512  

Incentive stock compensation

     38,491       —    

Surtax exemption

     —         (11,347 )

State income tax

     19,117       26,054  

Other items, net

     (31,646 )     167  

Change in valuation allowance

     —         (520,679 )
                

Income taxes

   $ 410,581     $ (232,869 )
                
The components of deferred taxes are as follows:     
     Years Ended December 31,  
     2006     2005  

Deferred income tax assets:

    

Loan loss reserves

   $ 426,856     $ 292,482  

Preopening and organization expenses

     19,387       58,163  

Contributions

     —         3,892  

Non-qualified stock compensation

     62,185       —    

Securities available for sale

     40,283       47,903  
                
     548,711       402,440  
                

Deferred income tax liabilities:

    

Depreciation

     103,667       106,084  

Other items

     2,730       2,954  
                
     106,397       109,038  
                

Net deferred income taxes

   $ 442,314     $ 293,402  
                

During 2005, management assessed the continuing need for a valuation allowance against deferred tax assets and concluded that an allowance was no longer needed under the guidance provided by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes . As a result, the Bank eliminated the valuation allowance and recognized all net deferred tax assets.

 

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Index to Financial Statements

NOTE 8.        COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.

The Bank’s 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. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:

 

     December 31
     2006    2005

Commitment to extend credit

   $ 30,576,000    $ 17,553,000

Letters of credit

     20,000      20,000
             
   $ 30,596,000    $ 17,573,000
             

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation for the party. Collateral held varies, but may include property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees 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 held varies as specified above and is required in instances which the Bank deems necessary.

At December 31, 2006 and 2005, the carrying amount of liabilities related to the Bank’s obligation to perform under standby letters of credit was insignificant. The Bank has not been required to perform on any standby letters of credit, and the Bank has not incurred any losses on standby letters of credit for the years ended December 31, 2006 and 2005.

Contingencies

In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Bank’s financial statements.

NOTE 9.        CONCENTRATIONS OF CREDIT

The Bank originates primarily commercial, residential and consumer loans to customers in its primary market area. The ability of the majority of the Bank’s customers to honor their contractual loan obligations is dependent on the economy in these areas. Ninety-two percent of the Bank’s loan portfolio is secured by real estate, of which a substantial portion is secured by real estate in the Bank’s market area.

The Bank, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of the Bank’s statutory capital or approximately $3,953,000.

NOTE 10.        STOCK OPTIONS

During 2005, the Company adopted a Stock Option Plan (“Plan”). The Plan offers stock options to key employees and directors to encourage continued employment by facilitating their purchase of an equity interest in the Bank. The options granted under the Plan may either be incentive stock options or non-qualified stock options as specified in the

 

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Index to Financial Statements

option agreement. These options are granted at the discretion of the Board of Directors at an exercise price at least equal to the fair market value of the common stock on the date of the grant. The options have a term of ten years from the date of grant and vest ratably over varying vesting periods. A total of 383,502 shares have been reserved under the Plan.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted-average assumptions listed in the table below. Expected volatility is based on expected volatility of similar entities. Expected dividends are based on anticipated dividends over the expected life and the market price of the Bank’s stock price at grant date. Historical data is used to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of the options granted is estimated based on the short-cut method.

NOTE 10.        STOCK OPTIONS

 

     2006     2005  

Weighted-average risk-free interest rate

     4.71 %     4.11 %

Expected life of the options

     6.5 years       10 years  

Expected dividends (as a percentage of the fair value of the stock)

     1.10 %     0.00 %

Expected volatility

     17.34 %     0.00 %

Weighted-average grant date fair value

   $ 3.06     $ 3.90  

At December 31, 2006, there was approximately $607,000 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 2.15 years.

A summary of activity of the Bank’s Stock Plan is as follows:

 

     2006
     Number    Weighted-
Average
Exercise Price

Outstanding at beginning of year

   139,467    $ 11.67

Granted

   241,238      11.68

Exercised

   —        —  

Forfeited/Expired

   —        —  
       

Outstanding at end of year

   380,705      11.68
       

Options exercisable at year-end

   109,039      11.67
       

The weighted-average fair value of options granted during the year ended December 31, 2006 and 2005 was $3.06 and $3.90, respectively.

Information pertaining to options outstanding at December 31, 2006 is as follows:

 

Options Outstanding    Options Exercisable
Number
outstanding
   Weighted-
average
remaining
contractual
life
   Weighted-
average
exercise
price
   Aggregate
intrinsic
value
   Number
exercisable
   Weighted-
average
exercise
price
   Aggregate
intrinsic
value
380,705    8.78    $ 11.68    $ 1,348,330    109,039    $ 11.67    $ 386,181

 

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Index to Financial Statements

As of December 31, 2006, the weighted-average remaining contractual life of the options outstanding was 1.83 years.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Bank’s closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair market value of the Bank’s stock.

There were no options exercised during the years ended December 31, 2006 and 2005. The total fair value of options vested during the years ended December 31, 2006 and 2005 was $104,275 and $320,978, respectively.

The compensation cost charged against income for the year ended December 31, 2006 was $277,999. Income tax benefits recognized for the year ended December 31, 2006 was $62,185. There was no compensation cost or income tax benefits recognized for the year ended December 31, 2005.

NOTE 11.        REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2006, approximately $379,000 of retained earnings were available for dividend declaration without regulatory approval.

The Bank is subject to various capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary regulatory actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2006 and 2005, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2006, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Bank’s actual capital amounts (in thousands) and ratios are presented in the following table.

 

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                           To Be Well Capitalized  
     Actual     Adequacy Purposes:     Action Provisions:  
     Amount    Ratio     Amount    Ratio     Amount    Ratio  

As of December 31, 2006:

               

Total Capital (to Risk Weighted Assets)

   $ 17,452    12.8 %   $ 10,873    8.0 %   $ 13,591    10.0 %

Tier I Capital (to Risk Weighted Assets)

   $ 16,217    11.9 %   $ 5,436    4.0 %   $ 8,154    6.0 %

Tier I Capital (to Average Assets)

   $ 16,217    12.8 %   $ 5,085    4.0 %   $ 6,356    5.0 %

As of December 31, 2005:

               

Total Capital (to Risk Weighted Assets)

   $ 16,131    18.4 %   $ 7,030    8.0 %   $ 8,788    10.0 %

Tier I Capital (to Risk Weighted Assets)

   $ 15,252    17.4 %   $ 3,515    4.0 %   $ 5,273    6.0 %

Tier I Capital (to Average Assets)

   $ 15,252    17.2 %   $ 3,541    4.0 %   $ 4,426    5.0 %

NOTE 12.        FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Bank.

The following methods and assumptions were used by the Bank in estimating the fair value of its financial instruments:

Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: The carrying amount of cash, due from banks, interest-bearing deposits in banks and federal funds sold approximates fair value.

Securities: Fair value of securities is based on available quoted market prices. The carrying amount of equity securities with no readily determinable fair value approximates fair value.

Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable.

Deposits: The carrying amount of demand deposits and savings deposits approximate fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities.

Other Borrowings: The carrying amount of variable rate borrowings approximates fair value. The fair value of fixed rate other borrowings are estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowing arrangements.

 

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Index to Financial Statements

Accrued Interest: The carrying amount of accrued interest approximates their fair value.

Off-Balance Sheet Instruments: The carrying amount of commitments to extend and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees charged to enter into such agreements.

The carrying amount and estimated fair values of the Bank’s financial instruments are as follows:

 

     December 31,
     2006    2005
     Carrying
Amount
  

Fair

Value

   Carrying
Amount
   Fair
Value
     (In Thousands)

Financial assets:

           

Cash, due from banks, interest-bearing deposits in banks and federal funds sold

   $ 7,006    $ 7,006    $ 3,039    $ 3,039

Securities

     7,575      7,567      6,028      6,022

Loans

     117,692      117,339      79,287      79,644

Accrued interest receivable

     1,376      1,376      654      654

Financial liabilities:

           

Deposits

     112,085      112,051      71,853      67,965

Federal funds purchased

     1,978      1,978      —        —  

Other borrowings

     11,078      11,054      5,000      5,000

Accrued interest payable

     941      941      396      396

NOTE 13.        SUPPLEMENTAL FINANCIAL DATA

Components of other operating expenses are as follows:

 

     Years Ended December 31,
     2006    2005

Data processing

   $ 163,695    $ 122,922

Professional services

     110,269      140,665

Other taxes

     76,637      67,219

All other operating

     578,453      427,673
             

Other operating expenses

   $ 929,054    $ 758,479
             

NOTE 14.        SUBSEQUENT EVENT

On February 7, 2007, Piedmont Community Bank Group, Inc., a newly organized bank holding company, consummated the acquisition of all of the outstanding common stock of Piedmont Community Bank in exchange for 1,358,968 shares of no par value common stock. The formation and reorganization was approved by the stockholders during the fourth quarter of 2006.

NOTE 15.        STOCK SPLIT

On April 19, 2007, the Company declared a 1.2 for 1 stock split payable on May 10, 2007 to stockholders of record as of April 30, 2007. The number of issued and outstanding shares as of December 31, 2006 has been revised to give effect to the stock split. In addition, earnings per common share and all per share data for the years ended December 31, 2006 and 2005 have been retroactively adjusted for this split as if it occurred on January 1, 2005.

 

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Index to Financial Statements

PIEDMONT COMMUNITY BANK GROUP, INC.

Consolidated Balance Sheets

June 30, 2007 and December 31, 2006

 

     June 30, 2007
(unaudited)
    December 31, 2006  

ASSETS

    

Cash and due from banks

   $ 5,802,021     $ 1,659,993  

Interest bearing deposits in banks

     3,107,738       1,584,000  

Federal funds sold

     21,000       3,762,000  

Securities held to maturity, at cost (fair value of $1,496,359 and $636,543, respectively)

     1,519,794       644,912  

Securities available for sale, at fair value

     8,968,559       6,162,724  

Restricted equity securities, at cost

     1,015,345       767,245  

Loans, less allowance for loan losses of $1,553,044 and $1,235,044, Respectively

     147,820,188       117,692,476  

Accrued interest receivable

     1,647,918       1,376,236  

Premises and equipment, net

     7,423,781       6,831,779  

Other assets

     650,339       562,674  
                

Total assets

   $ 177,976,683     $ 141,044,039  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Noninterest-bearing

   $ 7,176,474     $ 5,187,150  

Interest-bearing

     138,037,230       106,897,692  
                

Total deposits

     145,213,704       112,084,842  

Accrued interest payable

     895,931       941,498  

Federal Home Loan Bank advances

     13,100,000       9,100,000  

Federal funds purchased

     2,062,000       1,977,500  

Other liabilities

     186,185       789,275  
                

Total liabilities

     161,457,820       124,893,115  
                

Stockholders’ equity:

    

Common stock (no par value, 2007), ($5 par value, 2006) 10,000,000 shares authorized; 1,630,734 shares, and 1,358,968 shares issued and outstanding, respectively

     15,950,782       6,794,840  

Capital surplus

     —         9,017,451  

Undivided profits

     695,832       405,061  

Accumulated other comprehensive loss

     (127,751 )     (66,428 )
                

Total stockholders’ equity

     16,518,863       16,150,924  
                

Total liabilities and stockholders’ equity

   $ 177,976,683     $ 141,044,039  
                

See accompanying notes to unaudited consolidated financial statements

 

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PIEDMONT COMMUNITY BANK GROUP, INC.

Consolidated Statements of Income and Comprehensive Income

For the Three and Six Months Ended June 30, 2007 and 2006

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30, 2007     June 30, 2006     June 30, 2007     June 30, 2006  

Interest and dividend income:

        

Loans, including loan fees

   $ 3,070,367     $ 1,884,776     $ 5,704,142     $ 3,504,990  

Securities available for sale

     105,867       63,331       191,153       119,395  

Securities held to maturity

     14,643       2,525       26,960       4,278  

Interest bearing deposits in banks

     49,474       18,493       91,076       36,039  

Federal funds sold

     6,629       9,670       59,842       19,362  

Dividends

     12,432       7,885       21,985       13,574  
                                
     3,259,412       1,986,680       6,095,158       3,697,638  
                                

Interest expense:

        

Deposits

     1,727,308       883,675       3,240,251       1,628,352  

Other borrowings

     139,353       112,752       245,013       189,933  
                                
     1,866,661       996,427       3,485,264       1,818,285  
                                

Net interest income

     1,392,751       990,253       2,609,894       1,879,353  

Provision for loan losses

     181,000       56,190       318,000       175,272  
                                

Net interest income after provision for loan losses

     1,211,751       934,063       2,291,894       1,704,081  
                                

Noninterest income:

        

Service charges on deposit accounts

     23,360       22,805       51,686       42,991  

Mortgage origination income

     39,533       89,361       91,316       179,648  

Other

     11,068       9,310       25,787       21,510  
                                
     73,961       121,476       168,789       244,149  
                                

Noninterest expense:

        

Salaries and employee benefits

     540,834       433,900       1,054,038       774,847  

Equipment and occupancy

     115,148       71,160       218,295       137,203  

Other operating

     343,896       209,841       661,623       396,928  
                                
     999,878       714,901       1,933,956       1,308,978  
                                

Income before provision for income taxes and minority interest in net income of subsidiary

     285,834       340,638       526,727       639,252  

Provision for income taxes

     107,400       99,029       235,531       211,869  
                                

Income before minority interest in net income of subsidiary

     178,434       241,609       291,196       427,383  

Minority interest in net income of subsidiary

     —         (6,526 )     —         (6,228 )
                                

Net income

     178,434       235,083       291,196       421,155  

Other comprehensive loss

        

Unrealized losses on securities available for sale arising during the period, net of tax

     (63,001 )     (42,272 )     (61,323 )     (65,117 )
                                

Comprehensive income

   $ 115,433     $ 192,811     $ 229,873     $ 356,038  
                                

See accompanying notes to unaudited consolidated financial statements.

 

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Index to Financial Statements

PIEDMONT COMMUNITY BANK GROUP, INC.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2007 and 2006

(Unaudited)

 

     June 30, 2007     June 30, 2006  

Cash Flow from operating activities:

    

Net Income

   $ 291,196     $ 421,155  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     136,252       76,359  

Provision for loan losses

     318,000       175,272  

Share based compensation cost

     138,491       129,475  

Increase in accrued interest receivable

     (271,682 )     (238,681 )

Increase (decrease) in accrued interest payable

     (45,567 )     226,678  

Net other operating activities

     (653,565 )     (147,731 )
                

Net cash flow provided by (used in) operating activities

     (86,875 )     642,527  
                

Cash Flow from investing activities:

    

Net increase in loans

     (30,445,712 )     (15,729,417 )

Net decrease in federal funds sold

     3,741,000       180,000  

Net increase in interest–bearing deposits in banks

     (1,523,738 )     —    

Purchase of restricted equity securities

     (248,100 )     (221,600 )

Purchase of securities available for sale

     (3,083,120 )     (1,001,529 )

Proceeds from maturities of securities available for sale

     —         160,558  

Purchases of securities held to maturity

     (875,000 )     (201,777 )

Proceeds from maturities, calls & paydowns of securities

     175,194       —    

Purchases of premises and equipment

     (724,558 )     (1,047,649 )
                

Net cash flow used in investing activities

     (32,984,034 )     (17,861,414 )
                

Cash Flow from financing activities:

    

Net increase in deposits

     33,128,862       13,545,061  

Redemption of common stock

     —         (44,226 )

Payment of dividends on fractional shares

     (425 )     —    

Net increase in federal funds purchased

     84,500       —    

Proceeds from Federal Home Loan Bank advances

     4,000,000       4,100,000  
                

Net cash flow provided by financing activities

     37,212,937       17,600,835  
                

Net increase in cash and due from banks

     4,142,028       381,948  

Cash and due from banks at beginning of period

     1,659,993       898,199  
                

Cash and due from banks at end of period

   $ 5,802,021     $ 1,280,147  
                

Supplemental disclosures for cash flow information-Cash paid for:

    

Interest

   $ 3,530,831     $ 1,591,607  
                

Income taxes

   $ 450,000     $ —    
                

See accompanying notes to unaudited consolidated financial statements

 

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Index to Financial Statements

PIEDMONT COMMUNITY BANK GROUP, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

1. Basis of Presentation

Piedmont Community Bank Group, Inc. (the “Company”) is a one-bank holding company with respect to its wholly-owned subsidiary bank, Piedmont Community Bank (the “Bank”). The Company was organized on April 26, 2006 and consummated the acquisition of all of the outstanding common stock of the Bank in exchange for 1,358,968 shares of no par value common stock on February 7, 2007. In accounting for the transaction, the $5 par value common stock of the Bank became no par value common stock of the holding company. The formation and reorganization was approved by the stockholders during the fourth quarter of 2006.

The mortgage company was dissolved and merged into the bank in 2006.

The Bank is a commercial bank headquartered in Gray, Jones County, Georgia. The Bank provides a full range of banking services in its primary market areas of Jones, Bibb, Monroe, Houston, Greene and the surrounding counties.

The accompanying consolidated financial statements of the Company are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2006.

All significant intercompany transactions and balances have been eliminated in consolidation. The financial information included herein reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended June 30, 2007.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and income and expense amounts. Actual results could differ from those estimates. The results of operations for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year.

 

2. Stock Compensation Plan

At June 30, 2007, the Company had a stock-based employee/director compensation plan which is more fully described in Note 1 of the consolidated financial statements in the Annual Report on Form 10-KSB for the year ended December 31, 2006. As of June 30, 2007, the Company had 380,705 options outstanding.

The Company recorded stock based compensation expense of $138,491 and $129,475 for the six months ended June 30, 2007 and 2006, respectively.

At June 30, 2007, there was $468,000 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.6 years. No options have been granted or exercised in 2007. For the six months ended June 30, 2006, 200,032 options were granted with a weighted-average exercise price of $14.00 per share and a weighted-average grant date fair value of $3.66 per option.

 

3. Earnings Per Common Share

SFAS No. 128, Earnings Per Share , establishes standards for computing and presenting basic and diluted earnings per share. In this regard, the Company is required to report earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants on the face of the statements of income. Earnings per common share are based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per share. Additionally, the Company must reconcile the amounts used in the computation of both basic earnings per share and diluted earnings per share.

 

F-24


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Index to Financial Statements

Presented below is a summary of the components used to calculate basic and diluted earnings per common share.

 

     Three Months Ended    Six Months Ended
     June 30, 2007    June 30, 2006    June 30, 2007    June 30, 2006

Basic earnings per share:

           

Weighted average common shares outstanding

     1,630,734      1,630,762      1,630,753      1,630,972
                           

Net income

   $ 178,434    $ 235,083    $ 291,196    $ 421,155
                           

Basic earnings per share

   $ 0.11    $ 0.14    $ 0.18    $ 0.26
                           

Diluted earnings per share:

           

Weighted average common shares outstanding

     1,630,734      1,630,762      1,630,753      1,630,972

Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the period

     33,934      14,612      34,946      14,612
                           

Total weighted average common shares and common stock equivalents outstanding

     1,664,668      1,645,374      1,665,700      1,645,584
                           

Net income

   $ 178,434    $ 235,083    $ 291,196    $ 421,155
                           

Diluted earnings per share

   $ 0.11    $ 0.14    $ 0.17    $ 0.26
                           

 

4. Loans

The composition of loans is summarized as follows:

 

    

June 30,

2007

   

December 31,

2006

 

Commercial

   $ 13,971,341     $ 6,946,346  

Real estate – construction

     37,456,479       25,002,006  

Real estate – mortgage

     14,562,410       12,846,584  

Real estate – commercial

     81,204,879       72,088,049  

Consumer installment and other

     2,270,720       2,108,892  
                
     149,465,829       118,991,877  

Deferred loan fees

     (92,597 )     (64,357 )

Allowance for loan losses

     (1,553,044 )     (1,235,044 )
                

Loans, net

   $ 147,820,188     $ 117,692,476  
                

 

5. Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes . FIN 48 provides detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in the financial statements. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. Any difference between the tax position taken in the tax return and the tax position recognized in the financial statements using the criteria above results in the recognition of a liability in the financial statements for the unrecognized benefit. Similarly, if a tax position fails to meet the more-likely-than-not recognition threshold, the benefit taken in a tax return will also result in the recognition of a liability in the financial statements for the full amount of the unrecognized benefit. The new interpretation was effective for the Company for the six months ended June 30, 2007. The adoption of this new accounting principle did not have a significant impact on the Company’s financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for the fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not anticipate the adoption of this new accounting principle to have a material effect on its financial position, results of operations, or cash flows.

 

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Index to Financial Statements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years after November 15, 2007. The adoption of this standard is not expected to have a material impact on the financial condition or the results of operations of the Company and the Company did not early implement.

 

F-26


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Index to Financial Statements

EXHIBIT A

SUBSCRIPTION AGREEMENT

Piedmont Community Bank Group, Inc.

110 Bill Conn Parkway

Gray, Georgia 31032

Ladies and Gentlemen:

The undersigned hereby subscribes for and agrees to purchase the number of shares of common stock, no par value (the “Common Stock”), of Piedmont Community Bank Group, Inc., a Georgia corporation (the “Company”), indicated below. The undersigned has executed and delivered this Subscription Agreement in connection with the Company’s offering of Common Stock described in its prospectus dated [                           ] (such prospectus, including any amendments and supplements thereto, is herein called the “Prospectus.”) The undersigned agrees to purchase the shares of Common Stock subscribed for herein for the purchase price of $[              ] per share.

The undersigned acknowledges receipt of a copy of the Prospectus. The undersigned further acknowledges that an investment in the Common Stock involves significant risks, as set forth under “Risk Factors” in the Prospectus. The undersigned understands that no federal or state agency has made any findings or determination regarding the fairness of the offering of the Common Stock, the accuracy or adequacy of the Prospectus, or any recommendation or endorsement concerning an investment in the Common Stock. The undersigned represents that the undersigned resides in the State indicated below.

The undersigned agrees that this subscription is not binding on the Company until the undersigned furnishes to the Company payment for the shares subscribed for and the Company accepts the subscription. The undersigned acknowledges that the Company has the right to reject this Subscription Agreement either in whole or in part, in its sole discretion.

 

 
Signature
 
Signature (for joint ownership)
Print Name(s):    
Print Address:    
 
(Please print or type exact name(s) in which the shares should be registered.)

Accepted as of ____________, 200__, as to _________ shares.

 

 

PIEDMONT COMMUNITY BANK GROUP, INC.

    (When signing as attorney, trustee, administrator or guardian, please give your full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. In case of joint tenants, each joint owner must sign.)

By:

       

Name and Title:

         

 

IMPORTANT  -    PLEASE COMPLETE THE SUBSTITUTE W-9 AND THE QUESTIONNAIRE REGARDING BANKING INTERESTS ON THE OPPOSITE SIDE OF THIS PAGE.


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SUBSTITUTE W-9

Under the penalties of perjury, I certify that: (1) the Social Security number or Taxpayer Identification number given below is correct; and (2) I am not subject to backup withholding. INSTRUCTION: YOU MUST CROSS OUT #2 ABOVE IF YOU HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF UNREPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN.

 

         
Date     Signature(s)*
       

SSN/Taxpayer ID Number

    Area Code and Telephone Number
    Please indicate the form of ownership desired for the shares:
    ¨   Individual
    ¨   Joint Tenants with Right of Survivorship
    ¨   Tenants in Common
    ¨   Trust
    ¨   Corporation
    ¨   Partnership
    ¨   Custodian
    ¨   Other _______________________________

INFORMATION AS TO BANKING INTERESTS

 

1. Please indicate your interest in the following services by checking the appropriate spaces below:

 

          PERSONAL    BUSINESS
(a)    Checking Account    ________    ________
(b)    Savings Account    ________    ________
(c)    Certificates of Deposit    ________    ________
(d)    Individual Retirement Accounts    ________    ________
(e)    Checking Account Overdraft Protection    ________    ________
(f)    Consumer Loans (auto, etc.)    ________    ________
(g)    Commercial Loans    ________    ________
(h)    Equity Line of Credit    ________    ________
(i)    Mortgage Loans    ________    ________
(j)    Revolving Personal Credit Line    ________    ________
(k)    Safe Deposit Box    ________    ________
(l)    Internet Banking Services    ________    ________
(m)    Cash Management Services    ________    ________

 

2. I would like Piedmont Community Bank to provide the following additional services:

 

  (a) _________________________________________________________________


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Index to Financial Statements

PART II

Information not required in prospectus

 

Item 24. Indemnification of directors and officers.

Subsection (a) of Section 14-2-851 of the Georgia Business Corporation Code provides that a corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if such individual conducted himself in good faith and such individual reasonably believed, in the case of conduct in an official capacity, that such conduct was in the best interests of the corporation and, in all other cases, that such conduct was at least not opposed to the best interests of the corporation and, in the case of any criminal proceeding, such individual had no reasonable cause to believe such conduct was unlawful. Subsection (d) of Section 14-2-851 of the Georgia Business Corporation Code provides that a corporation may not indemnify a director in connection with a proceeding by or in the right of the corporation except for reasonable expenses incurred in connection with the proceeding if it is determined that the director has met the relevant standard of conduct under Section 14-2-851 of the Georgia Business Corporation Code or in connection with any proceeding with respect to conduct for which he was adjudged liable on the basis that personal benefit was improperly received by him.

Notwithstanding the foregoing, pursuant to Section 14-2-854 of the Georgia Business Corporation Code, a court may order a corporation to indemnify a director or advance expenses if such court determines that the director is entitled to indemnification under the Georgia Business Corporation Code or that it is fair and reasonable to indemnify such director in view of all the relevant circumstances, even if such director has not met the standard of conduct set forth in Section 14-2-851 of the Georgia Business Corporation Code, failed to comply with Section 14-2-853 of the Georgia Business Corporation Code or was adjudged liable according to Section 14-2-851 of the Georgia Business Corporation Code. However, if such director was adjudged liable, the indemnification shall be limited to reasonable expenses incurred in connection with the proceeding. If the court orders indemnification and/or advance of expenses pursuant to Section 14-2-854 of the Georgia Business Corporation Code, the court may also order the corporation to pay the director’s reasonable expenses in obtaining the court-ordered indemnification or advance of expenses.

Section 14-2-852 of the Georgia Business Corporation Code provides that if a director has been wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party, because he or she is or was a director of the corporation, the corporation shall indemnify the director against reasonable expenses incurred by the director in connection therewith.

Section 14-2-857 of the Georgia Business Corporation Code provides that a corporation may indemnify and advance expenses to an officer of the corporation who is a party to a proceeding because he or she is an officer of the corporation to the same extent as a director and if he or she is not a director to such further extent as may be provided in its articles of incorporation, bylaws, a resolution of its board of directors or a contract except for liability arising out of conduct that constitutes: (i) appropriation of any business opportunity of the corporation in violation of his duties; (ii) acts or omissions which involve intentional misconduct or a knowing violation of law; (iii) receipt of an improper personal benefit; or (iv) making distributions in violation of Section 14-2-640 of the Georgia Business Corporation Code. Section 14-2-857 of the Georgia Business Corporation Code also provides that an officer of the corporation who is not a director is entitled to mandatory indemnification under Section 14-2-852 and is entitled to apply for court-ordered indemnification or advances for expenses under Section 14-2-854, in each case to the same extent as a director. In addition, Section 14-2-857 provides that a corporation may also indemnify and advance expenses to an employee or agent who is not a director to the extent, consistent with public policy, that may be provided by its articles of incorporation, bylaws, action of its board of directors or by contract.

Section 14-2-858 of the Georgia Business Corporation Code provides that a corporation may purchase and maintain on behalf of a director, officer, employee or agent of a corporation insurance against liability asserted against or incurred by that person serving in such capacity for the corporation or arising from his status.

Section 9.2(a) of the bylaws of Piedmont Community Bank Group, Inc. provides that the corporation shall indemnify or obligate itself to indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if he acted in a manner he believed in good faith to be in, or not opposed to, the best interests of the corporation and, in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. Pursuant to Section 9.2(d), the corporation may not indemnify a director under Section 9.2 of the bylaws of Piedmont Community Bank Group, Inc.; (i) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (ii) in connection with


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Index to Financial Statements

any other proceeding in which he was adjudged liable on the basis that personal benefit was improperly received by him. Indemnification under Section 9.2 is limited to reasonable expenses incurred in connection with the proceeding.

Section 9.3 of the bylaws of Piedmont Community Bank Group, Inc. provide that, to the extent a director has been successful, on the merits or otherwise, in the defense of any proceeding to which he was a party, or in defense of any claim, issue or matter therein, because he is or was a director of the corporation, the corporation shall indemnify the director against reasonable expenses incurred by him in connection therewith.

According to Section 9.5 of the bylaws of Piedmont Community Bank Group, Inc., upon application by the director, a court may order indemnification or advances for expenses if it determines that: (i) the director is entitled to mandatory indemnification pursuant to Section 9.3 of the bylaws of Piedmont Community Bank Group, Inc., in which case, the court shall also order the corporation to pay the director’s reasonable expenses incurred to obtain court-ordered indemnification; (ii) the director is fairly and reasonably entitled to indemnification in view of all relevant circumstances, whether or not he met the standard of conduct contained in Section 9.2(a) of the bylaws of Piedmont Community Bank Group, Inc. or he was adjudged liable as described in Section 9.2(d); however, if he was adjudged so liable the indemnification shall be limited to reasonable expenses incurred unless otherwise stated by contract, resolution ratified or approved by the stockholders or the articles of incorporation of Piedmont Community Bank Group, Inc.; or (iii) in the case of advances for expenses, the director is entitled to payment, according to the articles of incorporation or bylaws of Piedmont Community Bank Group, Inc. or any resolution or agreement, of reasonable expenses incurred as a party to a proceeding in advance of final disposition of the proceeding.

Section 9.8 of the bylaws of Piedmont Community Bank Group provides that an officer of the corporation who is not a director is entitled to indemnification and advance of expenses to the same extent and subject to the same conditions as a director of the corporation except that there is no provision for court-ordered indemnification or advance of expenses for officers contained in the bylaws of Piedmont Community Bank Group, Inc. Employees or agents of the corporation who are not directors are entitled to indemnification and advance of expenses to the same extent and subject to the same conditions as a director of the corporation.

Section 9.9 of the bylaws of Piedmont Community Bank Group, Inc. provides that the corporation may purchase and maintain on behalf of a director, officer, employee or agent of the corporation insurance against liability asserted against or incurred by that person serving in such capacity for the corporation or arising from his status with the corporation whether or not the corporation would have the power to indemnify that person under the bylaws of Piedmont Community Bank Group, Inc.

Article 7 of the articles of incorporation of Piedmont Community Bank Group, Inc. provides that a director shall not be personally liable for any breach of duty as a director, except for liability for: (i) any appropriation of any business opportunity of the corporation in violation of his duties; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) distributions in violation of the Georgia Business Corporation Code; or (iv) any transaction for which the director derived an improper personal benefit.

 

Item 25. Other expenses of issuance and distribution.

Expenses of the sale of the Registrant’s common stock, no par value, are as follows:

 

Registration Fee

   $ 184

Legal Fees and Expenses (Estimate)

   $ 100,000

Accounting Fees and Expenses (Estimate)

   $ 30,000

Printing and Engraving Expenses (Estimate)

   $ 15,000

Other (Estimate)

   $ 54,816
      

TOTAL

   $ 200,000

 

Item 26. Recent sales of unregistered securities.

In connection with its incorporation, the Registrant issued 5 shares of its common stock to R. Drew Hulsey, Jr. for aggregate consideration equal to $50.00. The issuance of these shares was exempt from the registration requirements of the Securities Act of 1933 (the “Act”) as a transaction not involving a public offering under Section 4(2) of the Act. These shares were redeemed for the same consideration as that paid at the time when the Registrant’s bank subsidiary reorganized into a bank holding company structure effective February 7, 2007.


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Index to Financial Statements

On February 7, 2007 the Registrant’s bank subsidiary reorganized into a holding company structure in accordance with a merger agreement and plan of reorganization dated February 7, 2007 between the Registrant, Piedmont Community Bank and PCB Interim Corporation (the “Reorganization Agreement”). Pursuant to the terms of the Reorganization Agreement, the Registrant issued 1,630,734 shares of its common stock and assumed options to purchase 380,710 shares of common stock. These shares were issued pursuant to an exemption from registration provided by Section 3(a)(12) of the Securities Act of 1933, which generally provides an exemption for any equity security issued in connection with the acquisition by a holding company of a bank if certain conditions are satisfied.

 

Item 27. 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 3.1 to the Registrant’s Form 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.
5.1    Legal Opinion of Miller & Martin.
10.1      Piedmont Community Bank Group 2006 Stock Option Plan.*
10.2      Employment agreement with R. Drew Hulsey, Jr. dated February 16, 2005.*
10.3      Employment agreement with Mickey Parker dated February 16, 2005.*
10.4      Employment agreement with M. Cole Davis dated June 13, 2005.*
10.5      Employment Agreement with Julie Simmons dated February 16, 2005.*
10.6      Form of Sales Agency Agreement between Piedmont Community Bank Group, Inc. and SAMCO Capital Markets
21         Subsidiaries of the Registrant.
23.1      Consent of Mauldin & Jenkins, LLC
23.2      Consent of Miller & Martin PLLC (appears in Legal Opinion at Exhibit 5.1 hereto)
24.1      Powers of Attorney (appear on the signature page to this Registration Statement on Form SB-2).

 

* Denotes management contract or compensatory plan or arrangement.


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Index to Financial Statements
Item 28. Undertakings.

The undersigned Registrant hereby undertakes as follows:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement.

To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the “Act”);

To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the maximum estimated offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

To include any additional or changed material information on the plan of distribution.

(2) For determining liability under the Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at the time to be the initial bona fide offering.

(3) To file a post-effective amendment to remove from registration any of the securities being registered which remain unsold at the end of the offering.

(4) For determining liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned small business issuer undertakes that in primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424;

Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer;

The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and

Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser.

Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions set forth in Item 24, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.


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Signatures

In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Gray, State of Georgia on September 18, 2007.

 

PIEDMONT COMMUNITY BANK GROUP, INC.
By:   /s/ R. Drew Hulsey, Jr.
  R. Drew Hulsey, Jr., President


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Index to Financial Statements

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Drew Hulsey, Jr. as such person’s true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto this attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that this attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.


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Index to Financial Statements

Name

  

Position

 

Date

/s/ R. Drew Hulsey, Jr.

R. Drew Hulsey, Jr.

  

Chief Executive Officer/Director

[Principal Executive Officer]

  September 18, 2007

/s/ Julie Simmons

Julie Simmons

  

Chief Financial Officer [Principal

Accounting and Financial Officer]

  September 18, 2007

/s/Mickey Parker

Mickey Parker

   President/Director   September 18, 2007

 

Christine Daniels

   Secretary/Director   __________, 2007

/s/ Franklin J. Davis

Franklin J. Davis

   Director   September 18, 2007

/s/ Joseph S. Dumas

Joseph S. Dumas

   Director   September 18, 2007

 

Terrell L. Fulford

   Director   __________, 2007

/s/ Arthur Goolsby

Arthur Goolsby

   Director   September 18, 2007

 

James R. Hawkins

   Director   __________, 2007

 

Dr. John A. Hudson

   Director   __________, 2007

/s/ Robert C. McMahan

Robert C. McMahan

   Director   September 18, 2007

/s/ Zelma A. Redding

Zelma A. Redding

   Director   September 18, 2007

/s/ Angela Tribble

Angela Tribble

   Director   September 18, 2007


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Index to Financial Statements

Index of 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 3.1 to the Registrant’s Form 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.
5.1    Legal Opinion of Miller & Martin.
10.1      Piedmont Community Bank Group 2006 Stock Option Plan.*
10.2      Employment agreement with R. Drew Hulsey, Jr. dated February 16, 2005.*
10.3      Employment agreement with Mickey Parker dated February 16, 2005.*
10.4      Employment agreement with M. Cole Davis dated June 13, 2005.*
10.5      Employment Agreement with Julie Simmons dated February 16, 2005.*
10.6      Form of Sales Agency Agreement between Piedmont Community Bank Group, Inc. and SAMCO Capital Markets
21         Subsidiaries of the Registrant.
23.1      Consent of Mauldin & Jenkins, LLC.
23.2      Consent of Miller & Martin PLLC (appears in Legal Opinion at Exhibit 5.1 hereto).
24.1      Powers of Attorney (appear on the signature page to this Registration Statement on Form SB-2).

 

* Denotes management contract or compensatory plan or arrangement.
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