UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- ------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------ SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
COMMISSION FILE NUMBER 1-5735
PROVIDENT COMMUNITY BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its Charter)
DELAWARE 57-1001177
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
203 WEST MAIN STREET, UNION, SOUTH CAROLINA 29379
(Address of Principal Executive Offices)
(864) 429-1864
(Registrant's telephone number, including area code)
UNION FINANCIAL BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Exchange Act during the preceding 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 [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes [_] No [X]
The Corporation had 1,897,259 shares, $0.01 par value, of common stock issued
and outstanding as of May 3, 2006.
1
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ------
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005 3
Consolidated Statements of Income for the three months
ended March 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005 5
Consolidated Statements of Shareholders' Equity for the
three months ended March 31, 2006 and 2005 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21-23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
2
Part 1. Financial Information
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(FORMERLY UNION FINANCIAL BANCSHARES, INC.)
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and December 31, 2005 (unaudited)
March 31, December 31,
ASSETS 2006 2005
--------- ------------
(DOLLARS IN THOUSANDS)
Cash and due from banks $ 8,004 $ 8,380
Investment and mortgage-backed securities
Held to maturity 3,198 3,204
Available for sale 132,105 143,079
--------- ------------
Total investment and mortgage-backed securities 135,303 146,283
--------- ------------
Loans, net 201,705 192,577
Office properties and equipment, net 5,455 5,148
Federal Home Loan Bank Stock, at cost 2,948 3,976
Federal Reserve Stock, at cost 539 539
Accrued interest receivable 2,237 2,429
Intangible assets 3,417 3,576
Cash surrender value of life insurance 5,454 5,404
Other assets 3,113 2,730
--------- ------------
TOTAL ASSETS $ 368,175 $ 371,042
========= ============
LIABILITIES
Deposits $ 254,218 $ 239,603
Advances from the Federal Home Loan Bank 49,000 75,715
Securities sold under agreements to repurchase 30,000 20,000
Floating rate junior subordinated deferrable interest debentures 8,247 8,247
Accrued interest payable 603 520
Advances from borrowers for taxes and insurance 107 33
Other liabilities 1,168 1,591
--------- ------------
TOTAL LIABILITIES 343,343 345,709
--------- ------------
Commitments and contingencies-Note 4
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None -- --
Common stock - $0.01 par value,
authorized - 5,000,000 shares,
issued and outstanding - 1,897,259 shares at 3/31/06 and 1,905,897 at 12/31/05 20 20
Additional paid-in capital 12,388 12,346
Accumulated other comprehensive loss (1,442) (612)
Retained earnings, substantially restricted 17,425 16,916
Treasury stock, at cost (3,559) (3,337)
--------- ------------
TOTAL SHAREHOLDERS' EQUITY 24,832 25,333
--------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 368,175 $ 371,042
========= ============
See notes to consolidated financial statements.
3
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(FORMERLY UNION FINANCIAL BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2006 and 2005 (unaudited)
Three Months Ended
March 31, March 31,
2006 2005
----------- -----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE)
Interest Income:
Loans $ 3,789 $ 2,823
Deposits and federal funds sold 16 58
Mortgage-backed securities 282 388
Interest and dividends on
investment securities 1,340 1,142
----------- -----------
Total Interest Income 5,427 4,411
----------- -----------
Interest Expense:
Deposit accounts 1,705 1,139
Floating rate junior subordinated deferrable interest debentures 168 128
Advances from the FHLB and other borrowings 900 694
----------- -----------
Total Interest Expense 2,773 1,961
----------- -----------
Net Interest Income 2,654 2,450
Provision for loan losses 175 208
----------- -----------
Net Interest Income After
Provision for Loan Losses 2,479 2,242
----------- -----------
Non-Interest Income:
Fees for financial services 632 543
Other fees, net 41 26
Net gain on sale of investments 13 8
----------- -----------
Total Non-Interest Income 686 577
----------- -----------
Non-Interest Expense:
Compensation and employee benefits 1,087 1,015
Occupancy and equipment 486 509
Deposit insurance premiums 8 8
Professional services 117 88
Advertising/Public relations 36 38
Loan operations 14 42
Intangible amortization 159 159
Items processing 51 32
Telephone 39 46
Other 189 165
----------- -----------
Total Non-Interest Expense 2,186 2,102
----------- -----------
Income Before Income Taxes 979 717
Income tax expense 280 178
----------- -----------
Net Income $ 699 $ 539
=========== ===========
Basic Net Income Per Common Share $ 0.37 $ 0.28
=========== ===========
Diluted Net Income Per Common Share $ 0.36 $ 0.27
=========== ===========
Dividend Per Common Share $ 0.10 $ 0.10
=========== ===========
Weighted Average Number of
Common Shares Outstanding
Basic 1,896,210 1,928,946
Diluted 1,917,866 1,992,002
See notes to consolidated financial statements.
4
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(FORMERLY UNION FINANCIAL BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2006 and 2005 (unaudited)
Three Months Ended
March 31, March 31,
2006 2005
------------ --------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $699 $539
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 175 208
Amortization of intangibles 159 159
Depreciation expense 148 236
Recognition of deferred income, net of costs (124) (87)
Deferral of fee income, net of costs 122 86
Gain on investment transactions (13) (8)
Changes in operating assets and liabilities:
Decrease in accrued interest receivable 192 308
Increase in other assets 87 (255)
Increase (decrease) in other liabilities (349) (283)
Increase (decrease) in accrued interest payable 83 29
------------ --------------
Net cash provided by operating activities 1,179 932
------------ --------------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale (1,656) (18,352)
Proceeds from sale of investment and mortgage-
backed securities available for sale 7,437 4,370
Proceeds from maturity of investment and mortgage-
backed securities:
Available for sale 2,026 10,078
Held to maturity 6 --
Principal repayments on mortgage-backed securities:
Available for sale 1,903 2,477
Net increase in loans (9,374) (5,445)
(Purchase) redemption of FHLB stock 1,028 (39)
Purchase of office properties and equipment (455) (22)
------------ --------------
Net cash used by investing activities 915 (6,933)
------------ --------------
FINANCING ACTIVITIES:
Proceeds from the dividend reinvestment plan 27 26
Dividends paid in cash (190) (196)
Proceeds from the exercise of stock options 15 43
Share repurchase program (222) (897)
Repayment of term borrowings (26,715) --
Increase (decrease) in other borrowings 10,000 (4,000)
Increase in deposit accounts 14,615 8,542
------------ --------------
Net cash provided by financing activities (2,470) 3,518
------------ --------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (376) (2,483)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 8,380 13,197
------------ --------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $8,004 $10,714
============ ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $38 $100
Interest 2,690 1,932
Non-cash transactions:
Loans foreclosed $73 $--
See notes to consolidated financial statements.
5
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(FORMERLY UNION FINANCIAL BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended March 31, 2006 and 2005 (unaudited)
Retained Accumulated
Additional Earnings, Other Total
Common Stock Paid-in Substantially Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Restricted Income (loss) At Cost Equity
-------------------------------------------------------------------------------------
(Dollars in Thousands, Except Share Data)
BALANCE AT DECEMBER 31, 2004 1,957,989 $20 $12,109 $15,221 $109 ($1,440) $26,019
Net income 539 539
Other comprehensive income, net of tax
Unrealized holding losses
on securities available for sale
arising during period, net
of tax effect of $470 (988) (988)
Reclassification adjustment
for gains included
in net income, net of tax of $2 6 6
--------------------------------------------------------------------------------
Comprehensive loss (443)
Stock option activity, net 6,206 43 43
Dividend reinvestment plan contributions 1,540 26 26
Share repurchase program (52,666) (1) 1 (897) (897)
Cash dividend ($.10 per share) (196) (196)
--------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2005 1,913,069 $19 $12,178 $15,565 ($873) ($2,337) $24,552
================================================================================
BALANCE AT DECEMBER 31, 2005 1,905,897 $20 $12,346 $16,916 ($612) ($3,337) $25,333
Net income 699 699
Other comprehensive income, net of tax
Unrealized holding losses on
securities available for sale
arising during period, net
of tax effect of $777 (839) (839)
Reclassification adjustment
for gains included
in net income, net of tax of $4 9 9
--------------------------------------------------------------------------------
Comprehensive loss (131)
Stock option activity, net 2,086 15 15
Dividend reinvestment plan contributions 1,628 27 27
Share repurchase program (12,352) (222) (222)
Cash dividend ($.10 per share) (190) (190)
--------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2006 1,897,259 $20 $12,388 $17,425 ($1,442) ($3,559) $24,832
================================================================================
6
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
(Formerly Union Financial Bancshares, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Subsequent Event-Name Change
----------------------------
On April 19, 2006, the Corporation announced that it would change its name to
Provident Community Bancshares, Inc. In connection with the name change, the
Corporation began trading on Nasdaq under the ticker symbol "PCBS".
2. Presentation of Consolidated Financial Statements
-------------------------------------------------
The accompanying unaudited consolidated financial statements of Provident
Community Bancshares, Inc. (the "Corporation" or "Provident") were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
disclosures necessary for a complete presentation of consolidated financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, all
adjustments which are, in the opinion of management, necessary for the fair
presentation of the interim consolidated financial statements have been
included. All such adjustments are of a normal and recurring nature. The results
of operations for the three months ended March 31, 2006 are not necessarily
indicative of the results which may be expected for the entire calendar year.
Certain amounts in the prior year's financial statements have been reclassified
to conform with current year classifications.
Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information by the
Corporation:
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments--an amendment of FASB Statements No. 133 and 140." This
Statement 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." This Statement resolves
issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS No.
155 is 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 Corporation does not believe that the adoption of SFAS No. 155 will have a
material impact on its financial position, results of operations and cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," with respect to the accounting for separately
recognized servicing assets and servicing liabilities. 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; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value; and requires separate presentation of servicing assets
and servicing liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. An entity should adopt SFAS No. 156
as of the beginning of its first fiscal year that begins after September 15,
2006. The Corporation believes the adoption of SFAS No. 156 will not have a
material impact on its financial position, results of operations or cash flows.
7
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
2. Income Per Share
-----------------
Basic income per share amounts for the three months ended March 31, 2006 and
2005 were computed based on the weighted average number of common shares
outstanding during the period. Diluted income per share adjusts for the dilutive
effect of outstanding common stock options during the periods utilizing the
treasury stock method. Common stock equivalents included in the diluted earnings
per share calculation for the three months ended March 31, 2006 and 2005 were
21,656 and 63,056, respectively.
3. Assets Pledged
--------------
Approximately $65,862,000 and $83,170,000 of debt securities at March 31, 2006
and December 31, 2005, respectively, were pledged by Provident Community Bank,
N.A. (the "Bank") as collateral to secure deposits of the State of South
Carolina, and Union, Laurens and York counties along with additional borrowings
and repurchase agreements. The Bank pledges as collateral for Federal Home Loan
Bank advances the Bank's Federal Home Loan Bank stock and has entered into a
blanket collateral agreement with the Federal Home Loan Bank whereby the Bank
maintains, free of other encumbrances, qualifying mortgages (as defined) with
unpaid principal balances equal to, when discounted at 75% of the unpaid
principal balances, 100% of total advances. As part of the total assets pledged,
the Bank will also pledge securities to cover additional advances from the
Federal Home Loan Bank that exceed the qualifying mortgages balance along with
security repurchase lines with various brokerage houses.
8
4. Contingencies and Loan Commitments
----------------------------------
In the ordinary course of business, the Bank enters into financial instruments
with off-balance-sheet risk to meet the financing needs of its customers. These
instruments expose the Bank to credit risk in excess of the amount recognized on
the balance sheet.
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 is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at March 31, 2006
related to these items is summarized below:
Loan Commitments: Contract Amount
----------------- ---------------
Approved loan commitments $ 3,097,000
Unadvanced portions of loans and credit lines 43,287,000
------------
Total loan commitments $ 46,384,000
============
Loan 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. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the counter
party. Collateral held is primarily residential and commercial property.
Commitments outstanding at March 31, 2006 consisted of fixed and adjustable rate
loans at rates ranging from 5.5% to 7.5%. Commitments to originate loans
generally expire within 30 to 60 days.
Commitments to fund loans, including credit lines (principally variable rate,
consumer lines secured by real estate and overdraft protection) totaled
approximately $95,212,000 at March 31, 2006. Of these lines, the outstanding
loan balances totaled approximately $51,925,000.
5. Floating Rate Junior Subordinated Deferrable Interest Debentures
A summary of the Trust securities issued and outstanding follows:
-------------------------------------------------------------------------------------------------------------------
Amount Outstanding Prepayment Distribution Payment
At March 31, Option Date Maturity Frequency
-------------------------------------------------------------------------------------------------------------------
Name 2006 2005 Rate
-------------------------------------------------------------------------------------------------------------------
Union Financial $8,000,000 $8,000,000 8.53% December 18, 2006 December 18, 2031 Quarterly
Statutory Trust I
-------------------------------------------------------------------------------------------------------------------
9
6. Stock-Based Compensation
------------------------
On January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Accounting for Stock-Based Compensation, to
account for compensation costs under its stock option plans. The Company
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB
25"). Under the intrinsic value method prescribed by APB 25, no compensation
costs were recognized for the Company's stock options because the option
exercise price in its plans equals the market price on the date of grant. Prior
to January 1, 2006, the Company only disclosed the pro forma effects on net
income and earnings per share as if the fair value recognition provisions of
SFAS 123(R) had been utilized.
In adopting SFAS No. 123, the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the fair
value recognition method. Under the modified prospective method, compensation
cost is recognized from the adoption date forward for all new stock options
granted and for any outstanding unvested awards as if the fair value method had
been applied to those awards as of the date of grant. The following table
illustrates the effect on net income and earnings per share as if the fair value
based method had been applied to all outstanding and unvested awards in each
period (in thousands, except per share amounts).
Three Months
Ended March 31,
----------------------
2006 2005
Net income as reported $ 699 $ 539
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects. 12 -
-------- -------
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects (12) (48)
======== =======
$ 699 $ 491
Pro forma net income including stock-based compensation cost based
on fair-value method
Earnings per share:
Basic -- as reported $ 0.37 $ 0.28
Basic -- pro forma $ 0.37 $ 0.28
Diluted -- as reported $ 0.36 $ 0.27
Diluted -- pro forma $ 0.36 $ 0.27
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
- ----------------------------
The Corporation has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of financial statements.
10
Certain accounting policies involve significant judgments and assumptions
by management which could have a material impact on the carrying value of
certain assets and liabilities. Management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations of the
Corporation.
The Corporation believes the allowance for loan losses is a critical
accounting policy that requires significant judgments and estimates used in the
preparation of consolidated financial statements. Management reviews the level
of the allowance on a monthly basis and establishes the provision for loan
losses based on the nature and volume of the loan portfolio, overall portfolio
quality, delinquency levels, a review of specific problem loans, loss
experience, economic conditions, and other factors related to the collectibility
of the loan portfolio. A portion of the allowance is established by segregating
the loans by residential mortgage, commercial and consumer loans and assigning
allocation percentages based on historical loss experience and delinquency
trends. The applied allocation percentages are reevaluated at least annually to
ensure their relevance in the current economic environment. Accordingly,
increases in the size of the loan portfolio and the increased emphasis on
commercial real estate and commercial business loans, which carry a higher
degree of risk of default and, thus, a higher allocation percentage, increases
the allowance. Additionally, a portion of the allowance is established based on
the level of classified assets.
Although the Corporation believes that it uses the best information
available to establish the allowance for loan losses, future additions to the
allowance may be necessary based on estimates that are susceptible to change as
a result of changes in economic conditions and other factors. In addition, the
Office of the Comptroller of the Currency, as an integral part of its
examination process, will periodically review the Corporation's allowance for
loan losses. Such agency may require the Corporation to recognize adjustments to
the allowance based on its judgments about information available to it at the
time of its examination.
Forward Looking Statements
- --------------------------
Management's discussion and analysis of financial condition and results of
operations and other portions of this Form 10-Q may contain certain
"forward-looking statements" concerning the future operations of the Corporation
and the Bank. These forward-looking statements are generally identified by the
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. Management intends to take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and is including this statement for the express purpose of availing the
Corporation of the protections of such safe harbor with respect to all
forward-looking statements contained in this report to describe future plans and
strategies. Management's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could effect actual
results include interest rate trends, the general economic climate in the
Corporation's and the Bank's market area and the country as a whole, the ability
of the Corporation and the Bank to control costs and expenses, competitive
products and pricing, loan delinquency rates, the quality and composition of the
loan and investment portfolios, changes in accounting principles and guidelines
and changes in federal and state regulation. These factors should be considered
in evaluating the forward-looking statements, and undue reliance should not be
placed on such statements.
11
Except as required by applicable law or regulation, the Corporation does not
undertake, and specifically disclaims any obligation, to release publicly the
result of any revisions that may be made to any forward looking statements to
reflect events or circumstances after the date of these statements or to reflect
the occurrence of anticipated or unanticipated events.
Financial Condition
- -------------------
Assets
- ------
Total assets of the Corporation decreased $2,867,000, or 0.8%, to $368,175,000
at March 31, 2006 from $371,042,000 at December 31, 2005. Investments and
mortgage-backed securities decreased approximately $10,980,000, or 7.51%, from
December 31, 2005 to March 31, 2006, due to the sale and maturity of securities.
Proceeds from the maturity and sale of investment securities were utilized to
fund growth in higher-yielding loans.
Investment and Mortgage-Backed Securities
- -----------------------------------------
Held to Maturity-Securities classified as held to maturity consisted of the
following (in thousands):
March 31, 2006 December 31, 2005
--------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ ------ ------ ------
Municipal Securities $3,198 $3,208 $3,204 $3,247
====== ====== ====== ======
Available for Sale-Securities classified as available for sale consisted of the
following (in thousands):
March 31, 2006 December 31, 2005
--------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
Investment Securities:
U.S. Agency Obligations $77,582 $75,560 $84,631 $83,443
Municipal Securities 16,098 16,704 17,328 18,180
Other 13,324 13,386 14,530 14,621
------- ------- ------- -------
Total Investment Securities 107,004 105,650 116,489 116,244
------- ------- ------- -------
Mortgage-backed Securities:
Fannie Mae 17,745 17,132 17,370 16,771
Ginnie Mae 63 65 67 69
Freddie Mac 4,076 4,068 4,572 4,579
Collateralized Mortgage Obligations 5,337 5,190 5,523 5,416
----- ------ ------ -----
Total Mortgage-backed Securities 27,221 26,455 27,532 26,835
------ ------ ------ ------
Total Available for Sale $134,225 $132,105 $144,021 $143,079
======== ======== ======== ========
Loans increased $9,128,000, or 4.74%, to $201,705,000 at March 31, 2006. The
Corporation continues to focus on consumer and commercial lending with
specialized loan officers and products.
12
Loans receivable consisted of the following (in thousands):
March 31, December 31,
2006 2005
--------- ---------
Mortgage loans:
Fixed rate residential $22,120 $23,859
Adjustable-rate residential 11,979 12,701
Commercial real estate 48,763 45,665
Construction 4,410 4,842
--------- --------
Total mortgage loans 87,272 87,067
--------- --------
Commercial loans:
Commercial non-real estate 44,280 39,453
Commercial lines of credit 34,900 31,215
--------- --------
Total commercial loans 79,180 70,668
--------- --------
Consumer loans:
Home equity 16,658 16,427
Consumer and installment 23,598 23,067
Consumer lines of credit 367 382
--------- --------
Total consumer loans 40,623 39,876
--------- --------
Total loans 207,075 197,611
Less:
Undisbursed portion of interim
construction loans (2,190) (1,980)
Unamortized loan discount (744) (764)
Allowance for loan losses (2,541) (2,394)
Net deferred loan origination costs 105 104
--------- --------
Total, net $201,705 $192,577
========= ========
Weighted-average interest rate of loans 7.59% 7.64%
13
Other assets increased $383,000, or 14.03%, to $3,113,000, from December 31,
2005 to March 31, 2006, due to an increase in a net deferred tax receivable that
was related to the mark to market adjustment for investments available for sale.
LIABILITIES
Total liabilities decreased $2,366,000, or 0.7%, to $343,343,000 at March 31,
2006 from $345,709,000 at December 31, 2005. Deposits increased $14,615,000, or
6.1%, to $254,218,000 at March 31, 2006 from $239,603,000 at December 31, 2005.
The increase was due primarily to growth in lower cost demand accounts partially
offset by a reduction in higher cost certificates of deposit accounts. The
Corporation continues to target lower cost demand deposit accounts through media
advertising versus traditional higher cost certificates of deposits.
Deposit accounts were as follows (in thousands):
March 31, 2006 December 31, 2005
------------------------------ ---------------------------------
Rate Balance % Rate Balance %
---- ------- - ---- ------- -
Account Type
NOW accounts:
Commercial non-
interest-bearing $14,858 5.84% $14,651 6.11%
Non-commercial 2.49% 56,871 22.37% 1.93% 51,447 21.47%
Money market checking accounts 4.13% 23,017 9.05% 2.55% 14,414 6.02%
Regular savings 0.58% 17,204 6.78% 0.43% 16,733 6.98%
------ ------- -------- ------
Total demand and savings deposits 2.23% 111,950 44.04% 1.50% 97,245 40.58%
------- ------- -------- ------
Savings certificates:
Up to 3.00% 42,591 16.75% 55,105 23.00%
3.01 %- 4.00% 51,061 20.08% 56,033 23.38%
4.01 %- 5.00% 39,680 15.60% 23,862 9.96%
5.01 %- 6.00% 3,741 1.47% 2,720 1.13%
6.01 %- 7.00% 23 0.03% 23 0.02%
7.01 %- 8.00% -- 0.00% -- 0.00%
-------- ------ -------- -----
Total savings certificates 3.41% 137,096 53.93% 2.75% 137,743 57.49%
-------- ------ -------- ------
Sweep accounts 4.70% 5,172 2.03% 3.43% 4,615 1.93%
-------- ------ -------- ------
Total deposit accounts 2.90% $254,218 100.00% 2.57% $239,603 100.00%
======== ====== ======== =======
At March 31, 2006 and December 31, 2005, the Bank had $49,000,000 and
$75,715,000, respectively, of advances outstanding from the FHLB. The maturity
of the advances from the FHLB is as follows (in thousands):
March 31, 2006 December 31,2005
-------------- ----------------
Wtd Avg Rate Wtd Avg Rate
------------ ------------
Contractual Maturity:
Within one year - fixed rate $5,000 2.64% $10,000 2.35%
Within one year - adjustable rate 7,500 5.08% 23,215 4.08%
After one but within three years - fixed rate 3,000 3.35% 3,000 3.35%
After one but within three years - adjustable rate 5,000 3.79% 5,000 3.79%
After three but within five years - adjustable rate 12,500 4.52% 7,500 5.30%
Greater than five years - adjustable rate 16,000 4.45% 27,000 4.24%
------ ------
Total advances $49,000 4.24% $75,715 3.98%
======= =======
The Bank pledges as collateral for the advances its FHLB stock and investment
securities and has entered into a blanket collateral agreement with the FHLB
whereby the Bank maintains, free of other encumbrances, qualifying loans (as
defined) with unpaid principal balances equal to, when discounted at 50% to 80%
of the unpaid principal balances, 100% of total advances. Borrowings from the
Federal Home Loan Bank (the "FHLB") decreased $26,715,000, or 35.28%, to
$49,000,000 at March 31, 2006 from $75,715,000 at December 31, 2005. Securities
sold under agreement to repurchase increased $10,000,000 to $30,000,000 at March
31, 2006 from $20,000,000 at December 31, 2005. During this period, securities
sold under agreement to repurchase provided a lower cost funding alternative to
Federal Home Loan Bank advances. Borrowings were reduced with deposit growth and
reductions in investments and mortgage-backed securities. Other liabilities
decreased $423,000 to $1,168,000 at March 31, 2006 from $1,591,000 at December
31, 2005, due primarily to a reduction in outstanding loan fundings.
14
Shareholders' Equity
- --------------------
Shareholders' equity decreased $501,000, or 1.98%, to $24,832,000 at March 31,
2006 from $25,333,000 at December 31, 2005 due to the repurchase of 12,352
shares at a cost of $222,000, dividend payments of $0.10 per share at a cost of
$190,000 and a $830,000 increase in unrealized losses on securities available
for sale, offset by net income of $699,000.
Liquidity
- ---------
Liquidity is the ability to meet demand for loan disbursements, deposit
withdrawals, repayment of debt, payment of interest on deposits and other
operating expenses. The primary sources of liquidity are deposits, loan
repayments, borrowings, maturity and sale of securities and interest payments.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The primary investing activities of the Corporation are the
origination of commercial and consumer loans, and the purchase of investment and
mortgage-backed securities. These activities are funded primarily by principal
and interest payments on loans and investment securities, deposit growth,
securities sold under agreements to repurchase and the utilization of FHLB
advances.
At March 31, 2006, the Corporation's investment in agency and mortgage-backed
securities totaled $135,303,000, nearly all of which is available for sale.
Approximately $65,862,000 and $83,170,000 of debt securities at March 31, 2006
and December 31, 2005, respectively, were pledged by the Bank as collateral to
secure deposits of the State of South Carolina, and Union, Laurens and York
counties along with additional borrowings and repurchase agreements.
Additionally, outstanding loan commitments (including commitments to fund credit
lines) totaled $95,212,000 at March 31, 2006. Management of the Corporation
anticipates that it will have sufficient funds available to meet its current
loan commitments.
The Corporation closely monitors its liquidity position on a daily basis.
Certificates of deposit, which are scheduled to mature in one year or less from
March 31, 2006, totaled $109,421,000. The Corporation relies primarily on
competitive rates, customer service, and long-standing relationships with
customers to retain deposits. From time to time, the Corporation will also offer
special products to its customers to increase retention and to attract new
deposits. Based upon the Corporation's experience with deposit retention and
current retention strategies, management believes that, although it is not
possible to predict future terms and conditions upon renewal, a significant
portion of such deposits will remain with the Corporation. If the Corporation
requires funds beyond its ability to generate them internally, additional
sources of funds are available through FHLB advances, securities sold under
agreements to repurchase and lines of credit. At March 31, 2006, the Corporation
had outstanding $49,000,000 of FHLB borrowings and $30,000,000 of securities
sold under agreements to repurchase. At March 31, 2006, the Corporation had
unused short-term lines of credit to purchase federal funds from unrelated banks
totaling $20,000,000 and the ability to borrow an additional $22,000,000 from
FHLB and secured borrowing lines. Lines of credit are available on a one-to-ten
day basis for general purposes of the Corporation. All of the lenders have
reserved the right to withdraw these lines at their option.
15
Capital Management
- ------------------
The Bank and the Corporation are subject to various regulatory capital
requirements administered by banking regulators. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weights and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank and the Corporation to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to
average assets (as defined in the regulations). Management believes, as of March
31, 2006, that the Bank and the Corporation meet the capital adequacy
requirements to which they are subject.
As of March 31, 2006, the Bank was "well capitalized" under the regulatory
framework for prompt corrective action based on its capital ratio calculations.
In order to be "well capitalized", the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table.
Under present regulations of the Office of the Comptroller of the Currency, the
Bank must have core capital (leverage requirement) equal to 4.0% of assets, of
which 1.5% must be tangible capital, excluding intangible assets. The Bank must
also maintain risk-based regulatory capital as a percent of risk weighted assets
at least equal to 8.0%. In measuring compliance with capital standards, certain
adjustments must be made to capital and total assets.
The following tables present the total risk-based, Tier 1 risk-based and Tier 1
leverage requirements for the Corporation and the Bank (dollars in thousands).
March 31, 2006
--------------
Actual Regulatory Minimum "Well Capitalized"
---------------- ------------------ ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
$ % $ % $ %
Leverage ratio
Corporation 30,556 8.33% 14,665 4.00% n/a n/a
Bank 30,535 8.33% 14,661 4.00% 18,327 5.00%
Tier 1 capital ratio
Corporation 30,556 12.70% 9,628 4.00% n/a n/a
Bank 30,535 12.69% 9,624 4.00% 14,436 6.00%
Total risk-based capital ratio
Corporation 33,097 13.75% 19,255 8.00% n/a n/a
Bank 33,076 13.75% 19,248 8.00% 24,060 10.00%
16
During fiscal 2003, the Corporation implemented a share repurchase program under
which the Board of Directors of the Corporation authorized the repurchase of up
to 5% of the outstanding shares or 98,000 shares. The program was expanded by an
additional 5%, or 98,000 shares, in fiscal 2004 and by an additional 5%, or
95,000 shares in fiscal 2005. The shares are to be repurchased either through
open market purchases or privately negotiated transactions and will be made from
time to time depending on market conditions and other factors. Repurchased
shares will be held in treasury and will be available for the Corporation's
benefit plans. During the three months ended March 31, 2006, the Corporation
repurchased 12,352 shares. As of March 31, 2006, the Corporation had repurchased
a total of 203,905 shares under these authorizations. Of the three
authorizations, 87,095 shares remain to be purchased under the third
authorization.
Off-Balance Sheet Risk
- ----------------------
In the normal course of operations, the Corporation engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in its financial statements. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity
risk. Such transactions are used primarily to manage customer's requests for
funding and take the form of legally binding agreements to lend money to
customers at predetermined interest rates for a specified period of time.
Outstanding loan commitments (including commitments to fund credit lines)
totaled $95,212,000 at March 31, 2006. Each customer's credit worthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on the credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. The credit risk on these commitments is managed by subjecting each
customer to normal underwriting and risk management processes.
For the period ended March 31, 2006, the Corporation did not engage in any
off-balance sheet transactions reasonably likely to have a material effect on
its financial condition, results of operation and cash flows.
17
Results of Operations for the Three Months Ended March 31, 2006 and 2005
- ------------------------------------------------------------------------
General
- -------
Net income increased $160,000, or 29.68%, to $699,000 for the three months ended
March 31, 2006 as compared to $539,000 for the same period in 2005 as increases
in net interest income and non-interest income and a reduction in the provision
for loan losses were partially offset by an increase in non-interest expense.
Average Yields and Rates
- ------------------------
(Dollars in Thousands)
Quarter Ended March 31,
-------------------------------
2006 2005
---- ----
Average Average Average Average
Balance Interest Yield/cost Balance Interest Yield/cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans (1) $197,481 $3,789 7.67% $173,713 $2,823 6.50%
Mortgage-backed securities 26,810 282 4.21% 37,758 388 4.11%
Investment securities 118,276 1,340 4.53% 109,920 1,142 4.15%
Other interest-earning assets 1,500 16 4.26% 10,165 58 2.29%
------- ----- ---- ------- ----- ----
Total interest-earning assets 344,067 5,427 6.31% 331,556 4,411 5.32%
Non-interest-earning assets 26,831 25,895
------ ------
Total assets $370,898 $357,451
======== ========
Interest-bearing liabilities:
Deposits $244,745 $1,705 2.79% $232,489 $1,139 1.96%
Floating rate junior subordinated
deferrable interest debentures 8,247 168 8.17% 8,247 128 6.19%
FHLB advances and other borrowings 91,291 900 3.95% 89,652 694 3.10%
------- ----- ---- ------- ----- ----
Total interest-bearing liabilities 344,283 2,773 3.22% 330,388 1,961 2.37%
----- ===== ----- =====
Non-interest-bearing liabilities 1,533 1,777
Total liabilities 345,816 332,165
Shareholders' equity 25,082 25,286
------ ------
Total liabilities and shareholders'
equity $370,898 $357,451
======== ========
Net interest income/spread $2,654 3.09% $2,450 2.95%
====== ======
Net yield on earning assets 3.09% 2.96%
(1) Average balances of loans include non-accrual loans.
Interest Income
- ---------------
Interest income increased $1,016,000, or 23.03%, to $5,427,000 for the three
months ended March 31, 2006 as compared to the same period in 2005. Interest
income on loans increased by 34.22%, or $966,000, to $3,789,000 for the three
months ended March 31, 2006 from $2,823,000 for the three months ended March 31,
2005, due primarily to increasing market interest rates along with a higher
average balance of loans with a higher average rate due to our increased
emphasis on commercial and consumer loan originations. Interest on deposits and
federal funds sold, combined with interest and dividends on investment and
mortgage-backed securities increased $50,000, or 3.15%, for the three months
ended March 31, 2006 to $1,638,000 from $1,588,000 during the same period in
2005 due to higher yields, from higher market interest rates, offset by lower
average balances.
18
Interest Expense
- ----------------
Interest expense increased $812,000, or 41.41%, to $2,773,000 for the three
months ended March 31, 2006 as compared to the three months ended March 31,
2005. Interest expense on deposit accounts increased $566,000, or 49.69%, to
$1,705,000 for the three months ended March 31, 2006 from $1,139,000 during the
same period in 2005 due to higher averages balances and cost of deposits as a
result of higher market rates offset by growth in lower costing transaction
accounts. The Corporation continues to target lower cost demand deposit accounts
versus traditional higher cost certificates of deposits. Interest expense on
borrowings increased $206,000, or 29.68%, for the three months ended March 31,
2006 as compared to the same period in the previous year due to higher market
interest rates. Interest expense on floating rate junior subordinated deferrable
interest debentures increased $40,000, or 31.25%, to $168,000 for the three
months ended March 31, 2006 from $128,000 during the same period in 2005 due to
higher market interest rates.
Provision for Loan Losses
- -------------------------
During the three months ended March 31, 2006, the provision for loan losses
was $175,000 as compared to $208,000 for the same period in the previous year,
which a decrease in net charge-offs, offset by loan growth. The provision also
reflects the Corporation's continued movement from longer term, fixed rate
residential mortgage loans to shorter term, floating rate consumer and
commercial loans. Consumer and commercial loans carry higher risk weighted rates
in the reserve calculation as compared to residential mortgage loans.
Non-accruing loans decreased $120,000 from $1,246,000 at December 31, 2005 to
$1,126,000 at March 31, 2006. Loans 30-89 days past due and still accruing was
$5,315,000 at March 31, 2006 compared to $1,909,000 at December 31, 2005. The
delinquent loans for the three months ended March 31, 2006 included one
commercial loan for $2,550,000 that is now current. During the three months
ended March 31, 2006, bad debt charge-offs, net of recoveries, was $28,000 as
compared to $63,000 for the same period in the previous year. The Corporation's
loan loss allowance at March 31, 2006 was approximately 1.24% of the
Corporation's outstanding loan portfolio and 171.92% of non-performing loans
compared to 1.23% of the Corporation's outstanding loan portfolio and 162.86% of
non-performing loans at December 31, 2005.
19
The changes in the allowance for loan losses consisted of the following (in
thousands):
Balance at beginning of period $2,394
Provision for loan losses 175
Charge-offs, net (28)
------
Balance at end of period $2,541
======
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
March 31, 2006 December 31, 2005
-------------- -----------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real estate $ 343 $ 461
Commercial 366 436
Consumer 417 349
------ ------
Total $ 1,126 $ 1,246
====== ======
Percentage of loans receivable 0.55% 0.64%
===== =====
Percentage of allowance for loan losses
to total loans outstanding 1.24% 1.23%
===== =====
Allowance for loan losses $ 2,541 $ 2,394
====== ======
Real estate acquired through
foreclosure and repossessed assets $ 352 $ 224
======= ======
The allowance for loan loss calculation includes a segmentation of loan
categories subdivided by residential mortgage, commercial and consumer loans.
Each category is rated for all loans including performing groups. The weight
assigned to each performing group is developed from previous loan loss
experience and as the loss experience changes, the category weight is adjusted
accordingly. In addition to loan loss experience, management's evaluation of the
loan portfolio includes the market value of the underlying collateral, growth
and composition of the loan portfolio, delinquency trends and economic
conditions. Management evaluates the carrying value of loans periodically and
the allowance for loan loss calculation will adjust accordingly.
Non-Interest Income
- -------------------
Total non-interest income increased $109,000, or 18.89%, to $686,000 for the
three months ended March 31, 2006 from $577,000 for the same period in the
previous year. Fees from financial services increased $89,000, or 16.39%, to
$632,000 for the three months ended March 31, 2006 from $543,000 for the same
period in the previous year. The increase was from an increase in transaction
accounts along with higher fees generated from third party investment brokerage
and financing receivables programs due to an increase in product volumes.
20
Non-Interest Expense
- --------------------
For the three months ended March 31, 2006, total non-interest expense increased
$84,000, or 4.0%, to $2,186,000 from $2,102,000 for the same period in 2005.
Compensation and employee benefits increased $72,000, or 7.09%, to $1,087,000
for the three months ended March 31, 2006 from $1,015,000 for the same period in
2005 due primarily to higher compensation and benefits costs for normal merit
salary increases and additional staff due to the opening of a new banking center
location in Simpsonville, South Carolina. Occupancy and equipment expense
decreased $23,000, or 4.52%, to $486,000 for the three months ended March 31,
2006 from $509,000 for the same period in 2005 due to primarily to lower
depreciation expense. Professional services expense increased $29,000, or
32.95%, to $117,000 for the three months ended March 31, 2006 from $88,000 for
the same period in 2005 due to higher legal expenses primarily due to the
changing the name of the holding company during the first quarter of 2006. Loan
operations expense decreased $28,000, or 66.67%, to $14,000 for the three months
ended March 31, 2006 from $42,000 for the same period in 2005, due to lower
costs associated with foreclosures. Items processing expense increased $19,000,
or 59.38%, to $51,000 for the three months ended March 31, 2006 from $32,000 for
the same period in 2005 due to transaction accounts increasing to $95.1 million
at March 31, 2006 from $73.6 million at March 31, 2005. The Corporation
continues to target lower cost demand deposit accounts through media advertising
versus traditional higher cost certificates of deposits. Other expense increased
$24,000, or 14.55%, to $189,000 for the three months ended March 31, 2006 from
$165,000 for the same period in 2005 due to higher postage expense from a rate
increase and higher forms and supplies expense from two new banking center
openings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-----------------------------------------------------------
The Corporation is committed to following a program of asset and liability
management in an effort to manage the fluctuations in earnings caused by
movements in interest rates. A significant portion of the Corporation's income
results from the spread between the yield realized on its interest-earning
assets and the rate of interest paid on its deposits and other borrowings.
Differences in the timing and volume of repricing assets versus the timing and
volume of repricing liabilities expose the Corporation to interest rate risk.
Management's policies are directed at minimizing the impact on earnings of
movements in interest rates.
The Corporation's Asset/Liability Committee makes pricing and marketing
decisions on deposit and loan products in conjunction with managing the
Corporation's interest rate risk. In addition, the Asset/Liability Committee
reviews the Corporation's securities portfolio, FHLB advances and other
borrowings as well as the Corporation's asset and liability policies.
The primary objective of Asset/Liability management at the Corporation is
to manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles in order to maintain adequate liquidity.
This is achieved by maintaining the proper balance of rate-sensitive earning
assets and rate-sensitive costing liabilities. The relationship of
rate-sensitive earning assets to rate-sensitive costing liabilities is the
principal factor in projecting the effect that fluctuating interest rates will
have on future net interest income. Rate-sensitive assets and interest-bearing
liabilities are those that can be repriced to current market rates within a
relatively short time period. Management monitors the rate sensitivity of
earning assets and interest-bearing liabilities over the entire life of these
instruments.
21
The Corporation has established policies and monitors results to control
interest rate sensitivity. Although the Corporation utilizes measures such as
static gap, which is simply the measurement of the difference between
interest-sensitive assets and interest-sensitive liabilities repricing for a
particular time period, just as important a process is the evaluation of how
particular assets and liabilities are impacted by changes in interest rates or
selected indices as they reprice. Asset/liability modeling techniques are
utilized by the Corporation to assess varying interest rate and balance sheet
mix assumptions.
Net Interest Income Simulation Analysis. We analyze our interest rate
sensitivity position to manage the risk associated with interest rate movements
through the use of interest income simulation. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest sensitive." An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period.
Our goal is to manage asset and liability positions to moderate the effects of
interest rate fluctuations on net interest income. Interest income simulations
utilizing interest rate shocks are completed quarterly and presented to the
Asset/Liability Committee. The simulations provide an estimate of the impact of
changes in interest rates on net interest income under a range of assumptions.
The interest rate shocks are compared to board approved policy limits and are
reviewed by the Asset/Liability Committee on a quarterly basis. The simulation
incorporates assumptions regarding the potential timing in the repricing of
certain assets and liabilities when market rates change and the changes in
spreads between different market rates. The simulation analysis incorporates
management's current assessment of the risk that pricing margins will change
adversely over time due to competition or other factors.
Simulation analysis is only an estimate of our interest rate risk exposure at a
particular point in time. We continually review the potential effect changes in
interest rates could have on the repayment of rate sensitive assets and funding
requirements of rate sensitive liabilities.
The table below sets forth an approximation of our exposure as a percentage of
estimated net interest income for the next twelve month period using interest
income simulation. The simulation uses projected repricing of assets and
liabilities on the basis of contractual maturities, anticipated repayments and
scheduled rate adjustments. Prepayment rates can have a significant impact on
interest income simulation. When interest rates rise, prepayments tend to slow.
When interest rates fall, prepayments tend to rise.
22
The following table reflects changes in estimated net interest income from rate
shocks of (+) or (-) 100 and 200 basis points in a rising and falling interest
rate environment for the Corporation.
At At
March 31, December 31,
Change in Rates (Basis Points) 2006 2005
------------------------------ ---- ----
+200 +6.04% +5.88%
+100 +3.30% +3.24%
-100 (4.24%) (4.97%)
-200 (9.87%) (7.72%)
The Corporation improved slightly in rising interest rate environments for the
period ending March 31, 2006 as compared to the period ending December 31, 2005
due primarily to significant growth in prime based loan products.
The 200 and 100 basis point change in rates in the above table is assumed to
occur evenly over the following twelve months. Based on the scenario above, net
interest income would be positively affected in the twelve-month periods if
rates rose by 100 and 200 basis points, but would be adversely affected if rates
declined by 100 and 200 basis points.
Item 4. Controls and Procedures
-----------------------
The Corporation's management, including the Corporation's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Corporation's "disclosure controls and procedures," as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act"). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end
of the period covered by this report, the Corporation's disclosure controls and
procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that the Corporation files or submits
under the Exchange Act with the Securities and Exchange Commission (the "SEC")
(1) is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and (2) is accumulated and communicated
to the Corporation's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
There has been no change in the Corporation's internal control over financial
reporting identified in connection with the evaluation required by Rule
13(a)-15(e) that occurred during the Corporation's last fiscal quarter that has
materially affected or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Corporation is not involved in any legal proceedings. The Bank is involved
in various claims and legal actions arising in the normal course of business.
Management believes that these proceedings are immaterial to the Corporation's
financial condition and results of operations.
Item 1A. Risk Factors
------------
There have been no material changes with respect to the Risk Factors disclosed
in the Corporation's form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table provides certain information with regard to shares
repurchased by the Corporation during the first quarter of 2006.
(c)
Total Number of Shares (d)
(a) Purchased as part of Maximum Number of
Total Number (b) Publicly Shares that may
of Shares Average Price Announced be purchased
Period Purchased Paid per share Programs under Program
------ --------- -------------- -------- -------------
January 1, 2006 12,000 $18.04 12,000 87,447
through January
31, 2006
February 1, 2006 -- -- -- 87,447
through February 28,
2006
March 1, 2006 through 352 $16.75 352 87,095
March 31, 2006
Total 12,352 $18.00 12,352 N/A
In November 2004, the Corporation implemented a share repurchase program under
which the Corporation may repurchase up to 5% of the outstanding shares or
98,000 shares. In May 2005, the program was expanded by an additional 5% or
95,000 shares. The repurchase program will continue until it is completed or
terminated by the Board of Directors.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
24
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits
--------
3(a) Certificate of Ownership
31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32(a) Chief Executive Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32(b) Chief Financial Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENT COMMUNITY BANCSHARES, INC.
(REGISTRANT)
Date: May 9, 2006 By: /s/ Dwight V. Neese
----------- ------------------------------------
Dwight V. Neese, CEO
Date: May 9, 2006 By: /s/ Richard H. Flake
----------- ------------------------------------
Richard H. Flake, CFO
26