UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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.)
2700 Celanese Road, Rock Hill, South Carolina 29732
-----------------------------------------------------
(Address of Principal Executive Offices)
(803)-325-9400
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(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
to be filed 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
-- --
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [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 1,790,599 shares, $0.01 par value, of common stock issued
and outstanding as of May 10, 2010.
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
---------------------- ----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2010
and December 31, 2009 3
Consolidated Statements of Income (Loss) for the three
months ended March 31, 2010 and 2009 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2010 and 2009 5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss) for the three months
ended March 31, 2010 and 2009 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-32
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 32
Item 4T. Controls and Procedures 32
Part II. Other Information
------------------
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Reserved 33
Item 5. Other Information 33
Item 6. Exhibits 33
Signatures 34
Part 1. Financial Information
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2010 and December 31, 2009
March 31, December 31,
ASSETS 2010 2009
(Unaudited) (Audited)
------------ ------------
(DOLLARS IN THOUSANDS)
Cash and due from banks $ 4,427 5,103
Interest earning balances with the Federal Reserve 5,605 5,241
Federal funds sold 20,344 5,287
------------ ------------
Cash and cash equivalents 30,376 15,631
Investment and mortgage-backed securities
Held to maturity (market value of $4,009,000 and $3,976,000 at March 31, 2010 and December 31, 2009) 3,934 3,934
Available for sale 127,143 147,816
------------ ------------
Total investment and mortgage-backed securities 131,077 151,750
Loans, net of unearned fees 243,354 255,999
Allowance for loan losses (ALL) (5,433) (5,579)
------------ ------------
Loans, net of ALL 237,921 250,420
Real estate acquired through foreclosure 6,441 5,917
Office properties and equipment, net 5,346 5,447
Federal Home Loan Bank stock, at cost 3,947 3,947
Federal Reserve Bank stock, at cost 832 832
Accrued interest receivable 1,863 2,238
Cash surrender value of life insurance 9,430 9,332
Other assets 11,298 11,489
------------ ------------
TOTAL ASSETS $ 438,531 $ 457,003
============ ============
LIABILITIES
Demand and savings deposits $ 163,557 $ 161,911
Time deposits 162,389 170,851
------------ ------------
Total deposits 325,946 332,762
------------ ------------
Advances from the Federal Home Loan Bank 59,500 64,500
Securities sold under agreements to repurchase 11,991 18,520
Floating rate junior subordinated deferrable interest debentures 12,372 12,372
Accrued interest payable 539 581
Other liabilities 2,323 2,147
------------ ------------
TOTAL LIABILITIES 412,671 430,882
------------ ------------
Commitments and contingencies-Note 5
SHAREHOLDERS' EQUITY
Serial preferred stock - $0.01 par value
authorized - 500, 000 shares
issued and outstanding - 9,266 9,246 9,245
at March 31, 2010 and December 31, 2009, respectively
Common stock - $0.01 par value,
authorized - 5,000,000 shares,
issued and outstanding - 1,790,599 shares at March 31, 2010 20 20
and 1,790,599 at December 31, 2009
Common stock warrants 25 25
Additional paid-in capital 12,919 12,919
Accumulated other comprehensive income (loss) (1,135) (972)
Retained earnings, substantially restricted 11,085 11,184
Treasury stock, at cost (6,300) (6,300)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 25,860 26,121
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 438,531 $ 457,003
============ ============
See notes to consolidated financial statements.
3
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended March 31, 2010 and 2009 (unaudited)
Three Months Ended
March 31, March 31,
2010 2009
------------------- -------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Interest Income:
Loans $ 3,120 $ 3,596
Deposits and federal funds sold 6 8
Interest and dividends on mortgage-backed securities 429 895
Interest and dividends on investment securities 975 639
------------------- -------------------
Total interest income 4,530 5,138
------------------- -------------------
Interest Expense:
Deposit accounts 1,547 2,092
Floating rate junior subordinated deferrable interest debentures 118 151
Advances from the FHLB and other borrowings 744 784
------------------- -------------------
Total interest expense 2,409 3,027
------------------- -------------------
Net Interest Income 2,121 2,111
Provision for loan losses 896 2,700
------------------- -------------------
Net interest income (loss) after
provision for loan losses 1,225 (589)
------------------- -------------------
Non-Interest Income:
Fees for financial services 662 673
Other fees, net 23 22
Other-than-temporary-impairment write-down on securities (303) (309)
Net gain on sale of investments 677 95
------------------- -------------------
Total non-interest income 1,059 481
------------------- -------------------
Non-Interest Expense:
Compensation and employee benefits 1,122 1,192
Occupancy and equipment 599 611
Deposit insurance premiums 144 56
Professional services 100 93
Advertising and public relations 13 30
Loan operations 93 110
Intangible amortization -- 95
Items processing 77 89
Telephone 37 52
Other 154 188
------------------- -------------------
Total non-interest expense 2,339 2,516
------------------- -------------------
Net loss before income taxes (55) (2,624)
Benefit for income taxes (73) (929)
------------------- -------------------
Net income (loss) $ 18 (1,695)
Accretion of preferred stock to redemption value and preferred dividends accrued 119 25
------------------- -------------------
Net loss to common shareholders (101) $ (1,720)
=================== ===================
Net loss per common share (basic) $ (0.06) $ (0.96)
=================== ===================
Net loss per common share (diluted) $ (0.06) $ (0.96)
=================== ===================
Cash dividend per common share $ -- $ 0.03
=================== ===================
Weighted average number of common shares outstanding
Basic 1,790,599 1,787,890
Diluted 1,790,599 1,787,890
See notes to consolidated financial statements.
4
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2010 and 2009 (unaudited)
Three Months Ended
March 31, March 31,
2010 2009
-------------- -------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) $ 18 ($1,695)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Provision for loan losses 896 2,700
Amortization of intangibles -- 95
Depreciation expense 118 131
Recognition of deferred income, net of costs (65) (108)
Deferral of fee income, net of costs 56 73
Other than temporary impairment charge on AFS securities 303 309
Gain on investment transactions (677) (95)
Gain on sale of assets acquired from foreclosed loans -- (2)
Changes in operating assets and liabilities:
Decrease in accrued interest receivable 375 122
Increase in cash surrender value of life insurance (98) (100)
Increase in other assets (333) (1,647)
Increase in other liabilities 176 33
Increase (decrease) in accrued interest payable (42) 44
-------------- -------------
Net cash (used) provided by operating activities 727 (140)
-------------- -------------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale (40,598) (54,278)
Held to maturity -- (504)
Proceeds from sale of investment and mortgage-
backed securities available for sale 26,495 5,123
Proceeds from maturity of investment and mortgage-
backed securities:
Available for sale 27,848 18,251
Held to maturity -- --
Principal repayments on mortgage-backed securities:
Available for sale 7,139 3,547
Net decrease (increase) in loans 11,582 (2,716)
Purchase of FHLB/FRB stock -- (52)
Proceeds from sales of foreclosed assets, net of costs and improvements 30 69
Purchase of office properties and equipment (17) (62)
-------------- -------------
Net cash (used) provided by investing activities 32,479 (30,622)
-------------- -------------
FINANCING ACTIVITIES:
Proceeds from the dividend reinvestment plan -- 8
Proceeds from issuance of preferred stock -- 9,241
Proceeds from issuance of warrants -- 25
Dividends paid in cash -- (53)
Dividends paid on preferred stock (116) --
Decrease in other borrowings (11,529) 26
Increase (decrease) in deposit accounts (6,816) 24,775
-------------- -------------
Net cash (used) provided by financing activities (18,461) 34,022
-------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 14,745 3,260
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 15,631 21,370
-------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 30,376 $ 24,630
============== =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $ 18 $ 510
Interest 2,451 2,983
Non-cash transactions:
Loans foreclosed $ 559 $ 499
Unrealized gain (loss) on securities available for sale, net of income tax (395) 489
See notes to consolidated financial statements.
5
- -0-
*T
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended March 31, 2010 and 2009 (unaudited)
Retained Accumulated
Additional Earnings, Other Total
Preferred Common Paid-in Substantially Comprehensive Treasury Shareholders'
Stock Stock Stock
Shares Amount Shares Amount Warrants Capital Restricted Income (loss) at Cost Equity
------ ------ --------- ------ -------- ---------- ------------- ------------- -------- -------------
(Dollars in Thousands, Except Share Data)
BALANCE AT DECEMBER 31, 2008 1,787,092 $ 20 $ 12,903 $ 18,997 ($1,696) ($6,300) $ 23,924
Net income (loss) (1,695) (1,695)
Other comprehensive loss, net
of tax on
unrealized holding losses
on securities available
for sale
arising during period 489 489
Less reclassification
adjustment for gains and
other than (138) (138)
------------- -------------
temporary investment
charge in net loss
Comprehensive loss (1,344)
Dividend reinvestment plan
contributions 1,218 8 8
Issuance of preferred stock 9,266 9,240 9,240
Issuance of common stock
warrants 25 25
Accretion of Preferred Stock to
redemption value 1 (1) --
Cash dividend ($.03 per share) (52) (52)
----------------------- -----------------------------------------------------------------------------
BALANCE AT MARCH 31, 2009 9,266 $9,241 1,788,310 $ 20 $ 25 $ 12,911 $ 17,249 ($1,345) ($6,300) $ 31,801
======================= =============================================================================
BALANCE AT DECEMBER 31, 2009 9,266 $9,245 1,790,599 $ 20 $ 25 $ 12,919 $ 11,184 ($972) ($6,300) $ 26,121
Net income (loss) 18 18
Other comprehensive loss, net
of tax on
unrealized holding losses
on securities available
for sale
arising during period (395) (395)
Less reclassification
adjustment for gains and
other than
temporary investment
charge in net income 232 232
------------- -------------
Comprehensive loss (145)
Accretion of Preferred Stock to
redemption value 1 (1) --
Preferred stock dividend (116) (116)
-----------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2010 9,266 $9,246 1,790,599 $ 20 $ 25 $ 12,919 $ 11,085 ($1,135) ($6,300) $ 25,860
=====================================================================================================
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") 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, 2010 are not necessarily indicative of the
results which may be expected for the entire calendar year or for any other
period. Certain amounts in the prior year's financial statements have been
reclassified to conform to current year classifications. Subsequent events that
provide additional evidence about conditions that existed at the date of the
balance sheet should be recognized at the balance sheet date. Subsequent events
that provide evidence about conditions that arose after the balance sheet date
but before financial statements are issued, or are available to be issued, are
not required to be recognized.
Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that may
affect accounting, reporting, and disclosure of financial information by the
Corporation.
In January, 2010, an amendment was issued to clarify the scope of
subsidiaries for consolidation purposes. The amendment provides that the
decrease in ownership guidance should apply to (1) a subsidiary or group of
assets that is a business or nonprofit activity, (2) a subsidiary that is a
business or nonprofit activity that is transferred to an equity method investee
or joint venture, and (3) an exchange of a group of assets that constitutes a
business or nonprofit activity for a noncontrolling interest in an entity. The
guidance does not apply to a decrease in ownership in transactions related to
sales of in substance real estate or conveyances of oil and gas mineral rights.
The update is effective for the interim or annual reporting periods ending on or
after December 15, 2009 and had no impact on the Corporation's financial
statements.
In January 2010, fair value guidance was amended to require disclosures for
significant amounts transferred in and out of Levels 1 and 2 and the reasons for
such transfers and to require that gross amounts of purchases, sales, issuances
and settlements be provided in the Level 3 reconciliation. The new disclosures
are effective for the Corporation for the current quarter and have been
reflected in the Fair Value footnote.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Corporation's financial position, results of operations or cash flows.
2. Income(Loss)Per Share
---------------------
Basic income (loss) per common share amounts for the three months ended March
31, 2010 and 2009 were computed based on the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share adjusts
for the dilutive effect of outstanding common stock options during the periods
utilizing the treasury stock method. There were no common stock equivalents
included in the diluted earnings (loss) per share calculation for the three
months ended March 31, 2010 and 2009. Anti-dilutive common stock equivalents
that were excluded in the diluted earnings per share calculation for the three
months ended March 31, 2010 and 2009 were 90,863 and 94,113, respectively.
7
3. Assets Pledged
---------------
Approximately $76,547,000 and $94,598,000 of debt securities at March 31, 2010
and December 31, 2009, 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 commercial and residential real estate mortgage loans under a
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. Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
----------------------------------------------------------------------------
On July 18, 2006, Provident Community Bancshares Capital Trust I ("Capital Trust
I") was formed. 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 fixed/floating 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, which constitute the sole asset of Capital Trust I. The
interest rate on the debentures and the capital securities is 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 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.
On November 28, 2006, Provident Community Bancshares Capital Trust ("Capital
Trust II") was established. 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 issued on December 18,
2001. 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 March 1, 2037, which constitute
the sole asset of the Capital Trust II. The interest rate on the debentures and
the capital securities is variable and adjustable quarterly at 1.74% over the
three-month LIBOR. 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.
8
A summary of the Subordinated Deferrable Interest Debentures issued and
outstanding follows:
Amount Outstanding at
March 31,
------------------------------ Distribution
Prepayment Payment
Name 2010 2009 Rate Option Date Maturity Frequency
- ----------------------------- -------------- ------------- ------------------ ---------------- ----------------- ---------------
Provident Community October 1, 2011 October 1, 2036 Quarterly
Bancshares Capital Trust I 4,000,000 4,000,000 7.39%
Provident Community March 1, 2012 March 1, 2037 Quarterly
Bancshares Capital Trust II 8,000,000 8,000,000 1.99%
Total $ 12,000,000 $ 12,000,000
=============== =============
5. 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, 2010
related to these items is summarized below:
Loan Commitments: Contract Amount
----------------- ---------------
Approved loan commitments $ 700,000
Commitments to fund commercial and construction loans 379,000
Unused portions of loans and credit lines 32,650,000
---------------------
Total loan commitments $ 33,729,000
=====================
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, 2010 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 $33,729,000 at March 31, 2010. Of these lines, the outstanding
loan balances totaled approximately $54,718,000.
6. Fair Valueof Financial Instruments
-------------------------------------
The Corporation utilizes fair value measurements to record fair value
adjustments to certain assets and liabilities and to determine fair value
disclosures. Effective January 1, 2008, the Corporation adopted FASB ASC
825-10-50 ("FASB Topic 820") Fair Value Measurements which provides a framework
for measuring and disclosing fair value under generally accepted accounting
principles. FASB ASC 825-10-50 requires disclosures about the fair value of
assets and liabilities recognized in the balance sheet in periods subsequent to
initial recognition, whether the measurements are made on a recurring basis (for
example, available-for-sale investment securities) or on a nonrecurring basis
(for example, impaired loans).
9
Fair Value Hierarchy
- ----------------------
FASB ASC Topic 820 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. FASB ASC Topic
820 also establishes a fair value hierarchy which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:
Level 1 Valuation is based upon quoted prices in active markets for
identical assets or liabilities.
Level 2 Valuation is based upon quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
Level 3 Valuation is based upon quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; and
model-based techniques whose value is determined using pricing
models, discounted cash flow methodologies and similar
techniques.
Following is a description of valuation methodologies used for assets and
liabilities recorded at fair value.
Investment Securities Available-for-Sale
- ------------------------------------------
Available-for-sale investment securities are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security's credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange and U.S. Treasury securities that are traded by dealers or
brokers in active over-the-counter markets. Level 2 securities include
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities. Securities classified as Level 3 may
include asset-backed securities in less liquid markets.
Loans
- -----
The Corporation is predominantly an asset based lender with real estate serving
as collateral on a substantial majority of loans. The Corporation does not
record loans at fair value on a recurring basis. However, from time to time, a
loan is considered impaired and the related impairment is charged against the
allowance or a specific allowance is established. Loans for which it is probable
that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Loans which are
deemed to be impaired are primarily valued at the fair values of the underlying
real estate collateral. Such fair values are obtained using collateral net
liquidation value, market value of similar debt, enterprise value, and
discounted cash flows. Those impaired loans not requiring a specific allowance
represent loans for which the fair value of the expected repayment or collateral
meet or exceed the recorded investment in such loans. The Corporation considers
all non-accrual loans and troubled debt restructurings to be impaired.
Therefore, at March 31, 2010, loans classified as impaired totaled $26.1
million. When the fair value of the collateral is based on an observable market
price or a current appraised value, the Corporation records the impaired loan as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Corporation records
the impaired loans as nonrecurring Level 3.
10
Real Estate Acquired Through Foreclosure
- ------------------------------------------
Other real estate owned ("OREO") is adjusted to fair value upon transfer of the
loans to OREO. Subsequently, OREO is carried at the lower of carrying value or
fair value. Fair value is based upon independent market prices, appraised values
of the collateral or management's estimation of the value of the collateral.
When the fair value of the collateral is based on an observable market price or
a current appraised value, the Corporation records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Corporation records
the OREO as nonrecurring Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
- ------------------------------------------------------------------
The following tables present the balances of assets measured at fair value on a
recurring basis by level within the hierarchy as of March 31, 2010 and December
31, 2009 (In thousands).
Quoted Prices in Significant Other Significant
Active Markets for Observable Unobservable
March 31, Identical Assets Inputs Inputs
2010 (Level 1) (Level 2) (Level 3)
---------------- --------------------- ------------------- ---------------------
Investment securities:
U.S. Agency obligations $ 3 3
Government Sponsored Enterprises 82,188 82,188
Municipal securities 5,299 5,299
Trust Preferred securities 5,423 2,536 2,887
---------------- ------------------- ---------------------
Total investment securities 92,913 82,191 7,835 2,887
---------------- --------------------- ------------------- ---------------------
Mortgage-backed and related securities 34,230 34,230
---------------- -------------------
Total $ 127,143 82,191 42,065 2,887
================ ===================== =================== =====================
Quoted Prices in Significant Other Significant
Active Markets for Observable Unobservable
December 31, Identical Assets Inputs Inputs
2009 (Level 1) (Level 2) (Level 3)
------------------ ------------------ -------------------- -------------------
Investment securities:
U.S. Agency obligations $ 4 4
Government Sponsored Enterprises 78,471 78,471
Municipal securities 6,042 6,042
Trust Preferred securities 5,912 2,802 3,110
------------------ -------------------- -------------------
Total investment securities 90,429 78,475 8,844 3,110
------------------ ------------------ -------------------- -------------------
Mortgage-backed and related securities 57,387 57,387
------------------ --------------------
Total $ 147,816 78,475 66,231 3,110
================== ================== ==================== ===================
11
The following is a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the period ended March 31, 2010.
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
-----------------------------------------
Investment Securities
Available-for-Sale
-----------------------------------------
Beginning balance at December 31, 2009 $ 3,110,000
Transfers into Level 3 --
Gain/(Loss) for the year (223,000)
Purchases, sales, issuances and settlements, net --
-----------------------------------------
Ending balance at March 31, 2010 $ 2,887,000
=========================================
Assets andLiabilitiesRecorded atFairValue on aNonrecurringBasis
- -------------------------------------------------------------------
The Corporation may be required, from time to time, to measure certain assets at
fair value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period and assumes all impaired loans have specific reserves or have been
written down to fair value.
Assets measured at fair value on a nonrecurring basis at March 31, 2010 are as
follows:
Total (Level 1) (Level 2) (Level 3)
----------------- --------------- --------------- ---------------
Impaired loans $ 21,875,000 $ -- $ 21,875,000 $ --
Other real estate owned 6,441,000 -- 6,441,000 --
----------------- ---------------
Total assets at fair value $ 28,316,000 $ -- $ 28,316,000 $ --
================= =============== =============== ===============
Assets and liabilities measured at fair value on a nonrecurring basis at
December 31, 2009 are as follows:
Total (Level 1) (Level 2) (Level 3)
------------------- --------------- ----------------- --------------------
Impaired loans $ 20,869,000 $ -- $ 20,869,000 $ --
Other real estate owned 5,917,000 -- 5,917,000 --
------------------- -----------------
Total assets at fair value $ 26,786,000 $ -- $ 26,786,000 $ --
=================== =============== ================= ====================
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and due from banks
approximate their fair value.
Available for sale and held to maturity securities - Fair values for
securities are based on quoted market prices. The carrying values of restricted
equity securities approximate fair values. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted
for the security's credit rating, prepayment assumptions and other factors such
as credit loss assumptions.
Loans - The Corporation is predominantly an asset based lender with real
estate serving as collateral on a substantial majority of loans. The Corporation
does not record loans at fair value on a recurring basis. However, from time to
time, a loan is considered impaired and the related impairment is charged
against the allowance or a specific allowance is established. Loans for which it
is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered
impaired. Loans which are deemed to be impaired are primarily valued at the fair
values of the underlying real estate collateral. Such fair values are obtained
using collateral net liquidation value, market value of similar debt, enterprise
value, and discounted cash flows. Those impaired loans not requiring a specific
allowance represent loans for which the fair value of the expected repayment or
collateral meet or exceed the recorded investment in such loans. The Corporation
considers all non-accrual loans and troubled debt restructurings to be impaired.
12
Cash surrender value of life insurance - The carrying amounts of cash
surrender values of life insurance approximate their fair value.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Advances from the FHLB and other borrowings - The fair values of the
Corporation's borrowings are estimated using discounted cash flow analysis based
on the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Securities sold under agreements to repurchase - The fair values of the
Corporation's repurchase agreements are estimated using discounted cash flow
analysis based on the Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
Floating rate junior subordinated deferrable interest debentures - The fair
values of the Corporation's floating rate debentures are estimated using
discounted cash flow analysis based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counter parties' credit standings.
13
The estimated fair values of the Corporation's financial instruments were as
follows at March 31, 2010 (in thousands):
March 31, 2010
--------------------------------------------------
Carrying Fair
Amount Value
------------------------ -------------------------
Financial assets
- ----------------
Cash and due from banks $ 30,376 $ 30,376
Securities available for sale 127,143 127,143
Securities held to maturity 3,934 4,009
Federal Home Loan Bank stock, at cost 3,947 3,947
Federal Reserve Bank stock, at cost 832 832
Loans, net 237,921 237,869
Accrued interest receivable 1,863 1,863
Cash surrender value of life insurance 9,430 9,430
Financial liabilities
- ---------------------
Deposits $ 325,946 $ 317,109
Advances from FHLB and other borrowings 59,500 62,145
Securities sold under agreement to repurchase 11,991 11,305
Floating rate junior subordinated deferrable interest debentures 12,372 11,231
Accrued interest payable 539 539
Off-balance-sheet assets (liabilities)
- --------------------------------------
Commitments to extend credit ($33,729) ($0)
The estimated fair values of the Corporation's financial instruments were as
follows at December 31, 2009 (in thousands):
December 31, 2009
---------------------------------------------------
Carrying Fair
Amount Value
----------------------- ---------------------------
Financial assets
- ----------------
Cash and due from banks $ 15,631 $ 15,631
Securities available for sale 147,816 147,816
Securities held to maturity 3,934 3,976
Federal Home Loan Bank stock, at cost 3,947 3,947
Federal Reserve Bank stock, at cost 832 832
Loans, net 250,420 250,455
Accrued interest receivable 2,238 2,238
Cash surrender value of life insurance 9,332 9,332
Financial liabilities
- ---------------------
Deposits $ 332,762 $ 323,113
Advances from FHLB and other borrowings 64,500 67,457
Securities sold under agreement to repurchase 18,520 18,544
Floating rate junior subordinated deferrable interest debentures 12,372 10,758
Accrued interest payable 581 581
Off-balance-sheet assets (liabilities)
- --------------------------------------
Commitments to extend credit ($40,131) ($0)
7. Preferred Stock
----------------
On March 13, 2009, as part of the United States Department of the Treasury's
Capital Purchase Program, the Corporation issued 9,266 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation
preference, and a warrant to purchase up to 178,880 shares of the Corporation's
common stock for a period of ten years at an exercise price of $7.77 per share,
in exchange for $9,266,000 in cash from the United States Department of the
Treasury. The proceeds, net of issuance costs consisting primarily of legal
fees, were allocated between the preferred stock and the warrant on a pro rata
basis, based upon the estimated market values of the preferred stock and the
warrant. As a result, $25,000 of the proceeds were allocated to the warrant,
which increased additional paid-in-capital from common stock. The amount
allocated to the warrant is considered a discount on the preferred stock and
will be amortized using the level yield method over a five-year period through a
charge to retained earnings. Such amortization will not reduce net income, but
will reduce income available for common shares.
14
7. Preferred Stock
----------------
On March 13, 2009, as part of the United States Department of the Treasury's
Capital Purchase Program, the Corporation issued 9,266 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation
preference, and a warrant to purchase up to 178,880 shares of the Corporation's
common stock for a period of ten years at an exercise price of $7.77 per share,
in exchange for $9,266,000 in cash from the United States Department of the
Treasury. The proceeds, net of issuance costs consisting primarily of legal
fees, were allocated between the preferred stock and the warrant on a pro rata
basis, based upon the estimated market values of the preferred stock and the
warrant. As a result, $25,000 of the proceeds were allocated to the warrant,
which increased additional paid-in-capital from common stock. The amount
allocated to the warrant is considered a discount on the preferred stock and
will be amortized using the level yield method over a five-year period through a
charge to retained earnings. Such amortization will not reduce net income, but
will reduce income available for common shares.
The preferred stock pays cumulative dividends of 5% per year for the first five
years and 9% per year thereafter. The Corporation may redeem the preferred
stock at its liquidation preference plus accrued and unpaid dividends at any
time with the prior regulatory approval. The securities purchase agreement
between the Corporation and the United States Department of the Treasury limits,
for three years, the rate of dividend payments on the Corporation's common stock
to the amount of its last quarterly cash dividend before participation in the
program of $0.03 per share unless an increase is approved by the Department of
the Treasury, limits the Corporation's ability to repurchase its common stock
for three years and subjects the Corporation to certain executive compensation
limitations included in the Emergency Economic Stabilization Act of 2008, as
amended by the American Recovery and Reinvestment Act of 2009.
7. Subsequent Events
------------------
Subsequent events are events or transactions that occur after the balance sheet
date but before financial statements are issued. Recognized subsequent events
are events or transactions that provide additional evidence about conditions
that existed at the date of the balance sheet, including the estimates inherent
in the process of preparing financial statements. Non-recognized subsequent
events are events that provide evidence about conditions that did not exist at
the date of the balance sheet but arose after that date. Management has reviewed
events occurring through the date the financial statements were issued and no
subsequent events have occurred requiring accrual or disclosure.
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. 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 size of the loan portfolio, overall portfolio quality,
delinquency and charge-off 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 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.
15
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, plans or
strategies 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. 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 and the
demand for such products, 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 laws and regulations. The
Corporation provides greater detail regarding some of these factors in its Form
10-K for the year ended December 31, 2009, including in the Risk Factors section
of that report, and in its other SEC reports. 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
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 $18.5 million, or 4.0%, to $438.5
million at March 31, 2010 from $457.0 million at December 31, 2009. Investment
securities at March 31, 2010 decreased 13.6% to $131.1 million from $151.8
million at December 31, 2009. Fed funds sold at March 31, 2010 increased $15.1
million to $20.3 million from $5.3 million at December 31, 2009 as a result of
sales and maturities of securities. Net loans decreased $12.5 million from
December 31, 2009 to March 31, 2010, due primarily to a significant reduction in
loan demand as a result of economic conditions currently present in South
Carolina.
16
Investment and Mortgage-backed Securities
- --------------------------------------------
Included in our investment securities are 7 pooled trust preferred securities
with an amortized cost of $4.3 million and a fair value of $2.9 million. An
other than temporary investment charge of $303,000 was recorded for the
three-month period ended March 31, 2010 related to these trust preferred
securities as a result of projected shortfalls of interest and principal
payments in the cash flow analysis of the securities.
Held to Maturity-Securities classified as held to maturity consisted of the
following (in thousands):
March 31, 2010 December 31, 2009
----------------------------------- --------------------------------------
Amortize Fair Amortized Fair
Cost Value Cost Value
---------------- ------------------ -------------------- ----------------
Municipal Securities $ 3,934 $ 4,009 $ 3,934 $ 3,976
================ ================== ==================== ================
Available for Sale-Securities classified as available for sale consisted of the
following (in thousands):
March 31, 2010 December 31, 2009
-------------------------------- ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- --------------- --------------- --------------
Investment Securities:
U.S. Agency Obligations $ 3 $ 3 $ 4 $ 4
Government Sponsored Enterprises 82,477 82,188 79,162 78,471
Municipal Securities 5,054 5,299 5,781 6,042
Trust Preferred Securities 8,285 5,423 8,570 5,912
---------------- --------------- --------------- --------------
Total Investment Securities 95,819 92,913 93,517 90,429
---------------- --------------- --------------- --------------
Mortgage-backed Securities:
Fannie Mae 18,367 19,052 35,561 36,723
Ginnie Mae 13,674 14,201 16,569 17,030
Freddie Mac 456 468 3,068 3,154
Collateralized Mortgage Obligations 572 509 597 480
---------------- --------------- --------------- --------------
Total Mortgage-backed Securities 33,069 34,230 55,795 57,387
---------------- --------------- --------------- --------------
Total Available for Sale $ 128,888 $ 127,143 $ 149,312 $ 147,816
================ =============== =============== ==============
The Corporation uses the investment securities portfolio for several purposes.
It serves as a vehicle to manage interest rate and prepayment risk, to generate
interest and dividend income from investment of funds, to provide liquidity to
meet funding requirements, and to provide collateral for pledges on public funds
and FHLB borrowings. The average yield on investments at March 31, 2010 was
3.39% compared to 4.04% at December 31, 2009. The carrying values of the
investment securities at March 31, 2010 and December 31, 2009 and percentage of
each category to total investments are as follows:
March 31, 2010 December 31, 2009
-------------------------------- ----------------------------
Available for sale: Fair Percent of Fair Percent of
Value Portfolio Value Portfolio
--------------- --------------- ------------ --------------
Investment securities:
U.S. Agency obligations $ 3 0.01% $ 40.00% 0.01%
Government Sponsored Enterprises 82,188 64.64 78,471 53.08
Municipal securities 5,299 4.17 6,042 4.09
Trust Preferred securities 5,423 4.26 5,912 4.00
--------------- --------------- ------------ --------------
Total investment securities 92,913 73.08 90,429 61.18
--------------- --------------- ------------ --------------
Mortgage-backed and related securities 34,230 26.92 57,387 38.82
--------------- --------------- ------------ --------------
Total $ 127,143 100.00% $ 147,816 100.00%
=============== =============== ============ ==============
March 31, 2010 December 31, 2009
-------------------------------- ----------------------------
Held to maturity: Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
--------------- --------------- ------------ --------------
Municipal securities $ 3,934 100.00% $ 3,934 100.00%
=============== =============== ============ ==============
17
Investment securities at March 31, 2010 decreased 13.6% to $131.1 million from
$151.8 million at December 31, 2009. Fed funds sold at March 31, 2010, increased
$15.1 million to $20.3 million from $5.3 million at December 31, 2009 as a
result of sales and maturities of securities. The Corporation continues to
reposition the investment portfolio for the potential of rising interest rates.
The Corporation accounts for investment securities in accordance with FASB ASC
Topic 320: Investments in Debt and Equity Securities. In accordance with FASB
ASC Topic 320, debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as "held to maturity" securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
"trading" securities and reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not classified as either
held to maturity or trading securities are classified as "available for sale"
securities and reported at fair value with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity. No
securities have been classified as trading securities.
Purchases and sales of securities are accounted for on a trade date basis.
Premiums and discounts on debt securities are amortized or accreted as
adjustments to income over the estimated life of the security using a method
approximating the level yield method. Gains or losses on the sale of securities
are based on the specific identification method. The fair value of securities is
based on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
The amortized cost and fair value of investment securities are summarized as
follows:
Held to Maturity - Securities classified as held to maturity consisted of the
following (in thousands):
As of March 31, 2010
-----------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- ---------- ------------ --------------
Municipal Securities $ 3,934 $ 81 ($6) $ 4,009
=========== ========== ============ ==============
Available for Sale - Securities classified as available for sale consisted of
the following (in thousands):
As of March 31, 2010
-----------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- ---------- -------------- ------------
Investment Securities:
U.S. Agency Obligations $ 3 $ - $ -- $ 3
Government Sponsored Enterprises 82,477 166 (455) 82,188
Municipal Securities 5,054 245 - 5,299
Trust Preferred Securities 8,285 - (2,862) 5,423
----------- ---------- -------------- ------------
Total Investment Securities 95,819 411 (3,317) 92,913
----------- ---------- -------------- ------------
Mortgage-backed Securities:
Fannie Mae 18,367 685 - 19,052
Ginnie Mae 13,674 527 - 14,201
Freddie Mac 456 12 - 468
Collateralized Mortgage
Obligations 572 - (63) 509
----------- ---------- -------------- ------------
Total Mortgage-backed Securities 33,069 1,224 (63) 34,230
----------- ---------- -------------- ------------
Total available for sale $ 128,888 $ 1,635 ($3,380) $ 127,143
=========== ========== ============== ============
18
Held to Maturity - Securities classified as held to maturity consisted of the
following (in thousands):
As of December 31, 2009
----------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- ---------- ------------ -------------
Municipal Securities $ 3,934 $ 52 ($10) $ 3,976
=========== ========== ============ =============
Available for Sale - Securities classified as available for sale consisted of
the following (in thousands):
As of December 31, 2009
----------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- ---------- ------------- ------------
Investment Securities:
U.S. Agency Obligations $ 4 $ -- $ -- $ 4
Government Sponsored
Enterprises 79,162 217 (908) 78,471
Municipal Securities 5,781 261 -- 6,042
Trust Preferred Securities 8,570 -- (2,658) 5,912
----------- ---------- ------------- ------------
Total Investment Securities 93,517 478 (3,566) 90,429
----------- ---------- ------------- ------------
Mortgage-backed Securities:
Fannie Mae 35,561 1,162 -- 36,723
Ginnie Mae 16,569 461 -- 17,030
Freddie Mac 3,068 86 -- 3,154
Collateralized Mortgage
Obligations 597 -- (117) 480
----------- ---------- ------------- ------------
Total Mortgage-backed Securities 55,795 1,709 (117) 57,387
----------- ---------- ------------- ------------
Total available for sale $ 149,312 $ 2,187 $ (3,683) $ 147,816
=========== ========== ============= ============
19
The maturities of securities at March 31, 2010 are as follows
(in thousands):
Held to Maturity Available for Sale
----------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- --------
Due in one year or less $ -- $ -- $ 11 $ 11
Due after one year through five years -- -- 416 423
Due after five years through ten years -- -- 37,606 37,637
Due after ten years 3,934 4,009 90,855 89,072
--------- ------ --------- --------
Total investment and mortgage-backed
securities $3,934 $4,009 $128,888 $127,143
========= ====== ========= ========
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual securities
have been in a continuous unrealized loss position at March 31, 2010 (in
thousands).
Less than 12 Months 12 Months or More Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ------------ -------- ------------- --------- ------------
Held to Maturity
- ----------------
Municipal Securities $ -- $ -- $497 $6 $497 $6
========= ============ ======== ============= ========= ============
Less than 12 Months 12 Months or More Total
--------------------- ---------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ------------ -------- ------------ ------------- ------------
Securities Available for
Sale
- ------------------------
U.S. Agency Obligations $ -- $ -- $ -- $ -- $ -- $ --
Government Sponsored
Enterprises 47,481 455 -- -- 47,481 455
Municipal Securities -- -- -- -- -- --
Trust Preferred
Securities -- -- 5,423 2,862 5,423 2,862
Mortgage-backed
Securities -- -- 554 63 554 63
------- ------------ -------- ------------ ------------- ------------
Total $47,481 $455 $5,977 $2,925 $53,458 $3,380
======= ============ ======== ============ ============= ============
The following table shows gross unrealized losses and fair value, aggregated by
investment category, and length of time that individual securities have been in
a continuous unrealized loss position at December 31, 2009 (in thousands).
Less than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------- ------------ -------- ------------ -------- ------------
Held to Maturity
- ----------------
Municipal Securities $494 $9 $833 $1 $1,326 $10
Total $494 $9 $833 $1 $1,326 $10
======== ============ ======== ============ ======== ============
20
Less than 12 Months 12 Months or More Total
---------------------- --------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------- ------------ ------- ------------ -------- -------------
Securities Available
for Sale
- ----------------------
U.S. Agency
Obligations $ - $ - $ - $ - $ - $ -
Government Sponsored
Enterprises 41,040 908 - - 41,040 908
Municipal Securities - - - - - -
Trust Preferred - - 5,912 2,658 5,912 2,658
Securities
Mortgage-backed
Securities -- -- 532 117 532 117
-------- ------------ ------- ------------ -------- -------------
Total $41,040 $908 $6,444 $2,775 $47,484 $3,683
======== ============ ======= ============ ======== =============
Loans
- -----
Net loans decreased to $237.9 million at March 31, 2010 compared to $250.4
million at December 31, 2009. The decrease was due to a significant reduction in
loan demand as a result of economic conditions currently present in South
Carolina and more conservative underwriting standards. Consumer loans decreased
$2.4 million, or 4.5%, commercial loans decreased $8.6 million, or 4.7%, and
residential mortgage loans decreased $1.7 million, or 8.6%, for the period ended
March 31, 2010.
21
Loans receivable consisted of the following (in thousands):
March 31, December 31,
----------------- ------------------
2010 2009
----------------- ------------------
Mortgage loans:
Fixed-rate residential $10,399 $10,675
Adjustable-rate residential 5,952 6,202
Commercial real estate 109,673 110,901
Construction 1,811 2,923
----------------- ------------------
Total mortgage loans 127,835 130,701
----------------- ------------------
Commercial loans:
Commercial non-real estate 28,831 34,429
Commercial lines of credit 37,301 39,096
----------------- ------------------
Total commercial loans 66,132 73,525
----------------- ------------------
Consumer loans:
Home equity 17,117 17,395
Consumer and installment 32,517 34,578
Consumer lines of credit 301 314
----------------- ------------------
Total consumer loans 49,935 52,287
----------------- ------------------
Total loans 243,902 256,513
----------------- ------------------
Less:
Undisbursed portion of interim
construction loans (379) (320)
Unamortized loan discount (296) (309)
Allowance for loan losses (5,433) (5,579)
Net deferred loan origination costs 127 115
----------------- ------------------
Total, net $237,921 $250,420
================= ==================
Weighted-average interest rate of loans 5.14% 4.87%
22
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
March 31, 2010 December 31, 2009
----------------- ------------------
Non-accruing loans which are
contractually past due 90 days
or more:
Residential real estate $ 662 $ 649
Commercial 19,919 19,045
Consumer 1,294 1,175
------------------ ------------------
Total nonperforming loans 21,875 20,869
Real estate acquired through
foreclosure and repossessed assets 6,441 5,917
------------------ ------------------
Total nonperforming assets $ 28,316 $ 26,786
================== ==================
Nonperforming loans to total loans 8.96% 8.13%
================== ==================
Nonperforming assets to total assets 6.45% 5.86%
================== ==================
Allowance for loan losses to total
loans outstanding 2.23% 2.18%
================== ==================
Allowance for loan losses to
Nonperforming loans 24.84% 26.73%
================== ==================
Allowance for loan losses $ 5,433 $ 5,579
================== ==================
Loans which management identifies as impaired generally will be non-performing
loans. Non-performing assets increased $1.5 million to $28.3 million at March
31, 2010, or 6.45% of total assets, as compared to $26.8 million or 5.86% of
total assets, at December 31, 2009. Slow housing conditions have affected these
borrowers' ability to sell the completed projects in a timely manner. These
loans are currently being carried at management's best estimate of net
realizable value, although no assurance can be given that no further losses will
be incurred on these loans until the collateral has been acquired and liquidated
or other arrangements can be made. Interest income that would have been recorded
for the period ended March 31, 2010 had non-accruing loans been current in
accordance with their original terms amounted to approximately $325,000. There
was no interest included in interest income on such loans for the period ended
March 31, 2010. Management has allocated specific reserves to these and other
non-performing assets that it believes will offset losses, if any, arising from
less than full recovery of the loans from the supporting collateral. Specific
reserves for non-performing loans are charged to the loan as a write-down after
completion of the impairment analysis for all collateral dependent loans. These
additional reserves are based on management's evaluation of a number of factors,
including the estimated value of the collateral supporting each of these loans.
Management believes that the combination of additional reserves and established
impairment of these loans will be adequate to account for the current risk
associated with these loans as of March 31, 2010. Management continues to
evaluate and assess all nonperforming assets on a regular basis as part of its
well-established loan monitoring and review process.
At March 31, 2010, criticized and classified loans totaled $45.6 million,
compared to $51.4 million at December 31, 2009 and $27.0 million at March 31,
2009. The reduction of $4.0 million for criticized and classified loans from
December 31, 2009 to March 31, 2010 was due to the payout of two commercial real
estate loans. Our non-performing loans totaled $21.9 million at March 31, 2010
compared to $20.9 million at December 31, 2009. Non-performing and impaired
loans, net of specific reserves, totaled $11.8 million at March 31, 2009 and
$12.5 million at December 31, 2008. While management uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the valuations. Such adjustments would be made in the
relevant period and may be material to the financial statements.
23
Real estate acquired through foreclosure increased $524,000 to $6.4 million at
March 31, 2010 from $5.9 million at December 31, 2009, as a result of
foreclosure on one commercial real estate property. Other real estate owned
("OREO") is adjusted to fair value upon transfer of the loans to OREO.
Subsequently, OREO is carried at the lower of carrying value or fair value. Fair
value is based upon independent market prices, appraised values of the
collateral or management's estimation of the value of the collateral. The
properties are being actively marketed and maintained with the primary objective
of liquidating the collateral at a level which most accurately approximates fair
market value and allows recovery of as much of the unpaid balance as possible
upon the sale of the properties in a reasonable period of time. The carrying
value of these assets are believed to be representative of their fair market
value, although there can be no assurance that the ultimate proceeds from the
sale of these assets will be equal to or greater than the carrying values.
Real estate acquired in settlement of loans through foreclosure is summarized as
follows:
March 31, December 31,
2010 2009
----------- ------------
Balance at beginning of period $ 5,917 $ 667
Foreclosures added during the period 524 5,890
Provision charged as a write-down (0) (640)
----------- ------------
Balance at the end of period $ 6,441 $ 5,917
=========== ============
Other Assets
- -------------
Cash surrender value of life insurance increased $98,000, or 1.1%, to $9.4
million at March 31, 2010 from $9.3 million at December 31, 2009, due to accrued
life insurance benefits.
Other assets decreased $191,000, or 1.7%, to $11.3 million at March 31, 2010
from $11.5 million at December 31, 2009, due primarily to the amortization of
prepaid FDIC premiums for the period.
Liabilities
- -----------
Total liabilities decreased $18.2 million to $412.7 million at March 31, 2010
from $430.9 million at December 31, 2009. Deposits decreased $6.8 million, or
2.1%, to $325.9 million at March 31, 2010 from $332.8 million at December 31,
2009. The decrease was due to an $8.5 million decrease in certificates of
deposit, offset by a $1.6 million increase in transaction accounts as a result
of a special product promotion. The Corporation continues to target lower-cost
demand deposit accounts through media advertising and special product
promotions. FHLB advances decreased $5.0 million to $59.5 million at March 31,
2010 from $64.5 million at December 31, 2009 due to the maturity of advances as
additional advances were not needed due to the decrease in assets. Security
agreements to repurchase decreased $6.5 million to $11.9 million at March 31,
2010 from $18.5 million at December 31, 2009 due to the maturity of borrowings.
24
March 31, 2010 December 31, 2009
---------------------------- ---------------------------------
Rate Balance % Rate Balance %
------- -------- ---------- --------- --------- -----------
Account Type
- ------------
NOW accounts:
Commercial non-interest-bearing -- $ 18,965 5.82% -- $ 18,015 5.42%
Non-commercial 2.16% 95,209 29.19% 2.30% 98,274 29.53%
Money market checking accounts 1.31% 27,091 8.31% 1.57% 32,239 9.69%
Regular savings 0.58% 22,292 6.84% 0.51% 13,383 4.02%
------- ---------- --------- ------- -----------
Total demand and savings deposits 1.60% 163,557 50.16% 1.74% 161,911 48.66%
------- ---------- ------- -----------
Time deposits:
Up to 3.00% 145,225 44.55% 135,064 40.59%
3.01%- 4.00% 3,851 1.18% 20,885 6.27%
4.01%- 5.00% 12,380 3.80% 13,744 4.13%
5.01%- 6.00% 933 0.31% 1,130 0.34%
6.01%- 7.00% -- 0.00% 28 0.01%
------- ---------- ------- -----------
Total time deposits 2.02% 162,389 49.84% 2.27% 170,851 51.34%
------- ---------- ------- -----------
Total deposit accounts 1.81% $325,946 100.00% 2.02% $ 332,762 100.00%
======== ========== ========= ===========
FHLB advances decreased $5.0 million to $59.5 million at March 31, 2010 from
$64.5 million at December 31, 2009.The maturity of the advances from the FHLB is
as follows (in thousands):
March 31, 2010 December 31, 2009
-------------- -----------------
Balance Wtd Avg Rate Balance Wtd Avg Rate
-------- ------------- --------- ----------------
Contractual Maturity:
Within one year - fixed rate $ -- --% $ 5,000 4.93%
After one but within three years - fixed rate -- --% -- --%
After one but within three years - adjustable
rate 22,000 4.58% 22,000 4.58%
Greater than five years - adjustable rate 37,500 3.89% 37,500 3.89%
------ ------
Total advances $ 59,500 4.14% $ 64,500 4.20%
======== =========
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 with unpaid principal
balances equal to, when discounted at 50% to 75% of the unpaid principal
balances, 100% of total advances.
The Corporation had $11.9 million and $18.5 million borrowed under agreements to
repurchase at March 31, 2010 and December 31, 2009, respectively.
Shareholders' Equity
- ---------------------
Shareholders' equity decreased $261,000, or 1.0%, to $25.9 million at March 31,
2010 from $26.1 million at December 31, 2009 due primarily to a $163,000
increase in unrealized losses on securities available for sale and preferred
stock dividend payments of $116,000, offset by net income of $18,000. At March
31, 2010, all of the Bank's capital ratios continued to be sufficient to
classify it as a well-capitalized institution by regulatory measures.
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.
25
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 FHLB advances.
At March 31, 2010, the Corporation's investment in marketable securities totaled
$131.1 million, nearly all of which was available for sale. In addition, the
Corporation had $20.3 million in fed funds sold at March 31, 2010 compared to
$5.3 million at December 31, 2009. Approximately $76.5 million and $94.6 million
of debt securities at March 31, 2010 and December 31, 2009, 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 $33.7 million at March 31, 2010. 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. Time
deposits that are scheduled to mature in one year or less from March 31, 2010,
totaled $105.6 million. 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, 2010, the Corporation had outstanding $59.5 million of
FHLB borrowings and $11.9 million of securities sold under agreements to
repurchase. At March 31, 2010, the Corporation had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $4.0 million and
the ability to borrow an additional $70.0 million from 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.
Provident Community Bancshares, Inc. is a separate legal entity from the Bank
and must provide for its own liquidity. In addition to its operating expenses,
Provident Community Bancshares is responsible for paying any dividends declared
to its shareholders and paying the obligations on its outstanding debentures and
preferred stock. Provident Community Bancshares' primary sources of income are
proceeds that it retained from its offering of preferred stock and dividends
received from the Bank. The amount of dividends that the Bank may declare and
pay to Provident Community Bancshares in any calendar year, without the receipt
of prior approval from the Office of the Comptroller of the Currency cannot
exceed retained net income for that year combined with retained net income for
the prior two years less any transfers to surplus and capital distributions. At
March 31, 2010, Provident Community Bancshares, Inc. had liquid assets of $1.6
million.
26
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, 2010, that the Bank and the Corporation met the capital adequacy
requirements to which they are subject.
As of March 31, 2010, 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, 2010
--------------
Actual Regulatory Minimum Well Capitalized
------ ------------------ ----------------
Amount Ratio Amount Ratio Amount Ratio
$ % $ % $ %
Leverage ratio
Corporation 31,890 7.07% 18,043 4.00% n/a n/a
Bank 33,537 7.44% 18,035 4.00% 22,543 5.00%
Tier 1 capital ratio
Corporation 31,890 10.99% 11,610 4.00% n/a n/a
Bank 33,537 11.56% 11,602 4.00% 17,403 6.00%
Total risk-based capital
ratio
Corporation 38,540 13.28% 23,219 8.00% n/a n/a
Bank 37,185 12.82% 23,203 8.00% 29,004 10.00%
27
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 customers' 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 $33.7 million at March 31, 2010. 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, 2010, 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 or cash flows.
Results of operations for the three months endedMarch31, 2010 and 2009
- ----------------------------------------------------------------------
General
- -------
The Corporation recorded a net loss to common shareholders of $99,000 for the
three months ended March 31, 2010 as compared to a net loss of $1.7 million for
the same period in 2009. A decrease in the provision for loan losses to $896,000
for the three months ended March 31, 2010 compared to $2.7 million for the same
period in 2009, an increase in non-interest income to $1.1 million for the three
months ended March 31, 2010 compared to $481,000 for the same period in 2009 and
a decrease in non-interest expense all had a positive impact on earnings in
2010.
28
Average Average Average Average
Balance Interest Yield/Cost(2) Balance Interest Yield/Cost(2)
----------- ---------- ---------------- ----------- --------- ---------------
Interest-earning assets:
Loans (1) $ 247,998 $ 3,120 5.03% $ 283,804 $ 3,596 5.07%
Mortgage-backed securities 43,735 429 3.92% 65,311 895 5.48%
Investment securities 97,181 962 3.96% 47,581 624 5.24%
Other interest-earning assets 25,306 19 0.31% 21,160 23 0.43%
----------- ---------- ----------- ---------
Total interest-earning assets 414,220 4,530 4.37% 417,856 5,138 4.92%
---------- ---------
Non-interest-earning assets 40,716 30,491
----------- -----------
Total assets $ 454,936 $ 448,347
=========== ===========
Interest-bearing liabilities:
Deposits 312,594 1,547 1.98% 302,668 2,092 2.77%
Floating rate junior subordinated
deferrable interest debentures 12,372 118 3.82% 12,372 151 4.87%
FHLB advances and other borrowings 81,532 744 3.65% 88,131 784 3.77%
----------- ---------- ----------- ---------
Total interest-bearing liabilities 406,498 2,409 2.37% 403,171 3,027 3.00%
---------- ---------
Non-interest-bearing sources:
Non-interest-bearing deposits 18,733 19,069
Non-interest-bearing liabilities 3,228 3,138
----------- -----------
Total liabilities 428,459 425,378
Shareholders equity 26,477 22,969
----------- -----------
Total liabilities and shareholders
equity $ 454,936 $ 448,347
=========== ==========
Net interest income $ 2,121 $ 2,111
========== =========
Interest rate spread 2.00% 1.92%
Impact of non-interest-bearing deposits 0.05 0.10
---- ----
Net interest margin 2.05% 2.02%
-----
(1) Average balances of loans include non-accrual loans.
(2) Annualized
Interest Income
- ---------------
Interest income decreased $608,000, or 11.8%, to $4.5 million for the three
months ended March 31, 2010 as compared to the same period in 2009. Interest
income on loans decreased by 13.2%, or $476,000, to $3.1 million for the three
months ended March 31, 2010 from $3.6 million for the three months ended March
31, 2009, due primarily to lower average balances. Interest on deposits and
federal funds sold, combined with interest and dividends on investment and
mortgage-backed securities decreased $132,000, or 8.6%, for the three months
ended March 31, 2010 to $1.4 million from $1.5 million during the same period in
2009 due to lower yields due to declining market interest rates and a decrease
in the average balance of mortgage-backed securities, offset by higher average
balances of investment securities.
29
Interest Expense
- ----------------
Interest expense decreased $618,000, or 20.4%, to $2.4 million for the three
months ended March 31, 2010 as compared to $3.0 million for the three months
ended March 31, 2009. Interest expense on deposit accounts decreased $545,000,
or 26.1%, to $1.5 million for the three months ended March 31, 2010 from $2.1
million during the same period in 2009 due primarily to lower market interest
rates and a shift in the composition of the deposit portfolio from certificates
of deposits to transaction accounts, offset by higher average balances. The
Corporation continues to target lower cost demand deposit accounts versus higher
cost certificates of deposits in order to reduce overall funding costs. Interest
expense on FHLB advances and other borrowings decreased $40,000, or 5.1%, for
the three months ended March 31, 2010 as compared to the same period in the
previous year due primarily to lower average balances and lower rates paid.
Interest expense on floating rate junior subordinated deferrable interest
debentures decreased $33,000, or 21.8%, to $118,000 for the three months ended
March 31, 2010 from $151,000 during the same period in 2009 due to lower market
rates.
Provision for Loan Losses
- -------------------------
We have developed policies and procedures for evaluating the overall quality of
our credit portfolio and the timely identification of potential problem credits.
The Board of Directors reviews and approves the appropriate level for
Provident Community Bancshares allowance for loan losses quarterly based upon
our recommendations, the results of the internal monitoring and reporting
system, quarterly external independent loan reviews and the analysis of economic
conditions in our local markets. Additions to the allowance for loan losses,
which are expensed as the provision for loan losses on our income statement, are
periodically made to maintain the allowance at an appropriate level based on our
analysis of the potential risk in the loan portfolio. Loan losses, which include
write downs and charge-offs are charged directly to the allowance while
recoveries are credited against the allowance. The amount of the provision is a
function of the level and composition of loans outstanding, the level of
classified and non-performing loans, historical loan loss experience, the amount
of loan losses actually charged against the reserve during the given period, and
current and anticipated economic conditions.
Our allowance for loan losses is based upon judgments and assumption of risk
elements in the portfolio, future economic conditions and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process
and specific reviews and evaluations of significant problem credits. In
addition, we monitor overall portfolio quality through observable trends in
delinquency, charge offs, and general and economic conditions in the market
area. The adequacy of the allowance for loan losses and the effectiveness of our
monitoring and analysis system are also reviewed periodically by the banking
regulators which may require that we increase the allowance for loan losses.
Risks are inherent in making all loans, including risks with respect to the
period of time over which loans may be repaid, risks resulting from changes in
economic and industry conditions, risks inherent in dealing with individual
borrowers, and, in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral.
Our judgment about the adequacy of the allowance is based upon a number of
assumptions about future events, which we believe to be reasonable, but which
may not prove to be accurate. Thus, charge-offs in future periods could exceed
the allowance for loan losses, or substantial additional increases in the
allowance for loan losses could be required. Additions to the allowance for loan
losses would result in a decrease of our net income and, possibly, our capital.
Based on present information we believe the allowance for loan losses is
adequate at March 31, 2010 to meet presently known and inherent risks in the
loan portfolio.
30
During the three months ended March 31, 2010, the provision for loan losses was
$896,000 as compared to $2.7 million for the same period in the previous year.
The previous year provision was higher than the current year due to higher
specific reserves required on nonperforming loans along with a reduction in
classified loans for the current period. Non-performing loans increased $5.3
million from $16.6 million at March 31, 2009 to $21.9 million at March 31, 2010.
The increase in non-performing loans over the previous year related primarily to
commercial real estate relationships that have been affected by the downturn in
the residential housing market. Slow housing conditions have affected these
borrowers' ability to sell the completed projects in a timely manner. Specific
reserves for non-performing loans at March 31, 2010 were $720,000 compared to
$4.8 million for nonperforming loans at March 31, 2009. All specific reserves
for commercial real estate loans that were deemed collateral dependent were
charged off against the loans as of December 31, 2009. Management believes the
specific reserves allocated to these and other non accrual loans will offset
losses, if any, arising from less than full recovery of the loans from the
supporting collateral. Management has sought to provide the amount estimated to
be necessary to maintain an allowance for loan losses that is adequate to cover
the level of loss that management believed to be inherent in the portfolio as a
whole, taking into account the Corporation's experience, economic conditions and
information about borrowers available at the time of the analysis. However,
management expects further deterioration of economic conditions in the
Corporation's market areas is likely in the short-term, especially with respect
to real estate related activities and real property values. Consequently,
management expects that further additions in provisions for loan losses could be
needed in the future.
The changes in the allowance for loan losses consisted of the following for the
three months ended March 31, 2010 and 2009 (in thousands):
March 31, March 31,
2010 2009
------------- -------------
Balance at beginning of period $5,579 $6,778
Provision for loan losses 896 2,700
Charge-offs, net (1,042) (1,339)
------------- -------------
Balance at end of period $5,433 $8,139
============= =============
Non-Interest Income
- -------------------
Total non-interest income increased $578,000, or 120.2%, to $1.1 million for the
three months ended March 31, 2010 from $481,000 for the same period in the
previous year. The increase was due primarily to higher gains on the sale of
investments. Gain on sale of investments were $677,000 for the three months
ended March 31, 2010 compared to $95,000 for the same period in the previous
year. The Corporation sold approximately $26 million of primarily mortgage
backed securities to better position the investment portfolio for the potential
of rising interest rates. An other-than-temporary impairment charge of $303,000
from write-downs on trust preferred securities as a result of projected
shortfalls of interest and principal payments in the cash flow analysis of the
securities was recorded for the three months ended March 31, 2010 compared to
$309,000 for the same period in 2009. Fees from financial services decreased
$11,000, or 1.6%, to $662,000 for the three months ended March 31, 2010 from
$673,000 for the same period in the previous year. The decrease was due to lower
service charges on checking accounts.
Non-Interest Expense
- --------------------
For the three months ended March 31, 2010, total non-interest expense decreased
$177,000, or 7.0%, to $2.3 million from $2.5 million for the same period in
2009. Compensation and employee benefits decreased $70,000, or 5.9%, to $1.1
million for the three months ended March 31, 2010 from $1.2 million for the same
period in 2009 due primarily to reductions in mortgage commission compensation
expense due to lower loan volumes and reductions in employee compensation costs
due to prior year staffing reductions. Deposit insurance premiums expense
increased $88,000, to $144,000 for the three months ended March 31, 2010 from
$56,000 for the same period in 2009, due to higher industry-wide FDIC premium
assessments. Advertising and public relations expense decreased $17,000, or
56.7%, to $13,000 for the three months ended March 31, 2010 from $30,000 for the
same period in 2009 due primarily to lower deposit product and promotion
expenses. Loan operations expense decreased $17,000, or 15.5%, to $93,000 for
the three months ended March 31, 2010 from $110,000 for the same period in 2009
due primarily to lower foreclosure expenses. All goodwill and related deposit
premium intangibles were charged off in 2009 thereby eliminating amortization
expenses. Items processing expense decreased $12,000, or 13.5%, to $77,000 for
the three months ended March 31, 2010 from $89,000 for the same period in 2009,
due primarily to expense savings from the prior year installation of branch
capture units in banking centers. Telephone expense decreased $15,000, or 28.9%,
to $37,000 for the three months ended March 31, 2010 from $52,000 for the same
period in 2009 due primarily to improvements in data line services. Other
expense decreased $34,000, or 18.1%, to $154,000 for the three months ended
March 31, 2010 from $188,000 for the same period in 2009, due primarily to
reductions in courier expense as a result of the prior year installation of
branch capture and lower loan expense due to reduced loan volumes.
31
Income taxes
- ------------
Our benefit for income taxes was $73,000 for the three months ended March 31,
2010 as compared to a benefit of $929,000 for the same period in 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Not applicable as the registrant is a smaller reporting company.
Item 4T. 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 quarter that has materially affected or is
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Corporation is not involved in any legal proceedings. The Bank is not
involved in any pending legal proceedings other than routine legal proceedings
occurring 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, 2009, 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.
32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
In May 2005, 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 92,000 shares, in August 2006. The Corporation did not
repurchase any shares during the three months ended March 31, 2010 and 36,034
shares remain under the previously authorized plans. As part of the
Corporation's participation in the Troubled Asset Relief Capital Purchase
Program, prior to the earlier of March 6, 2012 or the date on which the
preferred stock issued to the Treasury Department has been redeemed in full or
transferred to non-affiliates, the Corporation cannot repurchase any shares of
its common stock without the prior approval of the Treasury Department.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Reserved
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits
--------
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
33
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 12, 2010 By: /s/ Dwight V. Neese
--------------------------
Dwight V. Neese, President and
Chief Executive Officer
Date: May 12, 2010 By: /s/ Richard H. Flake
--------------------------
Richard H. Flake, Executive Vice President
and Chief Financial Officer
34