10-Q 1 a5144838.txt UNION FINANCIAL BANCSHARES 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE ------ SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ------ SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ COMMISSION FILE NUMBER 1-5735 PROVIDENT COMMUNITY BANCSHARES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its Charter) DELAWARE 57-1001177 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 203 WEST MAIN STREET, UNION, SOUTH CAROLINA 29379 (Address of Principal Executive Offices) (864) 429-1864 (Registrant's telephone number, including area code) UNION FINANCIAL BANCSHARES, INC. -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes [_] No [X] The Corporation had 1,897,259 shares, $0.01 par value, of common stock issued and outstanding as of May 3, 2006. 1
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE ------------------------------ ------ Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 3 Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 5 Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2006 and 2005 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21-23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits 25 Signatures 26
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Part 1. Financial Information PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES (FORMERLY UNION FINANCIAL BANCSHARES, INC.) CONSOLIDATED BALANCE SHEETS March 31, 2006 and December 31, 2005 (unaudited) March 31, December 31, ASSETS 2006 2005 --------- ------------ (DOLLARS IN THOUSANDS) Cash and due from banks $ 8,004 $ 8,380 Investment and mortgage-backed securities Held to maturity 3,198 3,204 Available for sale 132,105 143,079 --------- ------------ Total investment and mortgage-backed securities 135,303 146,283 --------- ------------ Loans, net 201,705 192,577 Office properties and equipment, net 5,455 5,148 Federal Home Loan Bank Stock, at cost 2,948 3,976 Federal Reserve Stock, at cost 539 539 Accrued interest receivable 2,237 2,429 Intangible assets 3,417 3,576 Cash surrender value of life insurance 5,454 5,404 Other assets 3,113 2,730 --------- ------------ TOTAL ASSETS $ 368,175 $ 371,042 ========= ============ LIABILITIES Deposits $ 254,218 $ 239,603 Advances from the Federal Home Loan Bank 49,000 75,715 Securities sold under agreements to repurchase 30,000 20,000 Floating rate junior subordinated deferrable interest debentures 8,247 8,247 Accrued interest payable 603 520 Advances from borrowers for taxes and insurance 107 33 Other liabilities 1,168 1,591 --------- ------------ TOTAL LIABILITIES 343,343 345,709 --------- ------------ Commitments and contingencies-Note 4 SHAREHOLDERS' EQUITY Serial preferred stock, no par value, authorized - 500,000 shares, issued and outstanding - None -- -- Common stock - $0.01 par value, authorized - 5,000,000 shares, issued and outstanding - 1,897,259 shares at 3/31/06 and 1,905,897 at 12/31/05 20 20 Additional paid-in capital 12,388 12,346 Accumulated other comprehensive loss (1,442) (612) Retained earnings, substantially restricted 17,425 16,916 Treasury stock, at cost (3,559) (3,337) --------- ------------ TOTAL SHAREHOLDERS' EQUITY 24,832 25,333 --------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 368,175 $ 371,042 ========= ============ See notes to consolidated financial statements.
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PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES (FORMERLY UNION FINANCIAL BANCSHARES, INC.) CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2006 and 2005 (unaudited) Three Months Ended March 31, March 31, 2006 2005 ----------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE) Interest Income: Loans $ 3,789 $ 2,823 Deposits and federal funds sold 16 58 Mortgage-backed securities 282 388 Interest and dividends on investment securities 1,340 1,142 ----------- ----------- Total Interest Income 5,427 4,411 ----------- ----------- Interest Expense: Deposit accounts 1,705 1,139 Floating rate junior subordinated deferrable interest debentures 168 128 Advances from the FHLB and other borrowings 900 694 ----------- ----------- Total Interest Expense 2,773 1,961 ----------- ----------- Net Interest Income 2,654 2,450 Provision for loan losses 175 208 ----------- ----------- Net Interest Income After Provision for Loan Losses 2,479 2,242 ----------- ----------- Non-Interest Income: Fees for financial services 632 543 Other fees, net 41 26 Net gain on sale of investments 13 8 ----------- ----------- Total Non-Interest Income 686 577 ----------- ----------- Non-Interest Expense: Compensation and employee benefits 1,087 1,015 Occupancy and equipment 486 509 Deposit insurance premiums 8 8 Professional services 117 88 Advertising/Public relations 36 38 Loan operations 14 42 Intangible amortization 159 159 Items processing 51 32 Telephone 39 46 Other 189 165 ----------- ----------- Total Non-Interest Expense 2,186 2,102 ----------- ----------- Income Before Income Taxes 979 717 Income tax expense 280 178 ----------- ----------- Net Income $ 699 $ 539 =========== =========== Basic Net Income Per Common Share $ 0.37 $ 0.28 =========== =========== Diluted Net Income Per Common Share $ 0.36 $ 0.27 =========== =========== Dividend Per Common Share $ 0.10 $ 0.10 =========== =========== Weighted Average Number of Common Shares Outstanding Basic 1,896,210 1,928,946 Diluted 1,917,866 1,992,002 See notes to consolidated financial statements.
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PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES (FORMERLY UNION FINANCIAL BANCSHARES, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2006 and 2005 (unaudited) Three Months Ended March 31, March 31, 2006 2005 ------------ -------------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income $699 $539 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 175 208 Amortization of intangibles 159 159 Depreciation expense 148 236 Recognition of deferred income, net of costs (124) (87) Deferral of fee income, net of costs 122 86 Gain on investment transactions (13) (8) Changes in operating assets and liabilities: Decrease in accrued interest receivable 192 308 Increase in other assets 87 (255) Increase (decrease) in other liabilities (349) (283) Increase (decrease) in accrued interest payable 83 29 ------------ -------------- Net cash provided by operating activities 1,179 932 ------------ -------------- INVESTING ACTIVITIES: Purchase of investment and mortgage-backed securities: Available for sale (1,656) (18,352) Proceeds from sale of investment and mortgage- backed securities available for sale 7,437 4,370 Proceeds from maturity of investment and mortgage- backed securities: Available for sale 2,026 10,078 Held to maturity 6 -- Principal repayments on mortgage-backed securities: Available for sale 1,903 2,477 Net increase in loans (9,374) (5,445) (Purchase) redemption of FHLB stock 1,028 (39) Purchase of office properties and equipment (455) (22) ------------ -------------- Net cash used by investing activities 915 (6,933) ------------ -------------- FINANCING ACTIVITIES: Proceeds from the dividend reinvestment plan 27 26 Dividends paid in cash (190) (196) Proceeds from the exercise of stock options 15 43 Share repurchase program (222) (897) Repayment of term borrowings (26,715) -- Increase (decrease) in other borrowings 10,000 (4,000) Increase in deposit accounts 14,615 8,542 ------------ -------------- Net cash provided by financing activities (2,470) 3,518 ------------ -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (376) (2,483) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,380 13,197 ------------ -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,004 $10,714 ============ ============== SUPPLEMENTAL DISCLOSURES: Cash paid for: Income taxes $38 $100 Interest 2,690 1,932 Non-cash transactions: Loans foreclosed $73 $-- See notes to consolidated financial statements.
5 PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES (FORMERLY UNION FINANCIAL BANCSHARES, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Three Months Ended March 31, 2006 and 2005 (unaudited)
Retained Accumulated Additional Earnings, Other Total Common Stock Paid-in Substantially Comprehensive Treasury Stock Shareholders' Shares Amount Capital Restricted Income (loss) At Cost Equity ------------------------------------------------------------------------------------- (Dollars in Thousands, Except Share Data) BALANCE AT DECEMBER 31, 2004 1,957,989 $20 $12,109 $15,221 $109 ($1,440) $26,019 Net income 539 539 Other comprehensive income, net of tax Unrealized holding losses on securities available for sale arising during period, net of tax effect of $470 (988) (988) Reclassification adjustment for gains included in net income, net of tax of $2 6 6 -------------------------------------------------------------------------------- Comprehensive loss (443) Stock option activity, net 6,206 43 43 Dividend reinvestment plan contributions 1,540 26 26 Share repurchase program (52,666) (1) 1 (897) (897) Cash dividend ($.10 per share) (196) (196) -------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2005 1,913,069 $19 $12,178 $15,565 ($873) ($2,337) $24,552 ================================================================================ BALANCE AT DECEMBER 31, 2005 1,905,897 $20 $12,346 $16,916 ($612) ($3,337) $25,333 Net income 699 699 Other comprehensive income, net of tax Unrealized holding losses on securities available for sale arising during period, net of tax effect of $777 (839) (839) Reclassification adjustment for gains included in net income, net of tax of $4 9 9 -------------------------------------------------------------------------------- Comprehensive loss (131) Stock option activity, net 2,086 15 15 Dividend reinvestment plan contributions 1,628 27 27 Share repurchase program (12,352) (222) (222) Cash dividend ($.10 per share) (190) (190) -------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2006 1,897,259 $20 $12,388 $17,425 ($1,442) ($3,559) $24,832 ================================================================================
6 PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES (Formerly Union Financial Bancshares, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Subsequent Event-Name Change ---------------------------- On April 19, 2006, the Corporation announced that it would change its name to Provident Community Bancshares, Inc. In connection with the name change, the Corporation began trading on Nasdaq under the ticker symbol "PCBS". 2. Presentation of Consolidated Financial Statements ------------------------------------------------- The accompanying unaudited consolidated financial statements of Provident Community Bancshares, Inc. (the "Corporation" or "Provident") were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments which are, in the opinion of management, necessary for the fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results which may be expected for the entire calendar year. Certain amounts in the prior year's financial statements have been reclassified to conform with current year classifications. Recently Issued Accounting Standards The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Corporation: In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140." This Statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Corporation does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations and cash flows. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140." This Statement amends FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. The Corporation believes the adoption of SFAS No. 156 will not have a material impact on its financial position, results of operations or cash flows. 7 Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. 2. Income Per Share ----------------- Basic income per share amounts for the three months ended March 31, 2006 and 2005 were computed based on the weighted average number of common shares outstanding during the period. Diluted income per share adjusts for the dilutive effect of outstanding common stock options during the periods utilizing the treasury stock method. Common stock equivalents included in the diluted earnings per share calculation for the three months ended March 31, 2006 and 2005 were 21,656 and 63,056, respectively. 3. Assets Pledged -------------- Approximately $65,862,000 and $83,170,000 of debt securities at March 31, 2006 and December 31, 2005, respectively, were pledged by Provident Community Bank, N.A. (the "Bank") as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements. The Bank pledges as collateral for Federal Home Loan Bank advances the Bank's Federal Home Loan Bank stock and has entered into a blanket collateral agreement with the Federal Home Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying mortgages (as defined) with unpaid principal balances equal to, when discounted at 75% of the unpaid principal balances, 100% of total advances. As part of the total assets pledged, the Bank will also pledge securities to cover additional advances from the Federal Home Loan Bank that exceed the qualifying mortgages balance along with security repurchase lines with various brokerage houses. 8 4. Contingencies and Loan Commitments ---------------------------------- In the ordinary course of business, the Bank enters into financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These instruments expose the Bank to credit risk in excess of the amount recognized on the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at March 31, 2006 related to these items is summarized below: Loan Commitments: Contract Amount ----------------- --------------- Approved loan commitments $ 3,097,000 Unadvanced portions of loans and credit lines 43,287,000 ------------ Total loan commitments $ 46,384,000 ============ Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counter party. Collateral held is primarily residential and commercial property. Commitments outstanding at March 31, 2006 consisted of fixed and adjustable rate loans at rates ranging from 5.5% to 7.5%. Commitments to originate loans generally expire within 30 to 60 days. Commitments to fund loans, including credit lines (principally variable rate, consumer lines secured by real estate and overdraft protection) totaled approximately $95,212,000 at March 31, 2006. Of these lines, the outstanding loan balances totaled approximately $51,925,000. 5. Floating Rate Junior Subordinated Deferrable Interest Debentures A summary of the Trust securities issued and outstanding follows:
------------------------------------------------------------------------------------------------------------------- Amount Outstanding Prepayment Distribution Payment At March 31, Option Date Maturity Frequency ------------------------------------------------------------------------------------------------------------------- Name 2006 2005 Rate ------------------------------------------------------------------------------------------------------------------- Union Financial $8,000,000 $8,000,000 8.53% December 18, 2006 December 18, 2031 Quarterly Statutory Trust I -------------------------------------------------------------------------------------------------------------------
9 6. Stock-Based Compensation ------------------------ On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123(R), Accounting for Stock-Based Compensation, to account for compensation costs under its stock option plans. The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB 25"). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company's stock options because the option exercise price in its plans equals the market price on the date of grant. Prior to January 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized. In adopting SFAS No. 123, the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share amounts).
Three Months Ended March 31, ---------------------- 2006 2005 Net income as reported $ 699 $ 539 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects. 12 - -------- ------- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (12) (48) ======== ======= $ 699 $ 491 Pro forma net income including stock-based compensation cost based on fair-value method Earnings per share: Basic -- as reported $ 0.37 $ 0.28 Basic -- pro forma $ 0.37 $ 0.28 Diluted -- as reported $ 0.36 $ 0.27 Diluted -- pro forma $ 0.36 $ 0.27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies ---------------------------- The Corporation has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of financial statements. 10 Certain accounting policies involve significant judgments and assumptions by management which could have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Corporation. The Corporation believes the allowance for loan losses is a critical accounting policy that requires significant judgments and estimates used in the preparation of consolidated financial statements. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the nature and volume of the loan portfolio, overall portfolio quality, delinquency levels, a review of specific problem loans, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. A portion of the allowance is established by segregating the loans by residential mortgage, commercial and consumer loans and assigning allocation percentages based on historical loss experience and delinquency trends. The applied allocation percentages are reevaluated at least annually to ensure their relevance in the current economic environment. Accordingly, increases in the size of the loan portfolio and the increased emphasis on commercial real estate and commercial business loans, which carry a higher degree of risk of default and, thus, a higher allocation percentage, increases the allowance. Additionally, a portion of the allowance is established based on the level of classified assets. Although the Corporation believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review the Corporation's allowance for loan losses. Such agency may require the Corporation to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. Forward Looking Statements -------------------------- Management's discussion and analysis of financial condition and results of operations and other portions of this Form 10-Q may contain certain "forward-looking statements" concerning the future operations of the Corporation and the Bank. These forward-looking statements are generally identified by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Management intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Corporation of the protections of such safe harbor with respect to all forward-looking statements contained in this report to describe future plans and strategies. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could effect actual results include interest rate trends, the general economic climate in the Corporation's and the Bank's market area and the country as a whole, the ability of the Corporation and the Bank to control costs and expenses, competitive products and pricing, loan delinquency rates, the quality and composition of the loan and investment portfolios, changes in accounting principles and guidelines and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. 11 Except as required by applicable law or regulation, the Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward looking statements to reflect events or circumstances after the date of these statements or to reflect the occurrence of anticipated or unanticipated events. Financial Condition ------------------- Assets ------ Total assets of the Corporation decreased $2,867,000, or 0.8%, to $368,175,000 at March 31, 2006 from $371,042,000 at December 31, 2005. Investments and mortgage-backed securities decreased approximately $10,980,000, or 7.51%, from December 31, 2005 to March 31, 2006, due to the sale and maturity of securities. Proceeds from the maturity and sale of investment securities were utilized to fund growth in higher-yielding loans. Investment and Mortgage-Backed Securities ----------------------------------------- Held to Maturity-Securities classified as held to maturity consisted of the following (in thousands):
March 31, 2006 December 31, 2005 --------------- ------------------ Amortized Fair Amortized Fair Cost Value Cost Value ------ ------ ------ ------ Municipal Securities $3,198 $3,208 $3,204 $3,247 ====== ====== ====== ======
Available for Sale-Securities classified as available for sale consisted of the following (in thousands): March 31, 2006 December 31, 2005 --------------- ------------------ Amortized Fair Amortized Fair Cost Value Cost Value ------- ------- ------- ------- Investment Securities: U.S. Agency Obligations $77,582 $75,560 $84,631 $83,443 Municipal Securities 16,098 16,704 17,328 18,180 Other 13,324 13,386 14,530 14,621 ------- ------- ------- ------- Total Investment Securities 107,004 105,650 116,489 116,244 ------- ------- ------- ------- Mortgage-backed Securities: Fannie Mae 17,745 17,132 17,370 16,771 Ginnie Mae 63 65 67 69 Freddie Mac 4,076 4,068 4,572 4,579 Collateralized Mortgage Obligations 5,337 5,190 5,523 5,416 ----- ------ ------ ----- Total Mortgage-backed Securities 27,221 26,455 27,532 26,835 ------ ------ ------ ------ Total Available for Sale $134,225 $132,105 $144,021 $143,079 ======== ======== ======== ========
Loans increased $9,128,000, or 4.74%, to $201,705,000 at March 31, 2006. The Corporation continues to focus on consumer and commercial lending with specialized loan officers and products. 12 Loans receivable consisted of the following (in thousands): March 31, December 31, 2006 2005 --------- --------- Mortgage loans: Fixed rate residential $22,120 $23,859 Adjustable-rate residential 11,979 12,701 Commercial real estate 48,763 45,665 Construction 4,410 4,842 --------- -------- Total mortgage loans 87,272 87,067 --------- -------- Commercial loans: Commercial non-real estate 44,280 39,453 Commercial lines of credit 34,900 31,215 --------- -------- Total commercial loans 79,180 70,668 --------- -------- Consumer loans: Home equity 16,658 16,427 Consumer and installment 23,598 23,067 Consumer lines of credit 367 382 --------- -------- Total consumer loans 40,623 39,876 --------- -------- Total loans 207,075 197,611 Less: Undisbursed portion of interim construction loans (2,190) (1,980) Unamortized loan discount (744) (764) Allowance for loan losses (2,541) (2,394) Net deferred loan origination costs 105 104 --------- -------- Total, net $201,705 $192,577 ========= ======== Weighted-average interest rate of loans 7.59% 7.64% 13 Other assets increased $383,000, or 14.03%, to $3,113,000, from December 31, 2005 to March 31, 2006, due to an increase in a net deferred tax receivable that was related to the mark to market adjustment for investments available for sale. LIABILITIES Total liabilities decreased $2,366,000, or 0.7%, to $343,343,000 at March 31, 2006 from $345,709,000 at December 31, 2005. Deposits increased $14,615,000, or 6.1%, to $254,218,000 at March 31, 2006 from $239,603,000 at December 31, 2005. The increase was due primarily to growth in lower cost demand accounts partially offset by a reduction in higher cost certificates of deposit accounts. The Corporation continues to target lower cost demand deposit accounts through media advertising versus traditional higher cost certificates of deposits. Deposit accounts were as follows (in thousands):
March 31, 2006 December 31, 2005 ------------------------------ --------------------------------- Rate Balance % Rate Balance % ---- ------- - ---- ------- - Account Type NOW accounts: Commercial non- interest-bearing $14,858 5.84% $14,651 6.11% Non-commercial 2.49% 56,871 22.37% 1.93% 51,447 21.47% Money market checking accounts 4.13% 23,017 9.05% 2.55% 14,414 6.02% Regular savings 0.58% 17,204 6.78% 0.43% 16,733 6.98% ------ ------- -------- ------ Total demand and savings deposits 2.23% 111,950 44.04% 1.50% 97,245 40.58% ------- ------- -------- ------ Savings certificates: Up to 3.00% 42,591 16.75% 55,105 23.00% 3.01 %- 4.00% 51,061 20.08% 56,033 23.38% 4.01 %- 5.00% 39,680 15.60% 23,862 9.96% 5.01 %- 6.00% 3,741 1.47% 2,720 1.13% 6.01 %- 7.00% 23 0.03% 23 0.02% 7.01 %- 8.00% -- 0.00% -- 0.00% -------- ------ -------- ----- Total savings certificates 3.41% 137,096 53.93% 2.75% 137,743 57.49% -------- ------ -------- ------ Sweep accounts 4.70% 5,172 2.03% 3.43% 4,615 1.93% -------- ------ -------- ------ Total deposit accounts 2.90% $254,218 100.00% 2.57% $239,603 100.00% ======== ====== ======== =======
At March 31, 2006 and December 31, 2005, the Bank had $49,000,000 and $75,715,000, respectively, of advances outstanding from the FHLB. The maturity of the advances from the FHLB is as follows (in thousands):
March 31, 2006 December 31,2005 -------------- ---------------- Wtd Avg Rate Wtd Avg Rate ------------ ------------ Contractual Maturity: Within one year - fixed rate $5,000 2.64% $10,000 2.35% Within one year - adjustable rate 7,500 5.08% 23,215 4.08% After one but within three years - fixed rate 3,000 3.35% 3,000 3.35% After one but within three years - adjustable rate 5,000 3.79% 5,000 3.79% After three but within five years - adjustable rate 12,500 4.52% 7,500 5.30% Greater than five years - adjustable rate 16,000 4.45% 27,000 4.24% ------ ------ Total advances $49,000 4.24% $75,715 3.98% ======= =======
The Bank pledges as collateral for the advances its FHLB stock and investment securities and has entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying loans (as defined) with unpaid principal balances equal to, when discounted at 50% to 80% of the unpaid principal balances, 100% of total advances. Borrowings from the Federal Home Loan Bank (the "FHLB") decreased $26,715,000, or 35.28%, to $49,000,000 at March 31, 2006 from $75,715,000 at December 31, 2005. Securities sold under agreement to repurchase increased $10,000,000 to $30,000,000 at March 31, 2006 from $20,000,000 at December 31, 2005. During this period, securities sold under agreement to repurchase provided a lower cost funding alternative to Federal Home Loan Bank advances. Borrowings were reduced with deposit growth and reductions in investments and mortgage-backed securities. Other liabilities decreased $423,000 to $1,168,000 at March 31, 2006 from $1,591,000 at December 31, 2005, due primarily to a reduction in outstanding loan fundings. 14 Shareholders' Equity -------------------- Shareholders' equity decreased $501,000, or 1.98%, to $24,832,000 at March 31, 2006 from $25,333,000 at December 31, 2005 due to the repurchase of 12,352 shares at a cost of $222,000, dividend payments of $0.10 per share at a cost of $190,000 and a $830,000 increase in unrealized losses on securities available for sale, offset by net income of $699,000. Liquidity --------- Liquidity is the ability to meet demand for loan disbursements, deposit withdrawals, repayment of debt, payment of interest on deposits and other operating expenses. The primary sources of liquidity are deposits, loan repayments, borrowings, maturity and sale of securities and interest payments. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The primary investing activities of the Corporation are the origination of commercial and consumer loans, and the purchase of investment and mortgage-backed securities. These activities are funded primarily by principal and interest payments on loans and investment securities, deposit growth, securities sold under agreements to repurchase and the utilization of FHLB advances. At March 31, 2006, the Corporation's investment in agency and mortgage-backed securities totaled $135,303,000, nearly all of which is available for sale. Approximately $65,862,000 and $83,170,000 of debt securities at March 31, 2006 and December 31, 2005, respectively, were pledged by the Bank as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements. Additionally, outstanding loan commitments (including commitments to fund credit lines) totaled $95,212,000 at March 31, 2006. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. The Corporation closely monitors its liquidity position on a daily basis. Certificates of deposit, which are scheduled to mature in one year or less from March 31, 2006, totaled $109,421,000. The Corporation relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Corporation will also offer special products to its customers to increase retention and to attract new deposits. Based upon the Corporation's experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances, securities sold under agreements to repurchase and lines of credit. At March 31, 2006, the Corporation had outstanding $49,000,000 of FHLB borrowings and $30,000,000 of securities sold under agreements to repurchase. At March 31, 2006, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $20,000,000 and the ability to borrow an additional $22,000,000 from FHLB and secured borrowing lines. Lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have reserved the right to withdraw these lines at their option. 15 Capital Management ------------------ The Bank and the Corporation are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weights and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of March 31, 2006, that the Bank and the Corporation meet the capital adequacy requirements to which they are subject. As of March 31, 2006, the Bank was "well capitalized" under the regulatory framework for prompt corrective action based on its capital ratio calculations. In order to be "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. Under present regulations of the Office of the Comptroller of the Currency, the Bank must have core capital (leverage requirement) equal to 4.0% of assets, of which 1.5% must be tangible capital, excluding intangible assets. The Bank must also maintain risk-based regulatory capital as a percent of risk weighted assets at least equal to 8.0%. In measuring compliance with capital standards, certain adjustments must be made to capital and total assets. The following tables present the total risk-based, Tier 1 risk-based and Tier 1 leverage requirements for the Corporation and the Bank (dollars in thousands).
March 31, 2006 -------------- Actual Regulatory Minimum "Well Capitalized" ---------------- ------------------ ---------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- $ % $ % $ % Leverage ratio Corporation 30,556 8.33% 14,665 4.00% n/a n/a Bank 30,535 8.33% 14,661 4.00% 18,327 5.00% Tier 1 capital ratio Corporation 30,556 12.70% 9,628 4.00% n/a n/a Bank 30,535 12.69% 9,624 4.00% 14,436 6.00% Total risk-based capital ratio Corporation 33,097 13.75% 19,255 8.00% n/a n/a Bank 33,076 13.75% 19,248 8.00% 24,060 10.00%
16 During fiscal 2003, the Corporation implemented a share repurchase program under which the Board of Directors of the Corporation authorized the repurchase of up to 5% of the outstanding shares or 98,000 shares. The program was expanded by an additional 5%, or 98,000 shares, in fiscal 2004 and by an additional 5%, or 95,000 shares in fiscal 2005. The shares are to be repurchased either through open market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors. Repurchased shares will be held in treasury and will be available for the Corporation's benefit plans. During the three months ended March 31, 2006, the Corporation repurchased 12,352 shares. As of March 31, 2006, the Corporation had repurchased a total of 203,905 shares under these authorizations. Of the three authorizations, 87,095 shares remain to be purchased under the third authorization. Off-Balance Sheet Risk ---------------------- In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customer's requests for funding and take the form of legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. Outstanding loan commitments (including commitments to fund credit lines) totaled $95,212,000 at March 31, 2006. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on the credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The credit risk on these commitments is managed by subjecting each customer to normal underwriting and risk management processes. For the period ended March 31, 2006, the Corporation did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operation and cash flows. 17 Results of Operations for the Three Months Ended March 31, 2006 and 2005 ------------------------------------------------------------------------ General ------- Net income increased $160,000, or 29.68%, to $699,000 for the three months ended March 31, 2006 as compared to $539,000 for the same period in 2005 as increases in net interest income and non-interest income and a reduction in the provision for loan losses were partially offset by an increase in non-interest expense.
Average Yields and Rates ------------------------ (Dollars in Thousands) Quarter Ended March 31, ------------------------------- 2006 2005 ---- ---- Average Average Average Average Balance Interest Yield/cost Balance Interest Yield/cost ------- -------- ---------- ------- -------- ---------- Interest-earning assets: Loans (1) $197,481 $3,789 7.67% $173,713 $2,823 6.50% Mortgage-backed securities 26,810 282 4.21% 37,758 388 4.11% Investment securities 118,276 1,340 4.53% 109,920 1,142 4.15% Other interest-earning assets 1,500 16 4.26% 10,165 58 2.29% ------- ----- ---- ------- ----- ---- Total interest-earning assets 344,067 5,427 6.31% 331,556 4,411 5.32% Non-interest-earning assets 26,831 25,895 ------ ------ Total assets $370,898 $357,451 ======== ======== Interest-bearing liabilities: Deposits $244,745 $1,705 2.79% $232,489 $1,139 1.96% Floating rate junior subordinated deferrable interest debentures 8,247 168 8.17% 8,247 128 6.19% FHLB advances and other borrowings 91,291 900 3.95% 89,652 694 3.10% ------- ----- ---- ------- ----- ---- Total interest-bearing liabilities 344,283 2,773 3.22% 330,388 1,961 2.37% ----- ===== ----- ===== Non-interest-bearing liabilities 1,533 1,777 Total liabilities 345,816 332,165 Shareholders' equity 25,082 25,286 ------ ------ Total liabilities and shareholders' equity $370,898 $357,451 ======== ======== Net interest income/spread $2,654 3.09% $2,450 2.95% ====== ====== Net yield on earning assets 3.09% 2.96%
(1) Average balances of loans include non-accrual loans. Interest Income --------------- Interest income increased $1,016,000, or 23.03%, to $5,427,000 for the three months ended March 31, 2006 as compared to the same period in 2005. Interest income on loans increased by 34.22%, or $966,000, to $3,789,000 for the three months ended March 31, 2006 from $2,823,000 for the three months ended March 31, 2005, due primarily to increasing market interest rates along with a higher average balance of loans with a higher average rate due to our increased emphasis on commercial and consumer loan originations. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities increased $50,000, or 3.15%, for the three months ended March 31, 2006 to $1,638,000 from $1,588,000 during the same period in 2005 due to higher yields, from higher market interest rates, offset by lower average balances. 18 Interest Expense ---------------- Interest expense increased $812,000, or 41.41%, to $2,773,000 for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. Interest expense on deposit accounts increased $566,000, or 49.69%, to $1,705,000 for the three months ended March 31, 2006 from $1,139,000 during the same period in 2005 due to higher averages balances and cost of deposits as a result of higher market rates offset by growth in lower costing transaction accounts. The Corporation continues to target lower cost demand deposit accounts versus traditional higher cost certificates of deposits. Interest expense on borrowings increased $206,000, or 29.68%, for the three months ended March 31, 2006 as compared to the same period in the previous year due to higher market interest rates. Interest expense on floating rate junior subordinated deferrable interest debentures increased $40,000, or 31.25%, to $168,000 for the three months ended March 31, 2006 from $128,000 during the same period in 2005 due to higher market interest rates. Provision for Loan Losses ------------------------- During the three months ended March 31, 2006, the provision for loan losses was $175,000 as compared to $208,000 for the same period in the previous year, which a decrease in net charge-offs, offset by loan growth. The provision also reflects the Corporation's continued movement from longer term, fixed rate residential mortgage loans to shorter term, floating rate consumer and commercial loans. Consumer and commercial loans carry higher risk weighted rates in the reserve calculation as compared to residential mortgage loans. Non-accruing loans decreased $120,000 from $1,246,000 at December 31, 2005 to $1,126,000 at March 31, 2006. Loans 30-89 days past due and still accruing was $5,315,000 at March 31, 2006 compared to $1,909,000 at December 31, 2005. The delinquent loans for the three months ended March 31, 2006 included one commercial loan for $2,550,000 that is now current. During the three months ended March 31, 2006, bad debt charge-offs, net of recoveries, was $28,000 as compared to $63,000 for the same period in the previous year. The Corporation's loan loss allowance at March 31, 2006 was approximately 1.24% of the Corporation's outstanding loan portfolio and 171.92% of non-performing loans compared to 1.23% of the Corporation's outstanding loan portfolio and 162.86% of non-performing loans at December 31, 2005. 19 The changes in the allowance for loan losses consisted of the following (in thousands): Balance at beginning of period $2,394 Provision for loan losses 175 Charge-offs, net (28) ------ Balance at end of period $2,541 ====== The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated (dollars in thousands):
March 31, 2006 December 31, 2005 -------------- ----------------- Non-accruing loans which are contractually past due 90 days or more: Real estate $ 343 $ 461 Commercial 366 436 Consumer 417 349 ------ ------ Total $ 1,126 $ 1,246 ====== ====== Percentage of loans receivable 0.55% 0.64% ===== ===== Percentage of allowance for loan losses to total loans outstanding 1.24% 1.23% ===== ===== Allowance for loan losses $ 2,541 $ 2,394 ====== ====== Real estate acquired through foreclosure and repossessed assets $ 352 $ 224 ======= ======
The allowance for loan loss calculation includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is rated for all loans including performing groups. The weight assigned to each performing group is developed from previous loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition to loan loss experience, management's evaluation of the loan portfolio includes the market value of the underlying collateral, growth and composition of the loan portfolio, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically and the allowance for loan loss calculation will adjust accordingly. Non-Interest Income ------------------- Total non-interest income increased $109,000, or 18.89%, to $686,000 for the three months ended March 31, 2006 from $577,000 for the same period in the previous year. Fees from financial services increased $89,000, or 16.39%, to $632,000 for the three months ended March 31, 2006 from $543,000 for the same period in the previous year. The increase was from an increase in transaction accounts along with higher fees generated from third party investment brokerage and financing receivables programs due to an increase in product volumes. 20 Non-Interest Expense -------------------- For the three months ended March 31, 2006, total non-interest expense increased $84,000, or 4.0%, to $2,186,000 from $2,102,000 for the same period in 2005. Compensation and employee benefits increased $72,000, or 7.09%, to $1,087,000 for the three months ended March 31, 2006 from $1,015,000 for the same period in 2005 due primarily to higher compensation and benefits costs for normal merit salary increases and additional staff due to the opening of a new banking center location in Simpsonville, South Carolina. Occupancy and equipment expense decreased $23,000, or 4.52%, to $486,000 for the three months ended March 31, 2006 from $509,000 for the same period in 2005 due to primarily to lower depreciation expense. Professional services expense increased $29,000, or 32.95%, to $117,000 for the three months ended March 31, 2006 from $88,000 for the same period in 2005 due to higher legal expenses primarily due to the changing the name of the holding company during the first quarter of 2006. Loan operations expense decreased $28,000, or 66.67%, to $14,000 for the three months ended March 31, 2006 from $42,000 for the same period in 2005, due to lower costs associated with foreclosures. Items processing expense increased $19,000, or 59.38%, to $51,000 for the three months ended March 31, 2006 from $32,000 for the same period in 2005 due to transaction accounts increasing to $95.1 million at March 31, 2006 from $73.6 million at March 31, 2005. The Corporation continues to target lower cost demand deposit accounts through media advertising versus traditional higher cost certificates of deposits. Other expense increased $24,000, or 14.55%, to $189,000 for the three months ended March 31, 2006 from $165,000 for the same period in 2005 due to higher postage expense from a rate increase and higher forms and supplies expense from two new banking center openings. Item 3. Quantitative and Qualitative Disclosures About Market Risk ----------------------------------------------------------- The Corporation is committed to following a program of asset and liability management in an effort to manage the fluctuations in earnings caused by movements in interest rates. A significant portion of the Corporation's income results from the spread between the yield realized on its interest-earning assets and the rate of interest paid on its deposits and other borrowings. Differences in the timing and volume of repricing assets versus the timing and volume of repricing liabilities expose the Corporation to interest rate risk. Management's policies are directed at minimizing the impact on earnings of movements in interest rates. The Corporation's Asset/Liability Committee makes pricing and marketing decisions on deposit and loan products in conjunction with managing the Corporation's interest rate risk. In addition, the Asset/Liability Committee reviews the Corporation's securities portfolio, FHLB advances and other borrowings as well as the Corporation's asset and liability policies. The primary objective of Asset/Liability management at the Corporation is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles in order to maintain adequate liquidity. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive costing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive costing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and interest-bearing liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments. 21 The Corporation has established policies and monitors results to control interest rate sensitivity. Although the Corporation utilizes measures such as static gap, which is simply the measurement of the difference between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period, just as important a process is the evaluation of how particular assets and liabilities are impacted by changes in interest rates or selected indices as they reprice. Asset/liability modeling techniques are utilized by the Corporation to assess varying interest rate and balance sheet mix assumptions. Net Interest Income Simulation Analysis. We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest sensitive." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations utilizing interest rate shocks are completed quarterly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The interest rate shocks are compared to board approved policy limits and are reviewed by the Asset/Liability Committee on a quarterly basis. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management's current assessment of the risk that pricing margins will change adversely over time due to competition or other factors. Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities. The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next twelve month period using interest income simulation. The simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. 22 The following table reflects changes in estimated net interest income from rate shocks of (+) or (-) 100 and 200 basis points in a rising and falling interest rate environment for the Corporation. At At March 31, December 31, Change in Rates (Basis Points) 2006 2005 ------------------------------ ---- ---- +200 +6.04% +5.88% +100 +3.30% +3.24% -100 (4.24%) (4.97%) -200 (9.87%) (7.72%) The Corporation improved slightly in rising interest rate environments for the period ending March 31, 2006 as compared to the period ending December 31, 2005 due primarily to significant growth in prime based loan products. The 200 and 100 basis point change in rates in the above table is assumed to occur evenly over the following twelve months. Based on the scenario above, net interest income would be positively affected in the twelve-month periods if rates rose by 100 and 200 basis points, but would be adversely affected if rates declined by 100 and 200 basis points. Item 4. Controls and Procedures ----------------------- The Corporation's management, including the Corporation's principal executive officer and principal financial officer, have evaluated the effectiveness of the Corporation's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Corporation's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Corporation's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Corporation's internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Corporation's last fiscal quarter that has materially affected or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Corporation is not involved in any legal proceedings. The Bank is involved in various claims and legal actions arising in the normal course of business. Management believes that these proceedings are immaterial to the Corporation's financial condition and results of operations. Item 1A. Risk Factors ------------ There have been no material changes with respect to the Risk Factors disclosed in the Corporation's form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- The following table provides certain information with regard to shares repurchased by the Corporation during the first quarter of 2006.
(c) Total Number of Shares (d) (a) Purchased as part of Maximum Number of Total Number (b) Publicly Shares that may of Shares Average Price Announced be purchased Period Purchased Paid per share Programs under Program ------ --------- -------------- -------- ------------- January 1, 2006 12,000 $18.04 12,000 87,447 through January 31, 2006 February 1, 2006 -- -- -- 87,447 through February 28, 2006 March 1, 2006 through 352 $16.75 352 87,095 March 31, 2006 Total 12,352 $18.00 12,352 N/A
In November 2004, the Corporation implemented a share repurchase program under which the Corporation may repurchase up to 5% of the outstanding shares or 98,000 shares. In May 2005, the program was expanded by an additional 5% or 95,000 shares. The repurchase program will continue until it is completed or terminated by the Board of Directors. Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable. 24 Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits -------- 3(a) Certificate of Ownership 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32(a) Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32(b) Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROVIDENT COMMUNITY BANCSHARES, INC. (REGISTRANT) Date: May 9, 2006 By: /s/ Dwight V. Neese ----------- ------------------------------------ Dwight V. Neese, CEO Date: May 9, 2006 By: /s/ Richard H. Flake ----------- ------------------------------------ Richard H. Flake, CFO 26