UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2007
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-5735
PROVIDENT COMMUNITY BANCSHARES, INC.
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(Exact name of registrant as specified in its Charter)
Delaware 57-1001177
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2700 Celanese Road, Rock Hill, South Carolina 29732
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(Address of Principal Executive Offices)
(803) 325-9400
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(Registrant's telephone number, including area code)
203 West Main Street, Union, South Carolina 29379
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(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 Securities Exchange Act of 1934 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
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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
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The Corporation had 1,826,844 shares, $0.01 par value, of common stock issued
and outstanding as of May 2, 2007.
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
--------------------- ----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2007
and December 31, 2006 3
Consolidated Statements of Income for the three
months ended March 31, 2007 and 2006 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006 5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss)for the three months
ended March 31, 2007 and 2006 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-26
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 26-28
Item 4. Controls and Procedures 28
Part II. Other Information
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Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 30
Signatures 31
Part 1. Financial Information
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2007 and December 31, 2006
March 31, December 31,
ASSETS 2007 2006
(Unaudited) (Audited)
--------------------- --------------------
(DOLLARS IN THOUSANDS)
Cash and due from banks $ 12,153 $ 9,124
Investment and mortgage-backed securities
Held to maturity 3,176 3,182
Available for sale 118,033 119,003
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Total investment and mortgage-backed securities 121,209 122,185
--------------------- --------------------
Loans, net 236,926 231,886
Office properties and equipment, net 5,569 5,708
Federal Home Loan Bank Stock, at cost 3,466 3,983
Federal Reserve Stock, at cost 539 539
Accrued interest receivable 2,548 2,717
Intangible assets 3,582 3,741
Cash surrender value of life insurance 8,880 5,613
Other assets 1,959 2,134
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TOTAL ASSETS $ 396,831 $ 387,630
===================== ====================
LIABILITIES
Deposits $ 264,417 $ 248,440
Advances from the Federal Home Loan Bank 61,500 70,000
Securities sold under agreements to repurchase 29,696 28,533
Floating rate junior subordinated deferrable interest debentures 12,372 12,372
Accrued interest payable 868 784
Other liabilities 1,435 1,534
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TOTAL LIABILITIES 370,288 361,663
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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 - 1,826,844 shares at 3/31/07
and 1,830,528 at 12/31/06 20 20
Additional paid-in capital 12,545 12,506
Accumulated other comprehensive loss -423 -610
Retained earnings, substantially restricted 19,361 18,912
Treasury stock, at cost -4,960 -4,861
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TOTAL SHAREHOLDERS' EQUITY 26,543 25,967
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 396,831 $ 387,630
===================== ====================
See notes to consolidated financial statements.
3
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2007 and 2006 (unaudited)
Three Months Ended
March 31 March 31
2007 2006
--------------------- ---------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Interest Income:
Loans $ 4,776 $ 3,789
Deposits and federal funds sold 27 16
Mortgage-backed securities 290 282
Interest and dividends on
investment securities 1,326 1,340
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Total Interest Income 6,419 5,427
--------------------- ---------------------
Interest Expense:
Deposit accounts 2,389 1,705
Floating rate junior subordinated deferrable interest debentures 223 168
Advances from the FHLB and other borrowings 1,073 900
--------------------- ---------------------
Total Interest Expense 3,685 2,773
--------------------- ---------------------
Net Interest Income 2,734 2,654
Provision for loan losses 160 175
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Net Interest Income After
Provision for Loan Losses 2,574 2,479
--------------------- ---------------------
Non-Interest Income:
Fees for financial services 701 632
Other fees, net 22 41
Net gain on sale of investments -- 13
--------------------- ---------------------
Total Non-Interest Income 723 686
--------------------- ---------------------
Non-Interest Expense:
Compensation and employee benefits 1,182 1,087
Occupancy and equipment 583 486
Deposit insurance premiums 7 8
Professional services 111 117
Advertising/public relations 69 36
Loan operations 40 14
Intangible amortization 159 159
Items processing 56 51
Telephone 45 39
Other 187 189
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Total Non-Interest Expense 2,439 2,186
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Income Before Income Taxes 858 979
Income tax expense 209 280
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Net Income $ 649 $ 699
===================== =====================
Basic Net Income Per Common Share $ 0.36 $ 0.37
===================== =====================
Diluted Net Income Per Common Share $ 0.35 $ 0.36
===================== =====================
Dividend Per Common Share $ 0.11 $ 0.10
===================== =====================
Weighted Average Number of
Common Shares Outstanding
Basic 1,827,373 1,896,210
Diluted 1,862,194 1,917,866
See notes to consolidated financial statements.
4
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2007 and 2006 (unaudited)
Three Months Ended
March 31, March 31,
2007 2006
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(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $649 $699
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 160 175
Amortization of intangibles 159 159
Depreciation expense 139 148
Recognition of deferred income, net of costs -118 -124
Deferral of fee income, net of costs 197 122
Gain on investment transactions -- -13
Changes in operating assets and liabilities:
Decrease in accrued interest receivable 169 192
Increase in cash surrender value of life insurance -3,267 --
Decrease in other assets 175 87
Increase (decrease) in other liabilities 84 -349
Increase (decrease) in accrued interest payable -99 83
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Net cash (used) provided by operating activities -1,752 1,179
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INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale -21,800 -1,656
Proceeds from sale of investment and mortgage-
backed securities available for sale -- 7,437
Proceeds from maturity of investment and mortgage-
backed securities:
Available for sale 22,109 2,026
Held to maturity 6 6
Principal repayments on mortgage-backed securities:
Available for sale 848 1,903
Net increase in loans -5,279 -9,374
Redemption of FHLB stock 517 1,028
Purchase of office properties and equipment -- -455
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Net cash (used) provided by investing activities -3,599 915
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FINANCING ACTIVITIES:
Proceeds from the dividend reinvestment plan 28 27
Dividends paid in cash -200 -190
Proceeds from the exercise of stock options 11 15
Share repurchase program -99 -222
Repayment of term borrowings -8,500 -26,715
Increase in other borrowings 1,163 10,000
Increase in deposit accounts 15,977 14,615
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Net cash (used) provided by financing activities 8,380 -2,470
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,029 -376
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 9,124 8,380
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $12,153 $8,004
===================== =====================
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $9 $38
Interest 3,601 2,690
Non-cash transactions:
Loans foreclosed -- $73
See notes to consolidated financial statements.
5
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended March 31, 2007 and 2006 (unaudited)
Retained Accumulated
Additional Earnings, Other Treasury Total
Common Stock Paid-in Substantially Comprehensive Stock Shareholders'
Shares Amount Capital Restricted Income (loss) at Cost Equity
---------- ------ ---------- ------------- ------------- -------- -------------
(Dollars in Thousands, Except Share Data)
BALANCE AT DECEMBER 31, 2005 1,905,897 $20 $12,346 $16,916 -$612 -$3,337 $25,333
Net income 699 699
Other comprehensive income, net of tax
on unrealized holding losses on
securities available for sale arising
during period -839 -839
Less reclassification adjustment for 9 9
gains included in net income ------------- -------------
Comprehensive loss -131
Stock option activity, net 2,086 15 15
Dividend reinvestment plan contributions 1,628 27 27
Share repurchase program -12,352 -222 -222
Cash dividend ($.10 per share) -190 -190
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BALANCE AT MARCH 31, 2006 1,897,259 $20 $12,388 $17,425 -$1,442 -$3,559 $24,832
========== ====== ========== ============= ============= ======== =============
BALANCE AT DECEMBER 31, 2006 1,830,528 $20 $12,506 $18,912 -$610 -$4,861 $25,967
Net income 649 649
Other comprehensive income, net of tax
on unrealized holding gains on
securities available for sale arising
during period 187 187
Less reclassification adjustment for -- --
gains included in net income ------------- -------------
Comprehensive income 836
Stock option activity, net -- 11 11
Dividend reinvestment plan contributions 1,377 28 28
Share repurchase program -5,061 -99 -99
Cash dividend ($.11 per share) -200 -200
---------- ------ ---------- ------------- ------------- -------- -------------
BALANCE AT MARCH 31, 2007 1,826,844 $20 $12,545 $19,361 -$423 -$4,960 $26,543
========== ====== ========== ============= ============= ======== =============
6
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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, 2007 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, 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." FAS 155
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest only-strips and principal-only strips are not subject
to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, and
amends Statement 140 to eliminate the prohibition on a qualifying special
purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. 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 Company 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
7
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 Company does not believe the adoption of SFAS No. 156 will have a
material impact on its financial position, results of operations and cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in enterprises' financial statements in
accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption did not have a material impact
on the reported results of operations or financial conditions of the Company.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This standard does not require any new fair value
measurements, but rather eliminates inconsistencies found in various prior
pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and is
not expected to have a significant impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement
date--the date at which the benefit obligation and plan assets are measured--is
required to be the company's fiscal year end. SFAS 158 is effective for
8
publicly-held companies for fiscal years ending after December 15, 2006,
except for the measurement date provisions, which are effective for fiscal years
ending after December 15, 2008. The Company does not have a defined benefit
pension plan. Therefore, SFAS 158 will not impact the Company's financial
conditions or results of operations.
In September, 2006, The FASB ratified the consensuses reached by the FASB's
Emerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability for future benefits in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus Opinion--1967". EITF 06-4 is
effective for fiscal years beginning after December 15, 2006. Entities should
recognize the effects of applying this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods. The
Company does not believe the adoption of EITF 06-4 will have a material impact
on its financial position, results of operations and cash flows.
In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life Insurance--Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for
Purchases of Life Insurance." EITF 06-5 states that a policyholder should
consider any additional amounts included in the contractual terms of the
insurance policy other than the cash surrender value in determining the amount
that could be realized under the insurance contract. EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance contract assuming the surrender of an individual-life by
individual-life policy (or certificate by certificate in a group policy). EITF
06-5 is effective for fiscal years beginning after December 15, 2006. The
Company does not believe the adoption of EITF 06-5 will have a material impact
on its financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." This statement permits, but does not require, entities to
measure many financial instruments at fair value. The objective is to provide
entities with an opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the entity first recognizes an eligible instrument and will report
unrealized gains and losses on such instruments in current earnings. This
statement 1) applies to all entities, 2) specifies certain election dates, 3)
can be applied on an instrument-by-instrument basis with some exceptions, 4) is
irrevocable and 5) applies only to entire instruments. One exception is demand
deposit liabilities which are explicitly excluded as qualifying for fair value.
With respect to SFAS 115, available-for-sale and held-to-maturity securities at
the effective date are eligible for the fair value option at that date. If the
fair value option is elected for those securities at the effective date,
cumulative unrealized gains and losses at that date shall be included in the
9
cumulative-effect adjustment and thereafter, such securities will be accounted
for as trading securities. SFAS 159 is effective for the Corporation on January
1, 2008. Earlier adoption is permitted in 2007 if the Corporation also elects to
apply the provisions of SFAS 157, "Fair Value Measurement." The Corporation is
currently analyzing the fair value option provided under SFAS 159.
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, 2007 and
2006 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, 2007 and 2006 were
34,821 and 21,656, respectively.
3. Assets Pledged
--------------
Approximately $72,635,000 and $74,387,000 of debt securities at March 31, 2007
and December 31, 2006, 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.
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, 2007
related to these items is summarized below:
10
Loan Commitments: Contract Amount
---------------- ---------------
Approved loan commitments $ 2,136,000
Unadvanced portions of loans and credit lines 55,282,000
----------
Total loan commitments $ 57,418,000
==========
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, 2007 consisted of fixed and adjustable rate
loans at rates ranging from 6.5% to 8.5%. 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 $136,233,000 at March 31, 2007. Of these lines, the outstanding
loan balances totaled approximately $80,951,000.
5. Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
----------------------------------------------------------------------
On July 18, 2006, the Corporation sponsored the creation of Provident Community
Bancshares Capital Trust I ("Capital Trust I"). The Corporation is the owner of
all of the common securities of Capital Trust I. On July 21, 2006, Capital Trust
I issued $4,000,000 in the form of floating/fixed rate capital securities
through a pooled trust preferred securities offering. The proceeds from this
issuance, along with the Corporation's $124,000 capital contribution for Capital
Trust I's common securities, were used to acquire $4,124,000 aggregate principal
amount of the Corporation's floating rate junior subordinated deferrable
interest debentures due October 1, 2036 (the "Debentures"), which constitute the
sole asset of Capital Trust I. The interest rate on the Debentures and the
capital securities will be equal to 7.393% for the first five years. Thereafter,
the interest rate is variable and adjustable quarterly at 1.74% over the
three-month LIBOR. The Corporation has, through the Trust Agreement establishing
Capital Trust I, the Guarantee Agreement, the notes and the related Debenture,
taken together, fully irrevocably and unconditionally guaranteed all of the
Capital Trust I obligations under the capital securities. The stated maturity of
the Debentures is October 1, 2036. In addition, the Debentures are subject to
redemption at par at the option of the Corporation, subject to prior regulatory
approval, in whole or in part on any interest payment date after October 1,
2011. The Debentures are also subject to redemption prior to October 1, 2011 at
up to 103.7% of par after the occurrence of certain events that would either
have a negative tax effect on Capital Trust I or the Corporation or would result
in Capital Trust I being treated as an investment company that is required to be
registered under the Investment Company Act of 1940. Upon repayment of the
Debentures at their stated maturity or following their redemption, Capital Trust
I will use the proceeds of such repayment to redeem an equivalent amount of
outstanding trust preferred securities and trust common securities. The
Corporation has the right, at one or more times, to defer interest payments on
11
the Debentures for up to twenty consecutive quarterly periods. All deferrals
will end on an interest payment date and will not extend beyond October 1, 2036,
the stated maturity date of the Debentures. If the Corporation defers interest
payments on the Debentures, Capital Trust I will also defer distributions on the
capital securities. During any deferral period, each installment of interest
that would otherwise have been due and payable will bear additional interest at
the applicable distribution rate, compounded quarterly.
On November 28, 2006, the Corporation sponsored the creation of Provident
Community Bancshares Capital Trust ("Capital Trust II"). The Corporation is the
owner of all of the common securities of the Trust. On December 15, 2006, the
Trust issued $8,000,000 in the form of floating rate capital securities through
a pooled trust preferred securities offering. The proceeds of Capital Trust II
were utilized for the redemption of Union Financial Bancshares Statutory Trust
(the "Trust") issued on December 18, 2001. The proceeds from this issuance,
along with the Corporation's $247,000 capital contribution for the Trust's
common securities, were used to acquire $8,247,000 aggregate principal amount of
the Corporation's floating rate junior subordinated deferrable interest
debentures due March 1, 2037 (the "Debentures"), which constitute the sole asset
of the Trust. The interest rate on the Debentures and the capital securities is
variable and adjustable quarterly at 1.74% over the three-month LIBOR, with an
initial rate of 7.11%. The Corporation has, through the Trust agreement
establishing the Trust, the Guarantee Agreement, the notes and the related
Debenture, taken together, fully irrevocably and unconditionally guaranteed all
of the Trust's obligations under the capital securities. The stated maturity of
the Debentures is March 1, 2037. In addition, the Debentures are subject to
redemption at par at the option of the Corporation, subject to prior regulatory
approval, in whole or in part on any interest payment date after March 1, 2012.
The Debentures are also subject to redemption prior to March 1, 2012 at 103.5%
of par after the occurrence of certain events that would either have a negative
tax effect on the Trust or the Corporation or would result in the Trust being
treated as an investment company that is required to be registered under the
Investment Company Act of 1940. Upon repayment of the Debentures at their stated
maturity or following their redemption, the Trust will use the proceeds of such
repayment to redeem an equivalent amount of outstanding trust preferred
securities and trust common securities. The Corporation has the right, at one or
more times, to defer interest payments on the Debentures for up to twenty
consecutive quarterly periods. All deferrals will end on an interest payment
date and will not extend beyond March 1, 2037, the stated maturity date of the
Debentures. If the Corporation defers interest payments on the Debentures, the
Trust will also defer distributions on the capital securities. During any
deferral period, each installment of interest that would otherwise have been due
and payable will bear additional interest at the applicable distribution rate,
compounded quarterly.
On November 14, 2001, the Corporation sponsored the creation of the Trust. The
Corporation is the owner of all of the common securities of the Trust. On
December 18, 2001, the Trust issued $8,000,000 in the form of floating rate
capital securities through a pooled trust preferred securities offering. The
proceeds from this issuance, along with the Corporation's $248,000 capital
contribution for the Trust's common securities, were used to acquire $8,247,000
aggregate principal amount of the Corporation's floating rate junior
subordinated deferrable interest debentures due December 18, 2031 (the
"Debentures"), which constitute the sole asset of the Trust. The interest rate
on the Debentures and the capital securities is variable and adjustable
12
quarterly at 3.60% over the three-month LIBOR, with an initial rate of 5.60%.
The Debentures are subject to redemption at par at the option of the
Corporation, subject to prior regulatory approval, in whole or in part on any
interest payment date after December 18, 2006. On December 18, 2006, the Trust
was redeemed with the proceeds from Capital Trust II.
A summary of the Subordinated Deferrable Interest Debentures issued and
outstanding follows:
Amount Outstanding at
March 31,
------------------------ Distribution
Prepayment Payment
Name 2007 2006 Rate Option Date Maturity Frequency
- -------------------------------- ---------- ------------- ------ ----------------- ------------------- --------------
Union Financial Statutory
Trust I $-- $8,000,000 8.53% December 18, 2006 December 18, 2031 Quarterly
- -------------------------------- ---------- ------------- ------ ----------------- ------------------- --------------
Provident Community
Bancshares Capital Trust I 4,000,000 B 7.39% October 1, 2011 October 1, 2036 Quarterly
- -------------------------------- ---------- ------------- ------ ----------------- ------------------- --------------
Provident Community
Bancshares Capital Trust II 8,000,000 B 7.10% March 1, 2012 March 1, 2037 Quarterly
- -------------------------------- ---------- ------------- ------ ----------------- ------------------- --------------
Total $12,000,000
============
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.
Certain accounting policies involve significant judgments and assumptions by
management which, if incorrect, 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 composition and volume of the loan portfolio, overall portfolio quality,
13
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.
Except as required by applicable law or regulation, the Corporation does not
undertake, and specifically disclaims any obligation, to release publicly the
14
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.
15
Financial Condition
- -------------------
Assets
- ------
Total assets of the Corporation increased $9,201,000, or 2.37%, to $396,831,000
at March 31, 2007 from $387,630,000 at December 31, 2006. Investments and
mortgage-backed securities decreased approximately $976,000, or 0.80%, from
December 31, 2006 to March 31, 2007, due to the maturity of government sponsored
enterprise securities, offset by the purchase of Freddie Mac securities.
Proceeds from the maturity of investment securities were utilized to fund growth
in higher-yielding loans. Cash and due from banks increased $3,029,000, or
33.2%, to $12,153,000 at March 31, 2007 from $9,124,000 at December 31, 2006 due
to an increase in fed funds sold as a result of deposit growth.
Investment and Mortgage-backed Securities
- -----------------------------------------
Held to Maturity-Securities classified as held to maturity consisted of the
following (in thousands):
March 31, 2007 December 31, 2006
--------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Municipal Securities $3,176 $3,239 $3,182 $3,239
====== ====== ====== ======
16
Available for Sale-Securities classified as available for sale consisted of the
following (in thousands):
March 31, 2007 December 31, 2006
------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
Investment Securities:
U.S. Agency Obligations $ 511 $ 496 $ 515 $ 500
Government Sponsored Enterprises 66,907 66,270 73,511 72,638
Municipal Securities 10,291 10,660 10,594 10,970
Other 14,310 14,424 14,533 14,644
--------- --------- ---------- ---------
Total Investment Securities 92,019 91,850 99,153 98,752
--------- --------- ---------- ---------
Mortgage-backed Securities:
Fannie Mae 12,717 12,319 13,243 12,813
Ginnie Mae 1,207 1,214 55 57
Freddie Mac 8,569 8,564 3,111 3,109
Collateralized Mortgage Obligations 4,171 4,086 4,380 4,272
--------- --------- ---------- ---------
Total Mortgage-backed Securities 26,664 26,183 20,789 20,251
--------- --------- ---------- ---------
Total Available for Sale $ 118,683 $118,033 $ 119,942 $119,003
========== ========= ========== =========
Loans
Loans increased $5,040,000, or 2.17%, to $236,926,000 at March 31, 2007. The
Corporation continues to focus on consumer and commercial lending with
specialized loan officers and products.
17
Loans receivable consisted of the following (in thousands):
March 31, December 31,
-------------- --------------
2007 2006
-------------- --------------
Mortgage loans:
Fixed rate residential $ 17,673 $ 19,187
Adjustable-rate residential 9,581 10,295
Commercial real estate 67,103 62,450
Construction 4,819 5,787
Total mortgage loans 99,176 97,719
Commercial loans:
Commercial non-real estate 30,895 42,093
Commercial lines of credit 65,217 51,469
Total commercial loans 96,112 93,562
Consumer loans:
Home equity 15,394 15,936
Consumer and installment 31,611 29,827
Consumer lines of credit 340 373
Total consumer loans 47,345 46,136
Total loans 242,633 237,417
Less:
Undisbursed portion of interim
construction loans (2,238) (2,238)
Unamortized loan discount (546) (607)
Allowance for loan losses (2,906) (2,754)
Net deferred loan origination costs (17) 68
Total, net $ 236,926 $ 231,886
-------------- --------------
Weighted-average interest rate of loans 8.23% 8.14%
Cash surrender value of life insurance increased $3,267,000, or 58.2%, to
$8,880,000 at March 31, 2007 from $5,613,000 at December 31, 2006 due to the
purchase of additional bank-owned life insurance that will be utilized to offset
the rapidly rising costs of providing our employee benefits.
Liabilities
- -----------
Total liabilities increased $8,625,000, or 2.38%, to $370,288,000 at March 31,
2007 from $361,663,000 at December 31, 2006. Deposits increased $15,977,000, or
6.43%, to $264,417,000 at March 31, 2007 from $248,440,000 at December 31, 2006.
The increase was due primarily to growth in accounts generated from the new
banking center openings. The Corporation continues to target lower cost demand
deposit accounts through media advertising.
18
Deposit accounts were as follows (in thousands):
March 31, 2007 December 31, 2006
----------------------- -----------------------
Rate Balance % Rate Balance %
----- --------- ------- ----- --------- -------
Account Type
NOW accounts:
Commercial non-interest-bearing -- $ 18,036 6.82% -- $ 16,718 6.73%
Non-commercial 2.75% 56,886 21.51% 2.82% 52,512 21.14%
Money market checking accounts
4.67% 22,087 8.35% 4.22% 14,178 5.71%
Regular savings 0.75% 15,666 5.93% 0.76% 14,930 6.00%
Total demand and savings deposits
2.42% 112,675 42.61% 2.20% 98,338 39.58%
Savings certificates:
Up to 3.00% 10,142 3.84% 15,557 6.26%
3.01 %- 4.00% 26,707 10.10% 23,491 9.46%
4.01 %- 5.00% 19,961 7.55% 31,086 12.51%
5.01 %- 6.00% 94,907 35.89% 79,943 32.18%
6.01 %- 7.00% 25 0.01% 25 0.01%
-------- ------- -------- -------
Total savings certificates 4.62% 151,742 57.39% 4.47% 150,102 60.42%
-------- ------- -------- -------
Total deposit accounts 3.68% $264,417 100.00% 3.56% $248,440 100.00%
--------- ------- --------- -------
At March 31, 2007 and December 31, 2006, the Bank had $61,500,000 and
$70,000,000, respectively, of advances outstanding from the FHLB. The maturity
of the advances from the FHLB is as follows (in thousands):
March 31, 2007 December 31, 2006
--------------------- ----------------------
Wtd Avg Rate Wtd Avg Rate
--------------------- ----------------------
Contractual Maturity:
Within one year - fixed rate $ 8,000 4.77% $ 21,500 5.18%
Within one year - adjustable rate 10,000 5.33% 15,000 5.36%
After one but within three years - fixed rate
5,000 4.93% B B%
After one but within three years - adjustable rate
7,500 5.30% 12,500 5.33%
After three but within five years - adjustable rate 5,000 4.92% B B%
Greater than five years - adjustable rate 26,000 4.16% 21,000 4.33%
--------- -----------
Total advances $ 61,500 4.69% $ 70,000 5.00%
========== ============
19
The Bank pledges as collateral for the advances its 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 75% of the unpaid
principal balances, 100% of total advances. Borrowings from the Federal Home
Loan Bank (the "FHLB") decreased $8,500,000, or 12.14%, to $61,500,000 at March
31, 2007 from $70,000,000 at December 31, 2006. Securities sold under agreement
to repurchase increased $1,163,000 to $29,696,000 at March 31, 2007 from
$28,533,000 at December 31, 2006. During this period, securities sold under
agreement to repurchase provided a lower cost funding alternative to Federal
Home Loan Bank advances. The reduction in borrowings was funded with the excess
deposit growth.
Shareholders' Equity
- --------------------
Shareholders' equity increased $576,000, or 2.22%, to $26,543,000 at March 31,
2007 from $25,967,000 at December 31, 2006 due primarily to net income of
$649,000 and a $187,000 decrease in unrealized losses on securities available
for sale, offset by the repurchase of 5,061 shares at a cost of $99,000 and
dividend payments of $0.11 per share at a cost of $200,000.
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, 2007, the Corporation's investment in marketable securities totaled
$121,209,000, nearly all of which is available for sale. Approximately
$72,635,000 and $74,387,000 of debt securities at March 31, 2007 and December
31, 2006, 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.
Outstanding loan commitments (including commitments to fund credit lines)
totaled $136,233,000 at March 31, 2007. 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, 2007, totaled $109,953,000. 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, 2007, the Corporation
had outstanding $61,500,000 of FHLB borrowings and $29,696,000 of securities
sold under agreements to repurchase. At March 31, 2007, 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 $19,000,000 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.
20
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, 2007, that the Bank and the Corporation meet the capital adequacy
requirements to which they are subject.
As of March 31, 2007, 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.
21
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, 2007
-------------------------------------------------------------------
Actual Regulatory Minimum Well Capitalized
-------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ---------- ----------- ------------ ---------
$ % $ % $ %
Leverage ratio
Corporation 32,447 8.34% 15,557 4.00% n/a n/a
Bank 35,199 9.06% 15,544 4.00% 19,430 5.00%
Tier 1 capital ratio
Corporation 32,447 11.67% 11,115 4.00% n/a n/a
Bank 35,199 12.68% 11,106 4.00% 16,658 6.00%
Total risk-based capital ratio
Corporation 38,289 13.77% 22,231 8.00% n/a n/a
Bank 38,105 13.72% 22,211 8.00% 27,764 10.00%
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, by an additional 5%, or 95,000
shares in fiscal 2005 and by an additional 5%, or 92,000 shares in fiscal 2006.
The shares are to be repurchased either through open market purchases or
privately negotiated transactions, 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, 2007,
the Corporation repurchased 5,061 shares. As of March 31, 2007, the Corporation
had repurchased a total of 281,202 shares under these authorizations and had
101,798 shares available for repurchase under these authorizations.
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 $136,233,000 at March 31, 2007. 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.
22
For the period ended March 31, 2007, 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.
Results of operations for the three months ended March 31, 2007 and 2006
- ------------------------------------------------------------------------
General
- -------
Net income decreased $50,000, or 7.15%, to $649,000 for the three months ended
March 31, 2007 as compared to $699,000 for the same period in 2006 as an
increase in net interest income and non-interest income along with a reduction
in the provision for loan losses were more than offset by an increase in
non-interest expense. The increase in non-interest expense from the prior year
quarter reflects the additional expenses associated with opening three banking
centers in the previous twelve months.
23
Average Yields and Rates
- ------------------------
(dollars in thousands)
Three Months Ended March 31,
2007 2006
----------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ -------- ------------- --------- -------- -------------
Interest-earning assets:
Loans (1) $ 235,666 $ 4,776 8.11% $197,481 $ 3,789 7.67%
Mortgage-backed securities 24,636 290 4.70% 26,810 282 4.21%
Investment securities 100,541 1,326 5.28% 118,276 1,340 4.53%
Other interest-earning assets 2,240 27 4.78% 1,500 16 4.26%
----------- ------- ------------- -------- ------- -------------
Total interest-earning assets 363,083 6,419 7.07% 344,067 5,427 6.31%
------- ============= ------- =============
Non-interest-earning assets 29,421 26,832
Total assets $ 392,504 $370,899
============ =========
Interest-bearing liabilities:
Deposits 261,388 2,389 3.66% 244,745 1,705 2.79%
Floating rate junior subordinated deferrable
interest debentures 12,372 223 7.20% 8,247 168 8.17%
FHLB advances and other borrowings
89,654 1,073 4.79% 91,291 900 3.95%
----------- ------- ------------- -------- ------- -------------
Total interest-bearing liabilities 363,414 3,685 4.06% 344,283 2,773 3.22%
------- ============= ------- =============
Non-interest-bearing liabilities 2,696 1,533
----------- --------
Total liabilities 366,110 345,816
Shareholders = equity 26,394 25,083
Total liabilities and shareholders= equity
$ 392,504 $370,899
============ =========
Net interest income/spread $ 2,734 3.02% $ 2,654 3.09%
======== ========
Net yield on earning assets 3.01% 3.09%
(1) Average balances of loans include non-accrual loans.
Interest Income
- ---------------
Interest income increased $992,000, or 18.28%, to $6,419,000 for the three
months ended March 31, 2007 as compared to the same period in 2006. Interest
income on loans increased by 26.05%, or $987,000, to $4,776,000 for the three
months ended March 31, 2007 from $3,789,000 for the three months ended March 31,
2006, due primarily to a higher average balance of loans and higher average
rates due to increasing market interest rates along with 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 $5,000 for the three months ended March 31,
2007 to $1,643,000 from $1,638,000 during the same period in 2006 due to higher
yields from higher market interest rates offset by lower average balances.
24
Interest Expense
- ----------------
Interest expense increased $912,000, or 32.89%, to $3,685,000 for the three
months ended March 31, 2007 as compared to the three months ended March 31,
2006. Interest expense on deposit accounts increased $684,000, or 40.12%, to
$2,389,000 for the three months ended March 31, 2007 from $1,705,000 during the
same period in 2006 due to higher average balances and cost of deposits as a
result of higher market rates. The Corporation continues to target lower cost
demand deposit accounts versus traditional higher cost certificates of deposits
in order to reduce overall funding costs. Interest expense on borrowings
increased $173,000, or 19.22%, for the three months ended March 31, 2007 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 $55,000, or 32.74%, to $223,000 for the three months ended
March 31, 2007 from $168,000 during the same period in 2006 due to higher
average balances, offset by lower rates due to the repayment of older trust
preferred with the proceeds of newer trust preferred with lower rates. In
addition, on July 21, 2006, the Corporation completed a private placement of $4
million in trust preferred securities thereby increasing outstanding balances to
$12 million at March 31, 2007 compared to $8 million at March 31, 2006.
Provision for Loan Losses
- -------------------------
During the three months ended March 31, 2007, the provision for loan losses was
$160,000 as compared to $175,000 for the same period in the previous year due to
a decrease in nonperforming loans and loans charged-off that was partially
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. Nonperforming loans decreased $206,000
from $1,295,000 at December 31, 2006 to $1,089,000 at March 31, 2007. During the
three months ended March 31, 2007, bad debt charge-offs, net of recoveries, was
$8,000 as compared to $28,000 for the same period in the previous year. The
Corporation's loan loss allowance at March 31, 2007 was approximately 1.21% of
the Corporation's outstanding loan portfolio and 266.85% of non-performing loans
compared to 1.17% of the Corporation's outstanding loan portfolio and 212.66% of
non-performing loans at December 31, 2006.
The changes in the allowance for loan losses consisted of the following (in
thousands):
Balance at beginning of period $ 2,754
Provision for loan losses 160
Charge-offs, net (8)
---------
Balance at end of period $ 2,906
=========
25
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
March 31, 2007 December 31, 2006
----------------- -----------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real estate $ 68 $ 459
Commercial 826 631
Consumer 195 205
----------------- -----------------
Total $ 1,089 $ 1,295
================= =================
Percentage of loans receivable 0.44% 0.56%
================= =================
Percentage of allowance for loan losses
to total loans outstanding 1.21% 1.17%
================= =================
Allowance for loan losses $ 2,906 $ 2,754
================= =================
Real estate acquired through
foreclosure and repossessed assets $ 148 $ 148
================= =================
Non-performing loans for the three months ended March 31, 2007 decreased
$206,000 from December 31, 2006 due primarily to a reduction in residential real
estate loans. 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 $37,000, or 5.39%, to $723,000 for the three
months ended March 31, 2007 from $686,000 for the same period in the previous
year. Fees from financial services increased $69,000, or 10.92%, to $701,000 for
the three months ended March 31, 2007 from $632,000 for the same period in the
previous year. The change was from an increase in service charges due to an
increase in the number of transaction accounts.
26
Non-Interest Expense
- --------------------
For the three months ended March 31, 2007, total non-interest expense increased
$253,000, or 11.57%, to $2,439,000 from $2,186,000 for the same period in 2006.
The increase was due primarily to higher operating costs associated with banking
centers opened in Simpsonville, South Carolina and two in Rock Hill, South
Carolina during the previous twelve months. Compensation and employee benefits
increased $95,000, or 8.74%, to $1,182,000 for the three months ended March 31,
2007 from $1,087,000 for the same period in 2006 due primarily to higher
compensation and benefits costs for normal merit salary increases and additional
staff due to the new banking center openings. Occupancy and equipment expense
increased $97,000, or 19.96%, to $583,000 for the three months ended March 31,
2007 from $486,000 for the same period in 2006, due primarily to higher lease
expense from the new locations. Advertising/public relations expense increased
$33,000, or 91.67%, to $69,000 for the three months ended March 31, 2007 from
$36,000 for the same period in 2006 due primarily to product and promotion
expenses for the new banking center locations and product promotion expenses for
business checking accounts. Loan operations expense increased $26,000, or
185.71%, to $40,000 for the three months ended March 31, 2007 from $14,000 for
the same period in 2006, due to higher costs associated with loan foreclosures.
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
interest-earning assets and interest-bearing liabilities over the entire life of
these instruments.
27
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. The Corporation analyzes its 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.
The Corporations 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 the Corporation's interest rate risk
exposure at a particular point in time. The Corporation continually reviews 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 the Corporation's 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.
28
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.
March 31, December 31,
Change in Rates (Basis Points) 2007 2006
- ---------------------------------------- ----------- ---------------
+200 +1.68% +3.76%
+100 +1.05% +2.06%
- -100 -0.91% -2.42%
- -200 -8.68% -5.91%
The Corporation decreased slightly in rising interest rate environments for the
period ending March 31, 2007 as compared to the period ending December 31, 2006
due primarily to significant growth in prime-based loan products that was offset
by an increase in short-term borrowings.
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.
29
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
------------
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2006, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
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 2007.
(c) (d)
(a) Total Number of Maximum Number of
Total Number (b) Shares Purchased Shares that may be
of Shares Average Price Paid as part of Publicly purchased under
Period Purchased per share Announced Programs Program
- ------------------ ---------------- -------------------- -------------------- -------------------------
January 1, 2007
through January
31, 2007 2,700 $19.40 2,700 104,159
- ------------------ ---------------- -------------------- -------------------- -------------------------
February 1, 2007
through February
28, 2007 1,751 $20.16 1,751 102,408
- ------------------ ---------------- -------------------- -------------------- -------------------------
March 1, 2007
through March 31,
2007 610 $20.09 610 101,798
- ------------------ ---------------- -------------------- -------------------- -------------------------
Total 5,061 $19.75 5,061 N/A
- ------------------ ---------------- -------------------- -------------------- -------------------------
In May 2005, the Corporation implemented a share repurchase program under which
the Corporation may repurchase up to 5% of the outstanding shares or 98,000
30
shares. In August 2006, the program was expanded by an additional 5% or 92,000
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.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits
--------
10(a) Provident Community Bank, Supplemental Executive Retirement
Plan with Dwight V. Neese
10(b) Provident Community Bank, Supplemental Executive Retirement
Plan #2 with Dwight V. Neese
10(c) Provident Community Bank, National Association Supplemental
Executive Retirement Plan with Richard H. Flake
10(d) Provident Community Bank, National Association Supplemental
Executive Retirement Plan #2 with Richard H. Flake
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
31
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 14, 2007 By: /s/ Dwight V. Neese
------------------ ----------------------------------------
Dwight V. Neese, President and
Chief Executive Officer
Date: May 14, 2007 By: /s/ Richard H. Flake
------------------- ---------------------------------------
Richard H. Flake, Executive Vice President
and Chief Financial Officer
32