U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2000. ___ Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from _______________ to ________________ Commission File No. 333-25179 PEOPLE'S COMMUNITY CAPITAL CORPORATION (Exact Name of Small Business Issuer as Specified in its Charter) SOUTH CAROLINA 58-2287073 (State of Incorporation) (I.R.S. Employer Identification No.) 106-A PARK AVENUE, S.W., AIKEN, SOUTH CAROLINA 29801 (Address of Principal Executive Offices) (803) 641-0142 (Issuer's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 958,513 shares of common stock, par value $.01 per share outstanding at October 31, 2000. Transitional Small Business Disclosure Format (check one): Yes No X -- -- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PEOPLE'S COMMUNITY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30, December 31, 2000 1999 ---- ---- (Unaudited) (Audited) ASSETS Cash and due from banks $ 1,615,538 $ 3,076,294 Federal funds sold 6,900,000 5,550,000 Securities, available for sale 10,212,423 10,711,010 Loans receivable, net 39,315,690 33,225,197 Properties and equipment, net 1,725,058 1,678,862 Accrued interest receivable 404,582 325,904 Deferred income taxes 162,956 136,949 Other assets 103,046 90,571 --------------- ---------------- Total assets $ 60,439,293 $ 54,794,787 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Non-interest bearing deposits $ 7,699,018 $ 6,672,434 Interest bearing deposits 42,032,799 36,496,307 --------------- ---------------- Total deposits 49,731,817 43,168,741 Accrued interest payable 80,769 62,383 Accrued expenses and other liabilities 283,102 100,480 Other borrowings 694,711 2,006,427 --------------- ---------------- Total liabilities 50,790,399 45,338,031 --------------- ---------------- Shareholders' equity: Common stock, $.01 par value; 10,000,000 shares authorized, 998,262 shares issued at September 30, 2000 and December 31, 1999 9,983 9,983 Additional paid-in-capital 9,776,507 9,776,507 Retained earnings (deficit) 344,889 (58,320) Accumulated other comprehensive income (loss) (118,243) (113,914) --------------- --------------- 10,013,136 9,614,256 Treasury stock, 39,749 and 15,000 shares at cost (364,242) (157,500) --------------- ---------------- Total shareholders' equity 9,648,894 9,456,756 --------------- ---------------- Total liabilities and shareholders' equity $ 60,439,293 $ 54,794,787 =============== ================ See accompanying Notes to Consolidated Financial Statements. 2 PEOPLE'S COMMUNITY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the three months For the nine months ended September 30, ended September 30, ------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Interest income: Loans, including fees $ 933,303 $ 622,105 $ 2,655,808 $ 1,708,255 Federal funds sold 84,078 43,386 157,438 136,160 Securities and short-term investments 168,301 171,465 507,139 427,343 ------------ ------------ -------------- ------------- Total interest income 1,185,682 836,956 3,320,385 2,271,758 ------------ ------------ ------------- ------------- Interest expense: Deposits 495,130 282,834 1,283,849 747,813 Other borrowings 5,217 4,229 22,223 11,329 ------------ ------------ --------------- ------------- Total interest expense 500,347 287,063 1,306,072 759,142 ------------ ------------ ------------- ------------- Net interest income 685,335 549,893 2,014,313 1,512,616 Provision for loan losses 33,559 30,696 150,834 96,402 ------------ ------------ -------------- ------------- Net interest income after provision 651,776 519,197 1,863,479 1,416,214 ------------ ------------ ------------- ------------- for loan losses Non-interest income: Service charges on deposit accounts 68,222 56,123 183,777 142,474 Other income 26,712 17,538 80,346 77,820 ------------ ------------ ------------- ------------- Total non-interest income 94,934 73,661 264,123 220,294 ------------ ------------ ------------- ------------- Non-interest expenses: Salaries and employee benefits 286,956 249,985 820,053 715,874 Occupancy and equipment 62,016 53,640 176,231 151,953 Consulting and professional expenses 26,111 9,072 86,932 48,423 Customer related expenses 18,470 16,766 52,790 46,933 General operating expenses 72,636 74,805 239,857 194,374 Other expenses 35,165 23,139 100,407 77,218 ------------- ------------ ------------- ------------- Total non-interest expenses 501,354 427,407 1,476,270 1,234,775 Income before income taxes 245,356 165,451 651,332 401,733 Income tax provision 93,518 63,283 248,125 153,476 ------------- ------------ ------------- ------------- Net income $ 151,838 $ 102,168 $ 403,207 $ 248,257 ============ ============ ============ ============= Weighted average common shares outstanding: Basic 963,422 997,401 973,394 997,906 Diluted 963,422 1,040,325 973,394 1,040,027 Earnings per share: Basic $ .16 $ .10 $ .41 $ .25 Diluted $ .16 $ .10 $ .41 $ .24 See accompanying Notes to Consolidated Financial Statements. 3 PEOPLE'S COMMUNITY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the three months For the nine months ended September 30, ended September 30, ------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net income $ 151,838 $ 102,168 $ 403,207 $ 248,257 Other comprehensive income (loss), net of tax: 61,213 (41,089) (4,329) (122,612) ----------- ------------ ----------- ------------- Net change in unrealized gain (loss) on securities available for sale Total other comprehensive gain (loss) 61,213 (41,089) (4,329) (122,612) ----------- ------------ ----------- ------------- Comprehensive income $ 213,051 $ 61,079 $ 398,878 $ 125,645 =========== ============ =========== ============= See accompanying Notes to Consolidated Financial Statements. 4 PEOPLE'S COMMUNITY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended September 30, 2000 1999 ---- ---- OPERATING ACTIVITIES: Net income $ 403,207 $ 248,257 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 85,128 77,849 Provision for loan losses 150,834 96,402 Deferred income taxes (31,748) 53,052 Changes in deferred and accrued amounts: Other assets and accrued interest receivable (91,250) (67,964) Accrued expenses and other liabilities 201,015 45,620 ----------------- --------------- Net cash provided by operating activities 717,186 453,216 ----------------- --------------- INVESTING ACTIVITIES: Purchase of securities available for sale (8,500) (7,000,000) Maturities and calls of securities available for sale 500,000 4,361,647 Purchase of property and equipment (122,724) (37,235) Net increase in loans (6,241,327) (7,532,446) Net increase in federal funds sold (1,350,000) (110,000) ----------------- --------------- Net cash used for investing activities (7,222,551) (10,318,034) ----------------- --------------- FINANCING ACTIVITIES: Purchase of treasury stock (206,742) (107,500) Net increase in deposits 6,563,070 9,881,528 Net (decrease) increase in other borrowings (1,311,719) 674,536 ----------------- --------------- Net cash provided by financing activities 5,044,609 10,448,564 ----------------- --------------- Net (decrease)/increase in cash and due from banks (1,460,756) 583,746 Cash and due from banks at beginning of period 3,076,294 958,613 ----------------- --------------- Cash and due from banks at end of period $ 1,615,538 $ 1,542,359 ================= =============== Supplemental disclosure: Cash paid during the period for interest $ 1,287,686 $ 743,515 ================= =============== See accompanying Notes to Consolidated Financial Statements. 5 PEOPLE'S COMMUNITY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, please refer to the consolidated financial statements and footnotes thereto for the Company's fiscal year ended December 31, 1999, included in the Company's Form 10-KSB for the year ended December 31, 1999. NOTE 2. SUMMARY OF ORGANIZATION People's Community Capital Corporation (the "Company") was incorporated on February 26, 1997, under the laws of the State of South Carolina for the purpose of operating as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956, as amended. The Company is a bank holding company whose subsidiary, People's Community Bank of South Carolina (the "Bank"), is primarily engaged in the business of accepting savings and demand deposits insured by the Federal Deposit Insurance Corporation, and providing mortgage, consumer and commercial loans to the general public. The Bank formed a subsidiary, People's Financial Services, Inc. in December 1999 for the purpose of providing comprehensive financial planning services in addition to full service brokerage, including stocks, bonds, mutual funds, and insurance products. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This discussion and analysis is intended to assist the reader in understanding our financial condition and results of operations. This commentary should be read in conjunction with the financial statements and the related notes and other statistical information in this report. This report contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. The words "expect," "anticipate," and "believe," as well as similar expressions, are intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in our filings with the Securities and Exchange Commission, including the "Risk Factors" section in our registration statement on Form SB-2 (Registration Number 333-25179) as filed with and declared effective by the Securities and Exchange Commission. We were incorporated in South Carolina on February 26, 1997 for the purpose of operating as a bank holding company. Our wholly-owned subsidiary, People's Community Bank of South Carolina (the "Bank"), commenced business on September 22, 1997 and is primarily engaged in the business of accepting 6 savings and demand deposits and providing mortgage, consumer and commercial loans to the general public. The Bank operates two banking centers located in Aiken and one located in North Augusta, South Carolina. The second banking center located in Aiken was opened on September 8, 1998 in leased offices that also are the headquarters of the holding company. A tract of land has been purchased in downtown Aiken for the construction of a permanent banking center office. Construction of the office began in September 2000. A construction contract was awarded to R.D. Brown Contractors of North Augusta for $1,085,435. Raymond Brown is a director of the Company and the Bank. The cost of the land and preliminary construction costs through September 30, 2000 were approximately $236,000. Two options have also been acquired for the purchase of additional contiguous property for use as parking lots. In December 1999, the Bank formed a subsidiary, People's Financial Services, Inc. for the purpose of providing comprehensive financial planning services in addition to full service brokerage, including stocks, bonds, mutual funds, and insurance products. FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS REVIEW - Comparison of the three months ended September 30, 2000 to the three months ended September 30, 1999 Our net income for the third quarter of 2000 was $151,838 compared to $102,168 for the same period last year. The basic income per share increased to $.16 compared to $.10 for the same period in 1999. This improvement in earnings reflects the continued growth in the level of earning assets since the Bank commenced operations. The level of average earning assets was $55.0 million for the three months ended September 30, 2000 as compared to $41.7 million for the three months ended September 30, 1999. Net interest income represents the difference between interest received or accrued on interest earning assets and interest paid or accrued on interest bearing liabilities. The following presents, in a tabular form, average balance sheets that highlight the main components of interest earning assets and interest bearing liabilities, on an annualized basis, for the three month periods ended September 30, 2000 and 1999. Yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages. 7 Three months ended September 30, 2000 Three months ended September 30, 1999 ------------------------------------- ------------------------------------- Average Interest Yield Average Interest Yield/ Balance Income/Expense /Rate Balance Income/Expense Rate ASSETS Federal funds sold $ 5,051,186 $ 84,078 6.66% $3,373,454 $ 43,386 5.14% Securities 10,617,106 168,301 6.34% 11,022,616 171,465 6.22% Loans 39,323,979 933,303 9.49% 27,361,152 622,105 9.09% ------------ --------- ---------- -------- Total earning assets 54,992,271 1,185,682 8.62% 41,757,222 836,956 8.02% ------------ --------- ---------- -------- Cash and due from banks 1,746,614 1,396,193 Premises and equipment 1,725,790 1,687,746 Other assets 1,091,677 855,725 Allowance for loan losses (516,167) (365,000) ----------- ----------- Total assets $59,040,185 $45,331,886 =========== =========== LIABILITIES & EQUITY Interest-bearing deposits: Transaction accounts 6,472,631 20,603 1.27% 5,402,358 17,498 1.30% Money market accounts 10,087,137 106,945 4.24% 9,489,054 89,239 3.76% Savings deposits 869,036 5,149 2.37% 679,627 4,160 2.45% Time deposits 23,453,456 362,433 6.18% 13,434,284 171,937 5.12% ----------- -------- ---------- --------- Total interest bearing deposits 40,882,260 495,130 4.84% 29,005,323 282,834 3.90% Interest-bearing borrowings 324,216 5,217 6.44% 344,057 4,229 4.92% ----------- -------- ---------- --------- Total interest-bearing liabilities 41,206,476 500,347 4.86% 29,349,380 287,063 3.91% ----------- -------- ---------- --------- Demand deposits 7,887,572 6,405,097 Other liabilities 227,488 76,063 Shareholders' equity 9,718,649 9,501,346 ----------- ----------- Total liabilities & shareholders equity $59,040,185 $45,331,886 =========== ============ Net interest spread 3.77% 4.11% Net interest income/margin $ 685,335 4.98% $ 549,893 5.27% ========= ========== Net interest income was $685,335 for the three months ended September 30, 2000 as compared to $549,893 for the three months ended September 30, 1999. The net interest margin (net interest income divided by average earning assets) was 4.98% for the three months ended September 30, 2000 compared to the net interest margin of 5.27% for the three months ended September 30, 1999. Interest income for the third quarter of 2000 was $1,185,682 compared to $836,956 for the same period in 1999. The volume of total earnings assets increased by about $13.2 million between the two periods. The largest component of interest income was interest and fees on loans amounting to $933,303 for the three months ended September 30, 2000 compared to $622,105 for the comparable prior year period. The overall rate on the loan portfolio increased from 9.09% for the three months ended September 30, 1999 to 9.49% for the three month period ended September 30, 2000. Interest earned on federal funds sold increased between the two periods under review as the average federal funds sold balance was higher for the three months ended September 30, 2000 than for the comparable period in 1999 by about $1.7 million, and the average rate increased from 5.14% to 6.66%. Interest income on securities decreased slightly between the two periods as the average balance decreased by about $400,000. Interest expense increased from $287,063 for the three months ended September 30, 1999 to $500,347 for the three months ended September 30, 2000 as the size of interest-bearing liabilities, primarily deposits, 8 increased from $29.3 million to $41.2 million, an increase of 40%. The average rate paid on interest bearing liabilities increased from 3.91% to 4.86% reflecting the increases in general market rates of interest paid on deposits as prompted by several increases in the prime rate. Non-interest Income Non-interest income for the three month period ended September 30, 2000 was $94,934 compared to $73,661 for the same period in 1999. Of this total, $68,222 represented service charges on deposit accounts for the three months ended September 30, 2000 compared to $56,123 for the comparable period in 1999. The increase in income from deposit service charges is due to the increase in deposit customers during the comparable periods. The remaining $26,712 of non-interest income for the third quarter of 2000 was income generated from other fees charged such as brokered mortgage origination fees, lease fees, commissions on sale of checks to customers, and fees from non-deposit investment products' activity associated with the Bank's financial services subsidiary. For the third quarter of 1999, other income amounted to $17,538, the largest components being brokered mortgage origination fee income and credit life insurance commissions. Brokered mortgage origination fee income has been significantly less in 2000 compared to last year, reflecting the decrease in refinancing activities associated with rising interest rates. The largest item of other fee income for the third quarter of 2000 was $12,895 of fees from non-deposit investment products' activity. The financial services subsidiary began operations in December 1999. Non-interest Expense Non-interest expense for the three month periods ended September 30, 2000 and 1999 were $501,354 and $427,407, respectively, a 17% increase. The largest component of non-interest expense was salaries and employee benefits of $286,956 and $249,985, respectively. Salaries and employee benefits expense increased 15% due to general merit increases, the addition of staff associated with the financial services subsidiary, higher health insurance premiums, and the matching of 401k plan contributions that began January 1, 2000. Occupancy and equipment expense increased from $53,640 to $62,016, or 16% largely due to additional depreciation associated with new equipment purchases and repairs on existing equipment. Consulting and professional fees increased from $9,072 to $26,111 due to increases in consulting service contracts, an increase in the FDIC fee assessment as deposits have increased, and the commencement of directors' fees in August 1999. Other expenses increased from $23,139 to $35,165, or 52%, primarily due to increased advertising. EARNINGS REVIEW - Comparison of the nine months ended September 30, 2000 to the nine months ended September 30, 1999 Our net income for the nine months ended September 30, 2000 was $403,207 compared to $248,257 for the same period last year. The basic income per share increased to $.41 compared to $.25 for the same period in 1999. This improvement in earnings reflects the continued growth in the level of earning assets since the Bank commenced operations. The level of average earning assets was $51.9 million for the nine months ended September 30, 2000 as compared to $38.2 million for the nine months ended September 30, 1999. The following presents, in a tabular form, yield and rate data for interest-bearing balance sheet components during the nine month periods ended September 30, 2000 and 1999, along with average balances and the related interest income and interest expense amounts. 9 Nine months ended September 30, 2000 Nine months ended September 30, 1999 ------------------------------------ ------------------------------------ Average Interest Yield Average Interest Yield/ Balance Income/Expense /Rate Balance Income/Expense Rate ASSETS Federal funds sold $3,317,568 $157,438 6.33% $3,775,933 $ 136,160 4.81% Securities 10,657,585 507,139 6.34% 9,359,528 427,343 6.09% Loans 37,952,578 2,655,808 9.33% 25,080,859 1,708,255 9.08% ---------- --------- ------------ --------- Total earning assets 51,927,731 3,320,385 8.52% 38,216,320 2,271,758 7.93% ---------- ---------- ------------ --------- Cash and due from banks 1,735,232 1,422,397 Premises and equipment 1,695,230 1,698,715 Other assets 1,090,252 883,552 Allowance for loan losses (479,944) (334,648) ----------- ------------ Total assets $55,968,501 $41,886,336 =========== ============ LIABILITIES & EQUITY Interest-bearing deposits: Transaction accounts 6,567,424 62,416 1.27% 4,985,156 47,654 1.27% Money market accounts 9,625,006 298,468 4.13% 8,914,270 251,017 3.75% Savings deposits 795,017 14,296 2.40% 532,622 9,557 2.39% Time deposits 21,122,880 908,669 5.74% 11,534,945 439,585 5.08% ---------- ---------- ------------ --------- Total interest bearing deposits 38,110,327 1,283,849 4.49% 25,966,993 747,813 3.84% Interest-bearing borrowings 490,136 22,223 6.05% 323,927 11,329 4.66% ---------- ---------- ------------ --------- Total interest-bearing liabilities 38,600,463 1,306,072 4.51% 26,290,920 759,142 3.85% ---------- ---------- ------------ --------- Demand deposits 7,622,433 6,089,283 Other liabilities 104,188 90,347 Shareholders' equity 9,641,417 9,415,786 --------- ----------- Total liabilities & shareholders equity $55,968,501 $41,886,336 =========== =========== Net interest spread 4.01% 4.08% Net interest income/margin $2,014,313 5.17% $1,512,616 5.28% =========== ========== Net interest income was $2,014,313 for the nine months ended September 30, 2000 as compared to $1,512,616 for the nine months ended September 30, 1999. The net interest margin (net interest income divided by average earning assets) was 5.17% for the nine months ended September 30, 2000 compared to the net interest margin of 5.28% for the nine months ended September 30, 1999. Interest income for the first nine months of 2000 was $3,320,385 compared to $2,271,758 for the same period in 1999. The volume of total earning assets increased from $38.2 million at September 30, 1999 to $51.9 million at September 30, 2000. The largest component of interest income was interest and fees on loans amounting to $2,655,808 for the nine months ended September 30, 2000 compared to $1,708,255 for the comparable prior year period. The overall rate on the loan portfolio increased from 9.08% for the nine months ended September 30, 1999 to 9.33% for the nine month period ended September 30, 2000 as we encountered a period of rising interest rates. Interest earned on federal funds sold increased slightly between the two periods under review as the average federal funds sold balance was lower for the nine months ended September 30, 2000 than for the comparable period in 1999, but the average rate increased from 4.81% to 6.33%. Interest income on securities increased between the two periods as the average balance increased from $9.3 million to $10.7 million, and the average rate earned increased from 6.09% to 6.34%. 10 Interest expense increased from $759,142 for the nine months ended September 30, 1999 to $1,306,072 for the nine months ended September 30, 2000 as the size of interest-bearing liabilities, primarily deposits, increased from $26.3 million to $38.6 million, an increase of 47%. The average rate paid on interest bearing liabilities increased from 3.85% to 4.51% reflecting the increases in general market rates of interest paid on deposits as prompted by several increases in the prime rate. Non-interest Income Non-interest income for the nine month period ended September 30, 2000 was $264,123 compared to $220,294 for the same period in 1999. Of this total, $183,777 represented service charges on deposit accounts for the nine months ended September 30, 2000 compared to $142,474 for the comparable period in 1999. The increase in income from deposit service charges is due to the increase in deposit customers during the comparable periods. The remaining $80,346 of non-interest income for the first nine months of 2000 was income generated from other fees charged such as brokered mortgage origination fees, lease fees, commissions on sale of checks to customers, and fees from non-deposit investment products' activity associated with the Bank's financial services subsidiary. For the first nine months of 1999, other income amounted to $77,820, the largest component being brokered mortgage origination fee income of $38,383. Brokered mortgage origination fee income has been significantly less in 2000 compared to last year at $7,445, reflecting the decrease in refinancing activities associated with rising interest rates. The largest component of other fee income for the first nine months of 2000 was $41,445 of fees from non-deposit investment products' activity. The financial services subsidiary began operations in December 1999. Non-interest Expense Non-interest expense for the nine month periods ended September 30, 2000 and 1999 was $1,476,270 and $1,234,775, respectively, a 20% increase. The largest component of non-interest expense was salaries and employee benefits of $820,053 and $715,874, respectively. Salaries and employee benefits expense increased 15% due to general merit increases, the addition of staff associated with the financial services subsidiary, higher health insurance premiums, and the matching of 401k plan contributions that began January 1, 2000. Occupancy and equipment expense increased from $151,953 to $176,231, or 16% largely due to additional depreciation associated with new equipment purchases and repairs on existing equipment. Consulting and professional fees increased from $48,423 to $86,932 due to increases in consulting service contracts, an increase in the FDIC fee assessment as deposits have increased, and the commencement of directors' fees in August 1999. General operating expenses increased from $194,374 to $239,857, or 23%. This increase was primarily due to data processing fee increases, but was also impacted by increased spending for postage relative to a higher customer base. Additionally, the operating costs of the Bank's financial services subsidiary began in December of 1999. Other expenses increased from $77,218 to $100,407, or 30%, primarily due to increased levels of advertising. Provision for Loan Losses The provision for loan losses was $150,834 and $96,402, respectively, for the first nine months of 2000 and 1999, bringing the total reserve balance to $520,000 and $380,000 at September 30, 2000 and 1999, respectively. This amount represents 1.31% of gross loans at September 30, 2000 and 1.33% at September 30, 1999. It also reflects management's estimates of the amounts necessary to maintain the allowance for loan losses at a level believed to be adequate in relation to the current size, mix and quality of the loan portfolio. See the description of the allowance for loan losses below. However, management's judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that it believes to be reasonable, but which may or may not be accurate. Because of the inherent uncertainty of assumptions made during the evaluation process, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be 11 required. We had $25,394 in potential problem loans that were classified as non-accrual loans at September 30, 2000. There were no non-performing loans at September 30, 1999. Loan charge-offs, net of recoveries, for the nine months ended September 30, 2000 were $40,834 and were $1,402 for the nine months ended September 30, 1999. BALANCE SHEET REVIEW Total consolidated assets grew by $5.6 million from $54,794,787 at December 31, 1999 to $60,439,293 at September 30, 2000. The increase was generated through a $6.6 million increase in deposits with a $1.0 million decrease in borrowed funds and other liabilities. The increase in deposits was used to fund loans that increased by $6.0 million on a net basis. Between December 31, 1999 and September 30, 2000, cash and due from banks decreased by $1.5 million. Federal funds sold increased by $1.4 million, and securities available for sale decreased by $500,000 due to a bond maturity. There were no purchases of investment securities in the period except for $8,500 of additional stock purchased in the Federal Home Loan Bank of Atlanta. Loans Net outstanding loans represent the largest component of earning assets as of September 30, 2000 at $39,315,690, or 69.7% of total earning assets. Net loans increased $6,090,493, or 18.3%, since December 31, 1999. The interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulations also influence interest rates. The average yield on our loans for the period ended September 30, 2000 was 9.33% as compared to a yield of 9.19% for the year ended December 31, 1999. Allowance for Loan Losses The allowance for loan losses at September 30, 2000 was $520,000, or 1.31% of loans outstanding, compared to an allowance of $410,000, or 1.22%, at December 31, 1999. The allowance for loan losses is based upon management's continuing evaluation of the collectibility of loans based somewhat on historical loan loss experience, but mostly, because of the lack of historical data available in a new company, based on current economic conditions affecting the ability of borrowers to repay, the volume of loans, the quality of collateral securing non-performing and problem loans, and other factors deserving recognition. As of September 30, 2000, there were $25,394 in non-performing loans with charge-offs, net of recoveries, of $40,834 for the nine month period. Securities Investment securities represented 18.1% of earning assets at September 30, 2000 with a total of $10,212,423, down $498,587 from the December 31, 1999 balance of $10,711,010. One bond has matured since year-end for $500,000. There have been no purchases of investments for the nine months since December 31, 1999 with the exception of additional stock purchased in the Federal Home Loan Bank of Atlanta. The yield on investment securities was 6.34% for the nine months ended September 30, 2000 compared to 6.18% for the year ended December 31, 1999. Included in available-for-sale securities is $109,900 of stock purchased in the Federal Home Loan Bank of Atlanta, of which $8,500 was purchased in the first quarter of 2000. This purchase was a requirement from the FHLB in order to secure borrowings from them in the future. 12 Deposits Our primary source of funds for loans and investments is deposits. Deposits grew $6,563,076, or 15.2%, since year-end 1999 for a total of $49,731,817 at September 30, 2000. The average rates paid on interest-bearing deposits were 4.51% and 3.93% at September 30, 2000 and December 31, 1999, respectively. In pricing deposits, we consider our liquidity needs, the direction and levels of interest rates, and local market conditions. Pricing of deposits has gone up significantly over the last year due to local market competition associated with the several increases in the prime rate of interest. Liquidity and Sources of Capital At September 30, 2000, our liquid assets, consisting of cash and due from banks and Federal funds sold, amounted to $8,515,538, representing 14.1% of total assets. Investment securities amounted to $10,212,423, representing 16.9% of total assets; 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 also serves as a source of liquidity. For the nine month period ended September 30, 2000, total deposits increased by $6.6 million representing an increase of 15.2%, or 20.3% on an annualized basis. Our deposit growth rate is not as high as it was in the initial periods of our development. Our management closely monitors and seeks to maintain appropriate levels of interest-earning assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demand. We plan to meet future cash needs through the liquidation of temporary investments, maturities of loans and investment securities, and generation of deposits. In addition, the Bank maintains two lines of credit from correspondent banks in the amount of $1,800,000 each, and is a member of the Federal Home Loan Bank, from which applications may be made for borrowing capabilities, if needed. The Bank currently maintains a level of capitalization in excess of the minimum capital requirements set by the regulatory agencies. Despite anticipated asset growth, management expects its capital ratios to continue to be adequate for the next two to three years. However, no assurances can be given in this regard, as rapid growth, deterioration in loan quality, and operating losses, or a combination of these factors, could change our capital position in a relatively short period of time. We have begun construction on an office building in downtown Aiken with total estimated capital expenditures of $1,400,000. The construction contract was awarded to R.D. Brown Contractors for $1,085,435. Raymond Brown is a director of the Company and the Bank. The capital project is expected to be funded with available cash. The cost of the land and preliminary construction costs through September 30, 2000 was approximately $236,000. During the first quarter of this year, we purchased 5,000 shares of our outstanding stock at $9.75 per share to hold as treasury stock. In the second quarter, we purchased another 5,637 shares at $8.00 per share. In the third quarter, we purchased 14,112 shares at $8.00 per share, all of which were sold to us by Alan George, our President and Chief Operating Officer, which transaction was in accordance with the share purchase authorized by our board of directors. The total purchase price of the shares acquired in 2000 was $206,742. The treasury stock was purchased for possible utilization in connection with our stock option plan. Our Board of Directors has approved approximately 100,000 shares to be purchased as treasury stock. To date, 39,749 shares have been purchased for a cost of $364,242, at an average price of $9.17 per share. 13 Below is a table that reflects the leverage and risk-based regulatory capital ratios of the Bank at September 30, 2000: Well-Capitalized Minimum Ratio Requirement Requirement Tier 1 Capital 14.61% 6.00% 4.00% Total Capital 15.86% 10.00% 8.00% Tier 1 leverage ratio 10.99% 5.00% 4.00% RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board, FASB, issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES." All derivatives are to be measured at fair value and recognized in the balance sheet as assets and liabilities. SFAS No. 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES" was issued in June 2000 and amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The two statements are to be adopted concurrently and are effective for fiscal years and quarters beginning after June 15, 2000. We do not expect that the adoption of SFAS No. 133 and SFAS No. 138 will have a material impact on the presentation of our financial results or financial position. Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) Exhibits - 27.1 Financial Data Schedule for period ending September 30, 2000. (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended September 30, 2000. 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. People's Community Capital Corporation (Registrant) Date: November 6, 2000 By: /s/ Tommy B. Wessinger -------------------------- Tommy B. Wessinger Chief Executive Officer By: /s/ Jean H. Covington --------------------------- Jean H. Covington Principal Accounting and Chief Financial Officer 15