-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ks2gb8yddBd8VFcXeIh48WZq3CBzJUKMb4H77pHGCbSfOxAfqhSt5bsvxx2iw4JG 56K7nm1B6gQfCJqczPLHiQ== 0001157523-07-005104.txt : 20070514 0001157523-07-005104.hdr.sgml : 20070514 20070514142224 ACCESSION NUMBER: 0001157523-07-005104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070514 DATE AS OF CHANGE: 20070514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENT COMMUNITY BANCSHARES, INC. CENTRAL INDEX KEY: 0000926164 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570264560 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-80808 FILM NUMBER: 07845621 BUSINESS ADDRESS: STREET 1: 203 WEST MAIN ST STREET 2: C/O PROVIDENT COMMUNITY BANK CITY: UNION STATE: SC ZIP: 29379 BUSINESS PHONE: 8644279000 MAIL ADDRESS: STREET 1: 203 WEST MAIN STREET STREET 2: C/O PROVIDENT COMMUNITY BANK CITY: UNION STATE: SC ZIP: 29379 FORMER COMPANY: FORMER CONFORMED NAME: UNION FINANCIAL BANCSHARES INC DATE OF NAME CHANGE: 19940629 10-Q 1 a5401138.txt PROVIDENT COMMUNITY BANCSHARES, INC. 10-Q 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, 2007 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) 203 West Main Street, Union, South Carolina 29379 ------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 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 1,826,844 shares, $0.01 par value, of common stock issued and outstanding as of May 2, 2007.
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Page --------------------- ---- Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 3 Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 5 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)for the three months ended March 31, 2007 and 2006 6 Notes to Consolidated Financial Statements 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26-28 Item 4. Controls and Procedures 28 Part II. Other Information ----------------- Item 1. Legal Proceedings 29 Item 1A. Risk Factors 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 3. Defaults Upon Senior Securities 30 Item 4. Submission of Matters to a Vote of Security Holders 30 Item 5. Other Information 30 Item 6. Exhibits 30 Signatures 31
Part 1. Financial Information PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 2007 and December 31, 2006 March 31, December 31, ASSETS 2007 2006 (Unaudited) (Audited) --------------------- -------------------- (DOLLARS IN THOUSANDS) Cash and due from banks $ 12,153 $ 9,124 Investment and mortgage-backed securities Held to maturity 3,176 3,182 Available for sale 118,033 119,003 --------------------- -------------------- Total investment and mortgage-backed securities 121,209 122,185 --------------------- -------------------- Loans, net 236,926 231,886 Office properties and equipment, net 5,569 5,708 Federal Home Loan Bank Stock, at cost 3,466 3,983 Federal Reserve Stock, at cost 539 539 Accrued interest receivable 2,548 2,717 Intangible assets 3,582 3,741 Cash surrender value of life insurance 8,880 5,613 Other assets 1,959 2,134 --------------------- -------------------- TOTAL ASSETS $ 396,831 $ 387,630 ===================== ==================== LIABILITIES Deposits $ 264,417 $ 248,440 Advances from the Federal Home Loan Bank 61,500 70,000 Securities sold under agreements to repurchase 29,696 28,533 Floating rate junior subordinated deferrable interest debentures 12,372 12,372 Accrued interest payable 868 784 Other liabilities 1,435 1,534 --------------------- -------------------- TOTAL LIABILITIES 370,288 361,663 --------------------- -------------------- Commitments and contingencies-Note 4 SHAREHOLDERS' EQUITY Serial preferred stock, no par value, authorized - 500,000 shares, issued and outstanding - None -- -- Common stock - $0.01 par value, authorized - 5,000,000 shares, issued and outstanding - 1,826,844 shares at 3/31/07 and 1,830,528 at 12/31/06 20 20 Additional paid-in capital 12,545 12,506 Accumulated other comprehensive loss -423 -610 Retained earnings, substantially restricted 19,361 18,912 Treasury stock, at cost -4,960 -4,861 --------------------- -------------------- TOTAL SHAREHOLDERS' EQUITY 26,543 25,967 --------------------- -------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 396,831 $ 387,630 ===================== ==================== See notes to consolidated financial statements.
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PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2007 and 2006 (unaudited) Three Months Ended March 31 March 31 2007 2006 --------------------- --------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE) Interest Income: Loans $ 4,776 $ 3,789 Deposits and federal funds sold 27 16 Mortgage-backed securities 290 282 Interest and dividends on investment securities 1,326 1,340 --------------------- --------------------- Total Interest Income 6,419 5,427 --------------------- --------------------- Interest Expense: Deposit accounts 2,389 1,705 Floating rate junior subordinated deferrable interest debentures 223 168 Advances from the FHLB and other borrowings 1,073 900 --------------------- --------------------- Total Interest Expense 3,685 2,773 --------------------- --------------------- Net Interest Income 2,734 2,654 Provision for loan losses 160 175 --------------------- --------------------- Net Interest Income After Provision for Loan Losses 2,574 2,479 --------------------- --------------------- Non-Interest Income: Fees for financial services 701 632 Other fees, net 22 41 Net gain on sale of investments -- 13 --------------------- --------------------- Total Non-Interest Income 723 686 --------------------- --------------------- Non-Interest Expense: Compensation and employee benefits 1,182 1,087 Occupancy and equipment 583 486 Deposit insurance premiums 7 8 Professional services 111 117 Advertising/public relations 69 36 Loan operations 40 14 Intangible amortization 159 159 Items processing 56 51 Telephone 45 39 Other 187 189 --------------------- --------------------- Total Non-Interest Expense 2,439 2,186 --------------------- --------------------- Income Before Income Taxes 858 979 Income tax expense 209 280 --------------------- --------------------- Net Income $ 649 $ 699 ===================== ===================== Basic Net Income Per Common Share $ 0.36 $ 0.37 ===================== ===================== Diluted Net Income Per Common Share $ 0.35 $ 0.36 ===================== ===================== Dividend Per Common Share $ 0.11 $ 0.10 ===================== ===================== Weighted Average Number of Common Shares Outstanding Basic 1,827,373 1,896,210 Diluted 1,862,194 1,917,866 See notes to consolidated financial statements.
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PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2007 and 2006 (unaudited) Three Months Ended March 31, March 31, 2007 2006 --------------------- --------------------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income $649 $699 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 160 175 Amortization of intangibles 159 159 Depreciation expense 139 148 Recognition of deferred income, net of costs -118 -124 Deferral of fee income, net of costs 197 122 Gain on investment transactions -- -13 Changes in operating assets and liabilities: Decrease in accrued interest receivable 169 192 Increase in cash surrender value of life insurance -3,267 -- Decrease in other assets 175 87 Increase (decrease) in other liabilities 84 -349 Increase (decrease) in accrued interest payable -99 83 --------------------- --------------------- Net cash (used) provided by operating activities -1,752 1,179 --------------------- --------------------- INVESTING ACTIVITIES: Purchase of investment and mortgage-backed securities: Available for sale -21,800 -1,656 Proceeds from sale of investment and mortgage- backed securities available for sale -- 7,437 Proceeds from maturity of investment and mortgage- backed securities: Available for sale 22,109 2,026 Held to maturity 6 6 Principal repayments on mortgage-backed securities: Available for sale 848 1,903 Net increase in loans -5,279 -9,374 Redemption of FHLB stock 517 1,028 Purchase of office properties and equipment -- -455 --------------------- --------------------- Net cash (used) provided by investing activities -3,599 915 --------------------- --------------------- FINANCING ACTIVITIES: Proceeds from the dividend reinvestment plan 28 27 Dividends paid in cash -200 -190 Proceeds from the exercise of stock options 11 15 Share repurchase program -99 -222 Repayment of term borrowings -8,500 -26,715 Increase in other borrowings 1,163 10,000 Increase in deposit accounts 15,977 14,615 --------------------- --------------------- Net cash (used) provided by financing activities 8,380 -2,470 --------------------- --------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,029 -376 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,124 8,380 --------------------- --------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,153 $8,004 ===================== ===================== SUPPLEMENTAL DISCLOSURES: Cash paid for: Income taxes $9 $38 Interest 3,601 2,690 Non-cash transactions: Loans foreclosed -- $73 See notes to consolidated financial statements.
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PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Three Months Ended March 31, 2007 and 2006 (unaudited) Retained Accumulated Additional Earnings, Other Treasury Total Common Stock Paid-in Substantially Comprehensive Stock Shareholders' Shares Amount Capital Restricted Income (loss) at Cost Equity ---------- ------ ---------- ------------- ------------- -------- ------------- (Dollars in Thousands, Except Share Data) BALANCE AT DECEMBER 31, 2005 1,905,897 $20 $12,346 $16,916 -$612 -$3,337 $25,333 Net income 699 699 Other comprehensive income, net of tax on unrealized holding losses on securities available for sale arising during period -839 -839 Less reclassification adjustment for 9 9 gains included in net income ------------- ------------- Comprehensive loss -131 Stock option activity, net 2,086 15 15 Dividend reinvestment plan contributions 1,628 27 27 Share repurchase program -12,352 -222 -222 Cash dividend ($.10 per share) -190 -190 ---------- ------ ---------- ------------- ------------- -------- ------------- BALANCE AT MARCH 31, 2006 1,897,259 $20 $12,388 $17,425 -$1,442 -$3,559 $24,832 ========== ====== ========== ============= ============= ======== ============= BALANCE AT DECEMBER 31, 2006 1,830,528 $20 $12,506 $18,912 -$610 -$4,861 $25,967 Net income 649 649 Other comprehensive income, net of tax on unrealized holding gains on securities available for sale arising during period 187 187 Less reclassification adjustment for -- -- gains included in net income ------------- ------------- Comprehensive income 836 Stock option activity, net -- 11 11 Dividend reinvestment plan contributions 1,377 28 28 Share repurchase program -5,061 -99 -99 Cash dividend ($.11 per share) -200 -200 ---------- ------ ---------- ------------- ------------- -------- ------------- BALANCE AT MARCH 31, 2007 1,826,844 $20 $12,545 $19,361 -$423 -$4,960 $26,543 ========== ====== ========== ============= ============= ======== =============
6 PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Presentation of Consolidated Financial Statements ------------------------------------------------- The accompanying unaudited consolidated financial statements of Provident Community Bancshares, Inc. (the "Corporation" or "Provident") were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments which are, in the opinion of management, necessary for the fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results which may be expected for the entire calendar year. Certain amounts in the prior year's financial statements have been reclassified to conform with current year classifications. Recently Issued Accounting Standards The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Corporation: In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140." This Statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations and cash flows. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140." This Statement amends 7 FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not believe the adoption of SFAS No. 156 will have a material impact on its financial position, results of operations and cash flows. In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises' financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption did not have a material impact on the reported results of operations or financial conditions of the Company. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date--the date at which the benefit obligation and plan assets are measured--is required to be the company's fiscal year end. SFAS 158 is effective for 8 publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company does not have a defined benefit pension plan. Therefore, SFAS 158 will not impact the Company's financial conditions or results of operations. In September, 2006, The FASB ratified the consensuses reached by the FASB's Emerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", or Accounting Principles Board ("APB") Opinion No. 12, "Omnibus Opinion--1967". EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company does not believe the adoption of EITF 06-4 will have a material impact on its financial position, results of operations and cash flows. In September 2006, the FASB ratified the consensus reached related to EITF 06-5, "Accounting for Purchases of Life Insurance--Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance." EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of EITF 06-5 will have a material impact on its financial position, results of operations and cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the 9 cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 is effective for the Corporation on January 1, 2008. Earlier adoption is permitted in 2007 if the Corporation also elects to apply the provisions of SFAS 157, "Fair Value Measurement." The Corporation is currently analyzing the fair value option provided under SFAS 159. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. 2. Income Per Share ---------------- Basic income per share amounts for the three months ended March 31, 2007 and 2006 were computed based on the weighted average number of common shares outstanding during the period. Diluted income per share adjusts for the dilutive effect of outstanding common stock options during the periods utilizing the treasury stock method. Common stock equivalents included in the diluted earnings per share calculation for the three months ended March 31, 2007 and 2006 were 34,821 and 21,656, respectively. 3. Assets Pledged -------------- Approximately $72,635,000 and $74,387,000 of debt securities at March 31, 2007 and December 31, 2006, respectively, were pledged by Provident Community Bank, N.A. (the "Bank") as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements. The Bank pledges as collateral for Federal Home Loan Bank advances the Bank's Federal Home Loan Bank stock and has entered into a blanket collateral agreement with the Federal Home Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying mortgages (as defined) with unpaid principal balances equal to, when discounted at 75% of the unpaid principal balances, 100% of total advances. As part of the total assets pledged, the Bank will also pledge securities to cover additional advances from the Federal Home Loan Bank that exceed the qualifying mortgages balance along with security repurchase lines with various brokerage houses. 4. Contingencies and Loan Commitments ---------------------------------- In the ordinary course of business, the Bank enters into financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These instruments expose the Bank to credit risk in excess of the amount recognized on the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at March 31, 2007 related to these items is summarized below: 10 Loan Commitments: Contract Amount ---------------- --------------- Approved loan commitments $ 2,136,000 Unadvanced portions of loans and credit lines 55,282,000 ---------- Total loan commitments $ 57,418,000 ========== Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counter party. Collateral held is primarily residential and commercial property. Commitments outstanding at March 31, 2007 consisted of fixed and adjustable rate loans at rates ranging from 6.5% to 8.5%. Commitments to originate loans generally expire within 30 to 60 days. Commitments to fund loans, including credit lines (principally variable rate, consumer lines secured by real estate and overdraft protection) totaled approximately $136,233,000 at March 31, 2007. Of these lines, the outstanding loan balances totaled approximately $80,951,000. 5. Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures ---------------------------------------------------------------------- On July 18, 2006, the Corporation sponsored the creation of Provident Community Bancshares Capital Trust I ("Capital Trust I"). The Corporation is the owner of all of the common securities of Capital Trust I. On July 21, 2006, Capital Trust I issued $4,000,000 in the form of floating/fixed rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporation's $124,000 capital contribution for Capital Trust I's common securities, were used to acquire $4,124,000 aggregate principal amount of the Corporation's floating rate junior subordinated deferrable interest debentures due October 1, 2036 (the "Debentures"), which constitute the sole asset of Capital Trust I. The interest rate on the Debentures and the capital securities will be equal to 7.393% for the first five years. Thereafter, the interest rate is variable and adjustable quarterly at 1.74% over the three-month LIBOR. The Corporation has, through the Trust Agreement establishing Capital Trust I, the Guarantee Agreement, the notes and the related Debenture, taken together, fully irrevocably and unconditionally guaranteed all of the Capital Trust I obligations under the capital securities. The stated maturity of the Debentures is October 1, 2036. In addition, the Debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after October 1, 2011. The Debentures are also subject to redemption prior to October 1, 2011 at up to 103.7% of par after the occurrence of certain events that would either have a negative tax effect on Capital Trust I or the Corporation or would result in Capital Trust I being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, Capital Trust I will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities. The Corporation has the right, at one or more times, to defer interest payments on 11 the Debentures for up to twenty consecutive quarterly periods. All deferrals will end on an interest payment date and will not extend beyond October 1, 2036, the stated maturity date of the Debentures. If the Corporation defers interest payments on the Debentures, Capital Trust I will also defer distributions on the capital securities. During any deferral period, each installment of interest that would otherwise have been due and payable will bear additional interest at the applicable distribution rate, compounded quarterly. On November 28, 2006, the Corporation sponsored the creation of Provident Community Bancshares Capital Trust ("Capital Trust II"). The Corporation is the owner of all of the common securities of the Trust. On December 15, 2006, the Trust issued $8,000,000 in the form of floating rate capital securities through a pooled trust preferred securities offering. The proceeds of Capital Trust II were utilized for the redemption of Union Financial Bancshares Statutory Trust (the "Trust") issued on December 18, 2001. The proceeds from this issuance, along with the Corporation's $247,000 capital contribution for the Trust's common securities, were used to acquire $8,247,000 aggregate principal amount of the Corporation's floating rate junior subordinated deferrable interest debentures due March 1, 2037 (the "Debentures"), which constitute the sole asset of the Trust. The interest rate on the Debentures and the capital securities is variable and adjustable quarterly at 1.74% over the three-month LIBOR, with an initial rate of 7.11%. The Corporation has, through the Trust agreement establishing the Trust, the Guarantee Agreement, the notes and the related Debenture, taken together, fully irrevocably and unconditionally guaranteed all of the Trust's obligations under the capital securities. The stated maturity of the Debentures is March 1, 2037. In addition, the Debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after March 1, 2012. The Debentures are also subject to redemption prior to March 1, 2012 at 103.5% of par after the occurrence of certain events that would either have a negative tax effect on the Trust or the Corporation or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities. The Corporation has the right, at one or more times, to defer interest payments on the Debentures for up to twenty consecutive quarterly periods. All deferrals will end on an interest payment date and will not extend beyond March 1, 2037, the stated maturity date of the Debentures. If the Corporation defers interest payments on the Debentures, the Trust will also defer distributions on the capital securities. During any deferral period, each installment of interest that would otherwise have been due and payable will bear additional interest at the applicable distribution rate, compounded quarterly. On November 14, 2001, the Corporation sponsored the creation of the Trust. The Corporation is the owner of all of the common securities of the Trust. On December 18, 2001, the Trust issued $8,000,000 in the form of floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporation's $248,000 capital contribution for the Trust's common securities, were used to acquire $8,247,000 aggregate principal amount of the Corporation's floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the "Debentures"), which constitute the sole asset of the Trust. The interest rate on the Debentures and the capital securities is variable and adjustable 12 quarterly at 3.60% over the three-month LIBOR, with an initial rate of 5.60%. The Debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after December 18, 2006. On December 18, 2006, the Trust was redeemed with the proceeds from Capital Trust II. A summary of the Subordinated Deferrable Interest Debentures issued and outstanding follows:
Amount Outstanding at March 31, ------------------------ Distribution Prepayment Payment Name 2007 2006 Rate Option Date Maturity Frequency - -------------------------------- ---------- ------------- ------ ----------------- ------------------- -------------- Union Financial Statutory Trust I $-- $8,000,000 8.53% December 18, 2006 December 18, 2031 Quarterly - -------------------------------- ---------- ------------- ------ ----------------- ------------------- -------------- Provident Community Bancshares Capital Trust I 4,000,000 B 7.39% October 1, 2011 October 1, 2036 Quarterly - -------------------------------- ---------- ------------- ------ ----------------- ------------------- -------------- Provident Community Bancshares Capital Trust II 8,000,000 B 7.10% March 1, 2012 March 1, 2037 Quarterly - -------------------------------- ---------- ------------- ------ ----------------- ------------------- -------------- Total $12,000,000 ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies - ---------------------------- The Corporation has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of financial statements. Certain accounting policies involve significant judgments and assumptions by management which, if incorrect, could have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Corporation. The Corporation believes the allowance for loan losses is a critical accounting policy that requires significant judgments and estimates used in the preparation of consolidated financial statements. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the composition and volume of the loan portfolio, overall portfolio quality, 13 delinquency levels, a review of specific problem loans, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. A portion of the allowance is established by segregating the loans by residential mortgage, commercial and consumer loans and assigning allocation percentages based on historical loss experience and delinquency trends. The applied allocation percentages are reevaluated at least annually to ensure their relevance in the current economic environment. Accordingly, increases in the size of the loan portfolio and the increased emphasis on commercial real estate and commercial business loans, which carry a higher degree of risk of default and, thus, a higher allocation percentage, increases the allowance. Additionally, a portion of the allowance is established based on the level of classified assets. Although the Corporation believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review the Corporation's allowance for loan losses. Such agency may require the Corporation to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. Forward Looking Statements - -------------------------- Management's discussion and analysis of financial condition and results of operations and other portions of this Form 10-Q may contain certain "forward-looking statements" concerning the future operations of the Corporation and the Bank. These forward-looking statements are generally identified by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Management intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Corporation of the protections of such safe harbor with respect to all forward-looking statements contained in this report to describe future plans and strategies. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could effect actual results include interest rate trends, the general economic climate in the Corporation's and the Bank's market area and the country as a whole, the ability of the Corporation and the Bank to control costs and expenses, competitive products and pricing, loan delinquency rates, the quality and composition of the loan and investment portfolios, changes in accounting principles and guidelines and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Corporation does not undertake, and specifically disclaims any obligation, to release publicly the 14 result of any revisions that may be made to any forward looking statements to reflect events or circumstances after the date of these statements or to reflect the occurrence of anticipated or unanticipated events. 15 Financial Condition - ------------------- Assets - ------ Total assets of the Corporation increased $9,201,000, or 2.37%, to $396,831,000 at March 31, 2007 from $387,630,000 at December 31, 2006. Investments and mortgage-backed securities decreased approximately $976,000, or 0.80%, from December 31, 2006 to March 31, 2007, due to the maturity of government sponsored enterprise securities, offset by the purchase of Freddie Mac securities. Proceeds from the maturity of investment securities were utilized to fund growth in higher-yielding loans. Cash and due from banks increased $3,029,000, or 33.2%, to $12,153,000 at March 31, 2007 from $9,124,000 at December 31, 2006 due to an increase in fed funds sold as a result of deposit growth. Investment and Mortgage-backed Securities - ----------------------------------------- Held to Maturity-Securities classified as held to maturity consisted of the following (in thousands): March 31, 2007 December 31, 2006 --------------- ------------------ Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Municipal Securities $3,176 $3,239 $3,182 $3,239 ====== ====== ====== ====== 16 Available for Sale-Securities classified as available for sale consisted of the following (in thousands):
March 31, 2007 December 31, 2006 ------------------- ------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- -------- Investment Securities: U.S. Agency Obligations $ 511 $ 496 $ 515 $ 500 Government Sponsored Enterprises 66,907 66,270 73,511 72,638 Municipal Securities 10,291 10,660 10,594 10,970 Other 14,310 14,424 14,533 14,644 --------- --------- ---------- --------- Total Investment Securities 92,019 91,850 99,153 98,752 --------- --------- ---------- --------- Mortgage-backed Securities: Fannie Mae 12,717 12,319 13,243 12,813 Ginnie Mae 1,207 1,214 55 57 Freddie Mac 8,569 8,564 3,111 3,109 Collateralized Mortgage Obligations 4,171 4,086 4,380 4,272 --------- --------- ---------- --------- Total Mortgage-backed Securities 26,664 26,183 20,789 20,251 --------- --------- ---------- --------- Total Available for Sale $ 118,683 $118,033 $ 119,942 $119,003 ========== ========= ========== =========
Loans Loans increased $5,040,000, or 2.17%, to $236,926,000 at March 31, 2007. The Corporation continues to focus on consumer and commercial lending with specialized loan officers and products. 17 Loans receivable consisted of the following (in thousands):
March 31, December 31, -------------- -------------- 2007 2006 -------------- -------------- Mortgage loans: Fixed rate residential $ 17,673 $ 19,187 Adjustable-rate residential 9,581 10,295 Commercial real estate 67,103 62,450 Construction 4,819 5,787 Total mortgage loans 99,176 97,719 Commercial loans: Commercial non-real estate 30,895 42,093 Commercial lines of credit 65,217 51,469 Total commercial loans 96,112 93,562 Consumer loans: Home equity 15,394 15,936 Consumer and installment 31,611 29,827 Consumer lines of credit 340 373 Total consumer loans 47,345 46,136 Total loans 242,633 237,417 Less: Undisbursed portion of interim construction loans (2,238) (2,238) Unamortized loan discount (546) (607) Allowance for loan losses (2,906) (2,754) Net deferred loan origination costs (17) 68 Total, net $ 236,926 $ 231,886 -------------- -------------- Weighted-average interest rate of loans 8.23% 8.14%
Cash surrender value of life insurance increased $3,267,000, or 58.2%, to $8,880,000 at March 31, 2007 from $5,613,000 at December 31, 2006 due to the purchase of additional bank-owned life insurance that will be utilized to offset the rapidly rising costs of providing our employee benefits. Liabilities - ----------- Total liabilities increased $8,625,000, or 2.38%, to $370,288,000 at March 31, 2007 from $361,663,000 at December 31, 2006. Deposits increased $15,977,000, or 6.43%, to $264,417,000 at March 31, 2007 from $248,440,000 at December 31, 2006. The increase was due primarily to growth in accounts generated from the new banking center openings. The Corporation continues to target lower cost demand deposit accounts through media advertising. 18 Deposit accounts were as follows (in thousands):
March 31, 2007 December 31, 2006 ----------------------- ----------------------- Rate Balance % Rate Balance % ----- --------- ------- ----- --------- ------- Account Type NOW accounts: Commercial non-interest-bearing -- $ 18,036 6.82% -- $ 16,718 6.73% Non-commercial 2.75% 56,886 21.51% 2.82% 52,512 21.14% Money market checking accounts 4.67% 22,087 8.35% 4.22% 14,178 5.71% Regular savings 0.75% 15,666 5.93% 0.76% 14,930 6.00% Total demand and savings deposits 2.42% 112,675 42.61% 2.20% 98,338 39.58% Savings certificates: Up to 3.00% 10,142 3.84% 15,557 6.26% 3.01 %- 4.00% 26,707 10.10% 23,491 9.46% 4.01 %- 5.00% 19,961 7.55% 31,086 12.51% 5.01 %- 6.00% 94,907 35.89% 79,943 32.18% 6.01 %- 7.00% 25 0.01% 25 0.01% -------- ------- -------- ------- Total savings certificates 4.62% 151,742 57.39% 4.47% 150,102 60.42% -------- ------- -------- ------- Total deposit accounts 3.68% $264,417 100.00% 3.56% $248,440 100.00% --------- ------- --------- -------
At March 31, 2007 and December 31, 2006, the Bank had $61,500,000 and $70,000,000, respectively, of advances outstanding from the FHLB. The maturity of the advances from the FHLB is as follows (in thousands):
March 31, 2007 December 31, 2006 --------------------- ---------------------- Wtd Avg Rate Wtd Avg Rate --------------------- ---------------------- Contractual Maturity: Within one year - fixed rate $ 8,000 4.77% $ 21,500 5.18% Within one year - adjustable rate 10,000 5.33% 15,000 5.36% After one but within three years - fixed rate 5,000 4.93% B B% After one but within three years - adjustable rate 7,500 5.30% 12,500 5.33% After three but within five years - adjustable rate 5,000 4.92% B B% Greater than five years - adjustable rate 26,000 4.16% 21,000 4.33% --------- ----------- Total advances $ 61,500 4.69% $ 70,000 5.00% ========== ============
19 The Bank pledges as collateral for the advances its investment securities and has entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying loans (as defined) with unpaid principal balances equal to, when discounted at 50% to 75% of the unpaid principal balances, 100% of total advances. Borrowings from the Federal Home Loan Bank (the "FHLB") decreased $8,500,000, or 12.14%, to $61,500,000 at March 31, 2007 from $70,000,000 at December 31, 2006. Securities sold under agreement to repurchase increased $1,163,000 to $29,696,000 at March 31, 2007 from $28,533,000 at December 31, 2006. During this period, securities sold under agreement to repurchase provided a lower cost funding alternative to Federal Home Loan Bank advances. The reduction in borrowings was funded with the excess deposit growth. Shareholders' Equity - -------------------- Shareholders' equity increased $576,000, or 2.22%, to $26,543,000 at March 31, 2007 from $25,967,000 at December 31, 2006 due primarily to net income of $649,000 and a $187,000 decrease in unrealized losses on securities available for sale, offset by the repurchase of 5,061 shares at a cost of $99,000 and dividend payments of $0.11 per share at a cost of $200,000. Liquidity - --------- Liquidity is the ability to meet demand for loan disbursements, deposit withdrawals, repayment of debt, payment of interest on deposits and other operating expenses. The primary sources of liquidity are deposits, loan repayments, borrowings, maturity and sale of securities and interest payments. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The primary investing activities of the Corporation are the origination of commercial and consumer loans, and the purchase of investment and mortgage-backed securities. These activities are funded primarily by principal and interest payments on loans and investment securities, deposit growth, securities sold under agreements to repurchase and the utilization of FHLB advances. At March 31, 2007, the Corporation's investment in marketable securities totaled $121,209,000, nearly all of which is available for sale. Approximately $72,635,000 and $74,387,000 of debt securities at March 31, 2007 and December 31, 2006, respectively, were pledged by the Bank as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements. Outstanding loan commitments (including commitments to fund credit lines) totaled $136,233,000 at March 31, 2007. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. The Corporation closely monitors its liquidity position on a daily basis. Certificates of deposit, which are scheduled to mature in one year or less from March 31, 2007, totaled $109,953,000. The Corporation relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Corporation will also offer special products to its customers to increase retention and to attract new deposits. Based upon the Corporation's experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances, securities sold under agreements to repurchase and lines of credit. At March 31, 2007, the Corporation had outstanding $61,500,000 of FHLB borrowings and $29,696,000 of securities sold under agreements to repurchase. At March 31, 2007, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $20,000,000 and the ability to borrow an additional $19,000,000 from FHLB and secured borrowing lines. Lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have reserved the right to withdraw these lines at their option. 20 Capital Management - ------------------ The Bank and the Corporation are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weights and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of March 31, 2007, that the Bank and the Corporation meet the capital adequacy requirements to which they are subject. As of March 31, 2007, the Bank was "well capitalized" under the regulatory framework for prompt corrective action based on its capital ratio calculations. In order to be "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. Under present regulations of the Office of the Comptroller of the Currency, the Bank must have core capital (leverage requirement) equal to 4.0% of assets, of which 1.5% must be tangible capital, excluding intangible assets. The Bank must also maintain risk-based regulatory capital as a percent of risk weighted assets at least equal to 8.0%. In measuring compliance with capital standards, certain adjustments must be made to capital and total assets. 21 The following tables present the total risk-based, Tier 1 risk-based and Tier 1 leverage requirements for the Corporation and the Bank (dollars in thousands).
March 31, 2007 ------------------------------------------------------------------- Actual Regulatory Minimum Well Capitalized -------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ----------- -------- ---------- ----------- ------------ --------- $ % $ % $ % Leverage ratio Corporation 32,447 8.34% 15,557 4.00% n/a n/a Bank 35,199 9.06% 15,544 4.00% 19,430 5.00% Tier 1 capital ratio Corporation 32,447 11.67% 11,115 4.00% n/a n/a Bank 35,199 12.68% 11,106 4.00% 16,658 6.00% Total risk-based capital ratio Corporation 38,289 13.77% 22,231 8.00% n/a n/a Bank 38,105 13.72% 22,211 8.00% 27,764 10.00%
During fiscal 2003, the Corporation implemented a share repurchase program under which the Board of Directors of the Corporation authorized the repurchase of up to 5% of the outstanding shares or 98,000 shares. The program was expanded by an additional 5%, or 98,000 shares, in fiscal 2004, by an additional 5%, or 95,000 shares in fiscal 2005 and by an additional 5%, or 92,000 shares in fiscal 2006. The shares are to be repurchased either through open market purchases or privately negotiated transactions, depending on market conditions and other factors. Repurchased shares will be held in treasury and will be available for the Corporation's benefit plans. During the three months ended March 31, 2007, the Corporation repurchased 5,061 shares. As of March 31, 2007, the Corporation had repurchased a total of 281,202 shares under these authorizations and had 101,798 shares available for repurchase under these authorizations. Off-Balance Sheet Risk - ---------------------- In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customer's requests for funding and take the form of legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. Outstanding loan commitments (including commitments to fund credit lines) totaled $136,233,000 at March 31, 2007. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on the credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The credit risk on these commitments is managed by subjecting each customer to normal underwriting and risk management processes. 22 For the period ended March 31, 2007, the Corporation did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operation and cash flows. Results of operations for the three months ended March 31, 2007 and 2006 - ------------------------------------------------------------------------ General - ------- Net income decreased $50,000, or 7.15%, to $649,000 for the three months ended March 31, 2007 as compared to $699,000 for the same period in 2006 as an increase in net interest income and non-interest income along with a reduction in the provision for loan losses were more than offset by an increase in non-interest expense. The increase in non-interest expense from the prior year quarter reflects the additional expenses associated with opening three banking centers in the previous twelve months. 23 Average Yields and Rates - ------------------------ (dollars in thousands)
Three Months Ended March 31, 2007 2006 ----------------------------------- -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------------ -------- ------------- --------- -------- ------------- Interest-earning assets: Loans (1) $ 235,666 $ 4,776 8.11% $197,481 $ 3,789 7.67% Mortgage-backed securities 24,636 290 4.70% 26,810 282 4.21% Investment securities 100,541 1,326 5.28% 118,276 1,340 4.53% Other interest-earning assets 2,240 27 4.78% 1,500 16 4.26% ----------- ------- ------------- -------- ------- ------------- Total interest-earning assets 363,083 6,419 7.07% 344,067 5,427 6.31% ------- ============= ------- ============= Non-interest-earning assets 29,421 26,832 Total assets $ 392,504 $370,899 ============ ========= Interest-bearing liabilities: Deposits 261,388 2,389 3.66% 244,745 1,705 2.79% Floating rate junior subordinated deferrable interest debentures 12,372 223 7.20% 8,247 168 8.17% FHLB advances and other borrowings 89,654 1,073 4.79% 91,291 900 3.95% ----------- ------- ------------- -------- ------- ------------- Total interest-bearing liabilities 363,414 3,685 4.06% 344,283 2,773 3.22% ------- ============= ------- ============= Non-interest-bearing liabilities 2,696 1,533 ----------- -------- Total liabilities 366,110 345,816 Shareholders = equity 26,394 25,083 Total liabilities and shareholders= equity $ 392,504 $370,899 ============ ========= Net interest income/spread $ 2,734 3.02% $ 2,654 3.09% ======== ======== Net yield on earning assets 3.01% 3.09% (1) Average balances of loans include non-accrual loans.
Interest Income - --------------- Interest income increased $992,000, or 18.28%, to $6,419,000 for the three months ended March 31, 2007 as compared to the same period in 2006. Interest income on loans increased by 26.05%, or $987,000, to $4,776,000 for the three months ended March 31, 2007 from $3,789,000 for the three months ended March 31, 2006, due primarily to a higher average balance of loans and higher average rates due to increasing market interest rates along with our increased emphasis on commercial and consumer loan originations. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities increased $5,000 for the three months ended March 31, 2007 to $1,643,000 from $1,638,000 during the same period in 2006 due to higher yields from higher market interest rates offset by lower average balances. 24 Interest Expense - ---------------- Interest expense increased $912,000, or 32.89%, to $3,685,000 for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006. Interest expense on deposit accounts increased $684,000, or 40.12%, to $2,389,000 for the three months ended March 31, 2007 from $1,705,000 during the same period in 2006 due to higher average balances and cost of deposits as a result of higher market rates. The Corporation continues to target lower cost demand deposit accounts versus traditional higher cost certificates of deposits in order to reduce overall funding costs. Interest expense on borrowings increased $173,000, or 19.22%, for the three months ended March 31, 2007 as compared to the same period in the previous year due to higher market interest rates. Interest expense on floating rate junior subordinated deferrable interest debentures increased $55,000, or 32.74%, to $223,000 for the three months ended March 31, 2007 from $168,000 during the same period in 2006 due to higher average balances, offset by lower rates due to the repayment of older trust preferred with the proceeds of newer trust preferred with lower rates. In addition, on July 21, 2006, the Corporation completed a private placement of $4 million in trust preferred securities thereby increasing outstanding balances to $12 million at March 31, 2007 compared to $8 million at March 31, 2006. Provision for Loan Losses - ------------------------- During the three months ended March 31, 2007, the provision for loan losses was $160,000 as compared to $175,000 for the same period in the previous year due to a decrease in nonperforming loans and loans charged-off that was partially offset by loan growth. The provision also reflects the Corporation's continued movement from longer-term, fixed-rate residential mortgage loans to shorter-term, floating-rate consumer and commercial loans. Consumer and commercial loans carry higher risk weighted rates in the reserve calculation as compared to residential mortgage loans. Nonperforming loans decreased $206,000 from $1,295,000 at December 31, 2006 to $1,089,000 at March 31, 2007. During the three months ended March 31, 2007, bad debt charge-offs, net of recoveries, was $8,000 as compared to $28,000 for the same period in the previous year. The Corporation's loan loss allowance at March 31, 2007 was approximately 1.21% of the Corporation's outstanding loan portfolio and 266.85% of non-performing loans compared to 1.17% of the Corporation's outstanding loan portfolio and 212.66% of non-performing loans at December 31, 2006. The changes in the allowance for loan losses consisted of the following (in thousands): Balance at beginning of period $ 2,754 Provision for loan losses 160 Charge-offs, net (8) --------- Balance at end of period $ 2,906 ========= 25 The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated (dollars in thousands):
March 31, 2007 December 31, 2006 ----------------- ----------------- Non-accruing loans which are contractually past due 90 days or more: Real estate $ 68 $ 459 Commercial 826 631 Consumer 195 205 ----------------- ----------------- Total $ 1,089 $ 1,295 ================= ================= Percentage of loans receivable 0.44% 0.56% ================= ================= Percentage of allowance for loan losses to total loans outstanding 1.21% 1.17% ================= ================= Allowance for loan losses $ 2,906 $ 2,754 ================= ================= Real estate acquired through foreclosure and repossessed assets $ 148 $ 148 ================= =================
Non-performing loans for the three months ended March 31, 2007 decreased $206,000 from December 31, 2006 due primarily to a reduction in residential real estate loans. The allowance for loan loss calculation includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is rated for all loans including performing groups. The weight assigned to each performing group is developed from previous loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition to loan loss experience, management's evaluation of the loan portfolio includes the market value of the underlying collateral, growth and composition of the loan portfolio, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically and the allowance for loan loss calculation will adjust accordingly. Non-Interest Income - ------------------- Total non-interest income increased $37,000, or 5.39%, to $723,000 for the three months ended March 31, 2007 from $686,000 for the same period in the previous year. Fees from financial services increased $69,000, or 10.92%, to $701,000 for the three months ended March 31, 2007 from $632,000 for the same period in the previous year. The change was from an increase in service charges due to an increase in the number of transaction accounts. 26 Non-Interest Expense - -------------------- For the three months ended March 31, 2007, total non-interest expense increased $253,000, or 11.57%, to $2,439,000 from $2,186,000 for the same period in 2006. The increase was due primarily to higher operating costs associated with banking centers opened in Simpsonville, South Carolina and two in Rock Hill, South Carolina during the previous twelve months. Compensation and employee benefits increased $95,000, or 8.74%, to $1,182,000 for the three months ended March 31, 2007 from $1,087,000 for the same period in 2006 due primarily to higher compensation and benefits costs for normal merit salary increases and additional staff due to the new banking center openings. Occupancy and equipment expense increased $97,000, or 19.96%, to $583,000 for the three months ended March 31, 2007 from $486,000 for the same period in 2006, due primarily to higher lease expense from the new locations. Advertising/public relations expense increased $33,000, or 91.67%, to $69,000 for the three months ended March 31, 2007 from $36,000 for the same period in 2006 due primarily to product and promotion expenses for the new banking center locations and product promotion expenses for business checking accounts. Loan operations expense increased $26,000, or 185.71%, to $40,000 for the three months ended March 31, 2007 from $14,000 for the same period in 2006, due to higher costs associated with loan foreclosures. Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- The Corporation is committed to following a program of asset and liability management in an effort to manage the fluctuations in earnings caused by movements in interest rates. A significant portion of the Corporation's income results from the spread between the yield realized on its interest-earning assets and the rate of interest paid on its deposits and other borrowings. Differences in the timing and volume of repricing assets versus the timing and volume of repricing liabilities expose the Corporation to interest rate risk. Management's policies are directed at minimizing the impact on earnings of movements in interest rates. The Corporation's Asset/Liability Committee makes pricing and marketing decisions on deposit and loan products in conjunction with managing the Corporation's interest rate risk. In addition, the Asset/Liability Committee reviews the Corporation's securities portfolio, FHLB advances and other borrowings as well as the Corporation's asset and liability policies. The primary objective of Asset/Liability management at the Corporation is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles in order to maintain adequate liquidity. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive costing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive costing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and interest-bearing liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of interest-earning assets and interest-bearing liabilities over the entire life of these instruments. 27 The Corporation has established policies and monitors results to control interest rate sensitivity. Although the Corporation utilizes measures such as static gap, which is simply the measurement of the difference between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period, just as important a process is the evaluation of how particular assets and liabilities are impacted by changes in interest rates or selected indices as they reprice. Asset/liability modeling techniques are utilized by the Corporation to assess varying interest rate and balance sheet mix assumptions. Net Interest Income Simulation Analysis. The Corporation analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest sensitive." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Corporations goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations utilizing interest rate shocks are completed quarterly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The interest rate shocks are compared to board approved policy limits and are reviewed by the Asset/Liability Committee on a quarterly basis. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management's current assessment of the risk that pricing margins will change adversely over time due to competition or other factors. Simulation analysis is only an estimate of the Corporation's interest rate risk exposure at a particular point in time. The Corporation continually reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities. The table below sets forth an approximation of the Corporation's exposure as a percentage of estimated net interest income for the next twelve month period using interest income simulation. The simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. 28 The following table reflects changes in estimated net interest income from rate shocks of (+) or (-) 100 and 200 basis points in a rising and falling interest rate environment for the Corporation. March 31, December 31, Change in Rates (Basis Points) 2007 2006 - ---------------------------------------- ----------- --------------- +200 +1.68% +3.76% +100 +1.05% +2.06% - -100 -0.91% -2.42% - -200 -8.68% -5.91% The Corporation decreased slightly in rising interest rate environments for the period ending March 31, 2007 as compared to the period ending December 31, 2006 due primarily to significant growth in prime-based loan products that was offset by an increase in short-term borrowings. The 200 and 100 basis point change in rates in the above table is assumed to occur evenly over the following twelve months. Based on the scenario above, net interest income would be positively affected in the twelve-month periods if rates rose by 100 and 200 basis points, but would be adversely affected if rates declined by 100 and 200 basis points. Item 4. Controls and Procedures ----------------------- The Corporation's management, including the Corporation's principal executive officer and principal financial officer, have evaluated the effectiveness of the Corporation's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Corporation's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Corporation's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Corporation's internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Corporation's last fiscal quarter that has materially affected or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Corporation is not involved in any legal proceedings. The Bank is involved in various claims and legal actions arising in the normal course of business. Management believes that these proceedings are immaterial to the Corporation's financial condition and results of operations. Item 1A. Risk Factors ------------ In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- The following table provides certain information with regard to shares repurchased by the Corporation during the first quarter of 2007.
(c) (d) (a) Total Number of Maximum Number of Total Number (b) Shares Purchased Shares that may be of Shares Average Price Paid as part of Publicly purchased under Period Purchased per share Announced Programs Program - ------------------ ---------------- -------------------- -------------------- ------------------------- January 1, 2007 through January 31, 2007 2,700 $19.40 2,700 104,159 - ------------------ ---------------- -------------------- -------------------- ------------------------- February 1, 2007 through February 28, 2007 1,751 $20.16 1,751 102,408 - ------------------ ---------------- -------------------- -------------------- ------------------------- March 1, 2007 through March 31, 2007 610 $20.09 610 101,798 - ------------------ ---------------- -------------------- -------------------- ------------------------- Total 5,061 $19.75 5,061 N/A - ------------------ ---------------- -------------------- -------------------- -------------------------
In May 2005, the Corporation implemented a share repurchase program under which the Corporation may repurchase up to 5% of the outstanding shares or 98,000 30 shares. In August 2006, the program was expanded by an additional 5% or 92,000 shares. The repurchase program will continue until it is completed or terminated by the Board of Directors. Item 3. Defaults upon Senior Securities ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits -------- 10(a) Provident Community Bank, Supplemental Executive Retirement Plan with Dwight V. Neese 10(b) Provident Community Bank, Supplemental Executive Retirement Plan #2 with Dwight V. Neese 10(c) Provident Community Bank, National Association Supplemental Executive Retirement Plan with Richard H. Flake 10(d) Provident Community Bank, National Association Supplemental Executive Retirement Plan #2 with Richard H. Flake 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32(a) Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32(b) Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROVIDENT COMMUNITY BANCSHARES, INC. ------------------------------------ (Registrant) Date: May 14, 2007 By: /s/ Dwight V. Neese ------------------ ---------------------------------------- Dwight V. Neese, President and Chief Executive Officer Date: May 14, 2007 By: /s/ Richard H. Flake ------------------- --------------------------------------- Richard H. Flake, Executive Vice President and Chief Financial Officer 32 EX-10 2 a5401138-ex10a.txt EXHIBIT 10(A) Exhibit 10(a) PROVIDENT COMMUNITY BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THIS AGREEMENT is made effective as of October 1, 1997 by and between Provident Community Bank (the "Bank"), and Dwight V. Neese (the "Executive"). INTRODUCTION To encourage the Executive to remain an employee of the Bank, the Bank is willing to provide salary continuation benefits to the Executive. The Bank will pay such benefits from its general assets. The Executive and the Bank agree as follows: ARTICLE 1 Definitions 1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1.1 "Change in Control" shall mean an event deemed to occur if and when (a) an offeror other than the Company purchases shares of the common stock of the Company or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of the Company or the Bank representing 25% or more of the combined voting power of the Company's or the Bank's then outstanding securities, (c) the membership of the board of directors of the Company or the Bank changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Company or the Bank approve a merger, consolidation, sale or disposition of all or substantially all of the Company's or the Bank's assets, or a plan of partial or complete liquidation. 1.1.2 "Code" means the Internal Revenue Code of 1986, as amended. References to a Code section shall be deemed to be that section as it now exists and to any successor provision. 1.1.3 "Company" means Union Financial Bancshares, Inc., a Delaware corporation. 1.1.4 "Disability" means the Executive's inability to perform substantially all normal duties of the Executive's positions, as determined by the Bank's Board of Directors in its sole discretion. As a condition to any benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Board of Directors deems appropriate. 1.1.5 "Normal Retirement Date" means the date on which Executive attains age 65. 1.1.6 'Termination of Employment" means the Executive's ceasing to be employed by the Bank for any reason whatsoever, voluntary or involuntary, other than by reason of an approved leave of absence. 1.1.7 "Plan Year" means the twelve-month period ending December 31. Article 2 Lifetime Benefits 2.1 Normal Retirement Benefit. If the Executive terminates employment on or after the Normal Retirement Date for reasons other than death, the Bank shall pay to the Executive the benefit described in this Section 2.1. 2.1.1 Amount of Benefit. The benefit under this Section 2.1 is $6,341.67 per month. 2.1.2 Payment of Benefit. The Bank shall pay the benefit under Section 2.1.1 to the Executive on the first day of each month commencing with the month following his termination of employment and continuing for 239 additional months. 2.2 Early Retirement Benefit. If the Executive terminates employment before the Normal Retirement Date, and for reasons other than death or Disability, the Bank shall pay to the Executive the benefit described in Section 2.2. 2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the benefit determined under Schedule A, Column 2 based on the date of the Executive's termination of employment. 2.2.2 Payment of Benefits. The Bank shall pay the benefit under Section 2.1.1 to the Executive on the first date of each month commencing with the month following the Executive's Normal Retirement Date and continuing for 239 additional months. Notwithstanding anything herein to the contrary, the Executive may, prior to his termination of employment, elect to commence payment of the Early Retirement Benefit on the first day of the month following his termination of employment in the form of a reduced benefit determined under Schedule A, Column 1 and continuing for 239 additional months. 2.3 Disability Benefit. If the Executive terminates employment for Disability prior to the Normal Retirement Date, the Bank shall pay the Executive the benefit described in this Section 2.3. 2 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is the benefit determined under Schedule A, Column 1 based on the date of the Executive's termination of employment for Disability. 2.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executive's termination of employment for disability and continuing for 239 additional months. 2.4 Change of Control Benefit. Upon the occurrence of a Change of Control while the Executive is in the active service of the Bank, the Bank shall pay the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement. 2.4.1 Amount of Benefit. The benefit under this Section 2.4 is the Executive's Normal Retirement Benefit as provided in Section 2.1.1. 2.4.2 Payment of Benefit. The Bank (or any successor thereto) shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executive's Normal Retirement Date and continuing for 239 additional months. Article 3 Death Benefits 3.1 Death During Active Service. If the Executive dies while in the active service of the Bank, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 3.1 3.1.1 Amount of Benefits. The benefit under Section 3.1 is the lifetime benefits that would have been paid to the Executive under Section 2.1 calculated as if the date of the Executive's death were his Normal Retirement Date. 3.1.2 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary on the first day of each month following the Executive's death and continuing for 239 months. 3.2 Death During Benefit Period. If the Executive dies after benefit payments have commenced under this Agreement but before receiving all such payments, the Bank shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 3.3 Death After Early Retirement. If the Executive dies after terminating employment for Early Retirement under Section 2.2 but prior to commencement of benefits payments under this Agreement, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 3.3. 3 3.3.1 Amount of Benefit. The benefit under Section 3.3 is the lifetime benefits that would have been paid to the Executive under Section 2.2. 3.3.2 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary of the first day of each month commencing with the month following the Executive's death and continuing for 239 months. Article 4 Beneficiaries 4.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's surviving spouse, if any, and if none, to the Executive's surviving children and the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executive's estate. 4.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent or person or incapable person. The Bank may require proof of incompetency, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit. Article 5 General Limitations Notwithstanding any provisions of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement: 5.1 Excess Parachute Payment. To the extent that the benefits payable under this Agreement, taken together with any other payments of benefits to be provided to Executive upon a Change in Control, would be an excess parachute payments under Section 280G of the Code. 5.2 Termination of Cause. If the Bank terminates the Executive's employment for: 5.2.1 Gross negligence or gross neglect of duties; 4 5.2.2 Commission of a felony or of a gross misdemeanor involving moral turpitude; or 5.2.3 Fraud, disloyalty, dishonestly or willful violation of any law, regulation or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank. 5.3 Suicide, Misstatement. No benefits shall be payable if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Bank. Article 6 Claims and Review Procedures 6.1 Claims Procedure. The Bank shall notify the Executive's beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Bank determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement's claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed. If the Bank determines that there are special circumstances requiring additional time to make a decision, the Bank shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period. 6.2 Review Procedure. If the beneficiary is determined by the Bank not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within sixty (60) days after the receipt of the notice issued by the Bank. Said petition shall state the specific reasons which the beneficiary believe entitle him or her to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Bank of the petition, the Bank shall afford the beneficiary (and counsel, if any) an opportunity to present his or her positions to the Bank orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents. The Bank shall notify the beneficiary of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient , the decision may be deferred for up to another sixty-day period at the election of the Bank, but notice of this deferral shall be given to the beneficiary. 5 Article 7 Amendment and Termination The Bank may amend or terminate this Agreement at any time prior to the Executive's Termination of Employment by written notice to the Executive; provided, however, that any amendment or termination of this Agreement shall not affect the vested benefit of the Executive as of the date of such amendment or termination. Article 8 Miscellaneous 8.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees. The Bank, or the Company acting on behalf of the Bank, shall require any successor or assignee, whether director indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 8.2 No Guaranty of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 8.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 8.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 8.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of South Carolina, except to the extent preempted by the laws of the United States of America. 8.6 Unfunded Arrangement. The Executive and beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner or anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and beneficiary have no preferred or secured claim. 6 IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Bank have signed this Agreement on the 19 day of February, 1998. Attest: PROVIDENT COMMUNITY BANK /s/ Wanda J. Wells /s/ Carl L. Mason - --------------------------- ---------------------------------- Chairman of the Board Witness: /s/ Wanda J. Wells /s/ Dwight V. Neese - --------------------------- ---------------------------------- Dwight V. Neese 7 - -------------------------------------------------------------------------------- Salary Continuation Agreement Dwight V. Neese Schedule A - -------------------------------------------------------------------------------- Termination After Column 1 Column 2 Plan Year Ending Immediate Monthly Benefit Age 65 Monthly Benefit - -------------------------------------------------------------------------------- 9/30/98 $163.50 $634.17 - -------------------------------------------------------------------------------- 9/30/99 354.17 1,268.33 - -------------------------------------------------------------------------------- 9/30/00 575.33 1,902.50 - -------------------------------------------------------------------------------- 9/30/01 830.75 2,536.67 - -------------------------------------------------------------------------------- 9/30/02 1,124.60 3,170.83 - -------------------------------------------------------------------------------- 9/30/03 1,461.58 3,805.00 - -------------------------------------------------------------------------------- 9130104 1,846.67 4,439.17 - -------------------------------------------------------------------------------- 9/30/05 2,285.66 5,073.33 - -------------------------------------------------------------------------------- 9/30/06 2,784.75 5,707.50 - -------------------------------------------------------------------------------- 9/30/07 3,351.00 6,341.67 - -------------------------------------------------------------------------------- 9/30/08 3,629.17 6,341.67 - -------------------------------------------------------------------------------- 9/30/09 3,390.33 6,341.67 - -------------------------------------------------------------------------------- 9/30/10 4,256.58 6,341.67 - -------------------------------------------------------------------------------- 9/30/11 4,609.92 6,341.67 - -------------------------------------------------------------------------------- 9/30/12 4,992.50 6,341.67 - -------------------------------------------------------------------------------- 9/30/13 5,406.92 6,341.67 - -------------------------------------------------------------------------------- 9/30/14 5,855.67 6,341.67 - -------------------------------------------------------------------------------- 9/30/15 6,341.67 6,341.67 - -------------------------------------------------------------------------------- EX-10 3 a5401138-ex10b.txt EXHIBIT 10(B) Exhibit 10(b) PROVIDENT COMMUNITY BANK, NATIONAL ASSOCIATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN #2 THIS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN #2 (the "Agreement") is adopted this 1st day of January, 2007, by and between Provident Community Bank, National Association, a nationally-chartered commercial bank located in Union, South Carolina (the "Bank"), and Dwight V. Neese (the "Executive"). The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Bank. This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended from time to time. Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Accrual Balance" means the liability that should be accrued by the Bank, under Generally Accepted Accounting Principles ("GAAP"), for the Bank's obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 ("APB 12") as amended by Statement of Financial Accounting Standards Number 106 ("FAS 106") and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied. 1.2 "Beneficiary" means each designated person or entity, or the estate of the deceased Executive, entitled to any benefits upon the death of the Executive pursuant to Article 4. 1.3 "Beneficiary Designation Form" means the form established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan Administrator to designate one or more Beneficiaries. 1.4 "Board" means the Board of Directors of the Bank as from time to time constituted. 1.5 "Change in Control" means an event deemed to occur if and when (a) an offeror other than the Company purchases shares of the common stock of the Company or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of the Company or the Bank representing twenty five percent (25%) or more of the combined voting power of the Company's of the Bank's then outstanding securities, (c) the membership of the board of directors of the Company or the Bank changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four (24) month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Company or the Bank approve a merger, consolidation, sale or disposition of all or substantially all of the Company's or Bank's assets, or a plan of partial or complete liquidation. 1.6 "Code" means the Internal Revenue Code of 1986, as amended, and all regulations and guidance thereunder, including such regulations and guidance as may be promulgated after the Effective Date of this Agreement. 1.7 "Company" means Union Financial Bancshares, Inc., a Delaware corporation. 1.8 "Disability" means the Executive suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or Social Security Administration's determination upon the request of the Bank. 1.9 "Discount Rate" means the rate used by the Plan Administrator for determining the Accrual Balance. The initial Discount Rate is six percent (6%). However, the Plan Administrator, in its discretion, may adjust the Discount Rate to maintain the rate within reasonable standards according to GAAP and/or applicable bank regulatory guidance. 1.10 "Early Retirement" means Separation from Service before Normal Retirement Age except when such Separation from Service occurs: (i) following a Change in Control; or (ii) due to death, Disability or Termination for Cause. 1.11 "Effective Date" means January 1, 2007. 1.12 "Normal Retirement Age" means the Executive attaining age sixty-five (65). 1.13 "Normal Retirement Date" means the later of Normal Retirement Age or Separation from Service. 1.14 "Plan Administrator" means the Board or such committee or person as the Board shall appoint. 1.15 "Plan Year" means each twelve (12) month period commencing on October 1 and ending on September 30 of each year. The initial Plan Year shall commence on the Effective Date of this Agreement and end on the following September 30. 1.16 "Separation from Service" means the termination of the Executive's employment with the Bank for reasons other than death. Whether a Separation from Service takes place is determined based on the facts and circumstances surrounding the termination of the Executive's employment and whether the Bank and the Executive intended for the Executive to provide significant services for the Bank following such termination. A termination of employment will not be considered a Separation from Service if: (a) the Executive continues to provide services as an employee of the Bank at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or (b) the Executive continues to provide services to the Bank in a capacity other than as an employee of the Bank at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period). 1.17 "Specified Employee" a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Bank if any stock of the Bank is publicly traded on an established securities market or otherwise. 1.18 "Termination for Cause" shall have the meaning set forth in Article 5. Article 2 Distributions During Lifetime 2.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Bank shall distribute to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article. 2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is Eighty Three Thousand Dollars ($83,000). 2.1.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Normal Retirement Date. The annual benefit shall be distributed to the Executive for twenty (20) years. 2.2 Early Retirement Benefit. If Early Retirement occurs, the Bank shall distribute to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article. 2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the Normal Retirement Benefit multiplied by the applicable vesting amount. This benefit is determined by vesting the Executive in ten percent (10%) of the Normal Retirement Benefit for the first Plan Year, and an additional ten percent (10%) of said amount for each succeeding year thereafter. Upon the Executive reaching Normal Retirement Age, the Executive becomes one hundred percent (100%) vested in the Normal Retirement Benefit. 2.2.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Normal Retirement Age. The annual benefit shall be distributed to the Executive for twenty (20) years. 2.3 Disability Benefit. If the Executive experiences a Disability which results in a Separation from Service prior to Normal Retirement Age, the Bank shall distribute to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article. 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is one hundred percent (100%) of the Accrual Balance determined as of the end of the Plan Year preceding Separation from Service. 2.3.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Separation from Service. The annual benefit shall be distributed to the Executive for twenty (20) years. During the applicable installment period, interest will be applied to the Accrual Balance at the Discount Rate in effect at Separation from Service, compounded monthly. 2.4 Change in Control Benefit. If a Change in Control occurs followed by a Separation from Service, the Bank shall distribute to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article. 2.4.1 Amount of Benefit. The benefit under this Section 2.4 is one hundred percent (100%) of the Normal Retirement Benefit amount described in Section 2.1.1. 2.4.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Normal Retirement Age. The annual benefit shall be distributed to the Executive for twenty (20) years. 2.5 Restriction on Timing of Distribution. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee at Separation from Service under such procedures as established by the Bank in accordance with Section 409A of the Code, benefit distributions that are made upon Separation from Service may not commence earlier than six (6) months after the date of such Separation from Service. Therefore, in the event this Section 2.5 is applicable to the Executive, any distribution which would otherwise be paid to the Executive within the first six months following the Separation from Service shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following the date of Separation from Service. All subsequent distributions shall be paid in the manner specified. 2.6 Distributions Upon Income Inclusion Under Code Section 409A. Upon the inclusion of any amount into the Executive's income as a result of the failure of this non-qualified deferred compensation plan to comply with the requirements of Section 409A of the Code, to the extent such tax liability can be covered by the Executive's Accrual Balance, a distribution shall be made as soon as is administratively practicable following the discovery of the plan failure. 2.7 Change in Form or Timing of Distributions. For distribution of benefits under this Article 2, the Executive and the Bank may, subject to the terms of Section 8.1, amend the Agreement to delay the timing or change the form of distributions. Any such amendment: (a) may not accelerate the time or schedule of any distribution, except as provided in Code Section 409A and the regulations thereunder; (b) must, for benefits distributable under Sections 2.2 and 2.4 be made at least twelve (12) months prior to the first scheduled distribution; (c) must, for benefits distributable under Article 2 delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and (d) must take effect not less than twelve (12) months after the amendment is made. Article 3 Distribution at Death 3.1 Death During Active Service. If the Executive dies prior to Separation from Service, the Bank shall distribute to the Beneficiary the benefit described in this Section 3.1. This benefit shall be distributed in lieu of any benefits under Article 2. 3.1.1 Amount of Benefit. The benefit under this Section 3.1 is the Normal Retirement Benefit in Section 2.1.1. 3.1.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Beneficiary in twelve (12) equal monthly installments for twenty (20) years commencing within sixty (60) days following receipt by the Bank of the Executive's death certificate. 3.2 Death During Distribution of a Benefit. If the Executive dies after any benefit distributions have commenced under this Agreement but before receiving all such distributions, the Bank shall distribute to the Beneficiary the remaining benefits at the same time and in the same amounts they would have been distributed to the Executive had the Executive survived. 3.3 Death After Early Retirement. If the Executive dies after Separation from Service for Early Retirement under Section 2.2 but prior to commencement of benefit payments under this Agreement, the Bank shall pay to the Beneficiary the benefit described in Section 3.3. 3.3.1 Amount of Benefit. The benefit under this Section 3.3 is the lifetime benefits that would have been paid to the Executive under Section 2.2. 3.3.2 Payment of Benefit. The Bank shall distribute the annual benefit to the Beneficiary in twelve (12) equal monthly installments commencing on the first day of the month following the Executive's death. The annual benefit shall be distributed to the Executive for twenty (20) years. Article 4 Beneficiaries 4.1 In General. The Executive shall have the right, at any time, to designate a Beneficiary to receive any benefit distributions under this Agreement upon the death of the Executive. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Bank in which the Executive participates. 4.2 Designation. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. If the Executive names someone other than the Executive's spouse as a Beneficiary, the Plan Administrator may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Plan Administrator, executed by the Executive's spouse and returned to the Plan Administrator. The Executive's beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator's rules and procedures. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive's death. 4.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent. 4.4 No Beneficiary Designation. If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive's spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, any benefits shall be paid to the Executive's estate. 4.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be distributed to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person's property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be completely discharge of any liability under the Agreement for such distribution amount. Article 5 General Limitations Notwithstanding any provisions of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement: 5.1 Termination for Cause. If the Bank terminates the Executive's employment for: (a) Gross negligence or gross neglect of duties to the Bank; or (b) Conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive's employment with the Bank; or (c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Bank. 5.2 Suicide or Misstatement. No benefit shall be distributed if the Executive commits suicide within two (2) years after the Effective Date of this Agreement, or if an insurance company which issued a life insurance policy covering the Executive and owned by the Bank denies coverage (i) for material misstatements of fact made by the Executive on an application for such life insurance, or (ii) for any other reason. 5.3 Removal. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not distribute any benefit under this Agreement if the Executive is subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act. Article 6 Claims And Review Procedures 6.1 Claims Procedure. An Executive or Beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be distributed shall make a claim for such benefits as follows: 6.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits. If such a claim relates to the contents of a notice received by the claimant, the claim must be made within sixty (60) days after such notice was received by the claimant. All other claims must be made within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the claimant. 6.1.2 Timing of Plan Administrator Response. The Plan Administrator shall respond to such claimant within ninety (90) days after receiving the claim. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional ninety (90) days by notifying the claimant in writing, prior to the end of the initial ninety (90) day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. 6.1.3 Notice of Decision. If the Plan Administrator denies part or the entire claim, the Plan Administrator shall notify the claimant in writing of such denial. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed; (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures; and (e) A statement of the claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. 6.2 Review Procedure. If the Plan Administrator denies part or the entire claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial as follows: 6.2.1 Initiation - Written Request. To initiate the review, the claimant, within sixty (60) days after receiving the Plan Administrator's notice of denial, must file with the Plan Administrator a written request for review. 6.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits. 6.2.3 Considerations on Review. In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 6.2.4 Timing of Plan Administrator Response. The Plan Administrator shall respond in writing to such claimant within sixty (60) days after receiving the request for review. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional sixty (60) days by notifying the claimant in writing, prior to the end of the initial sixty (60) day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. 6.2.5 Notice of Decision. The Plan Administrator shall notify the claimant in writing of its decision on review. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits; and (d) A statement of the claimant's right to bring a civil action under ERISA Section 502(a). Article 7 Amendments and Termination 7.1 Amendments. This Agreement may be amended only by a written agreement signed by the Bank and the Executive. However, the Bank may unilaterally amend this Agreement to conform with written directives to the Bank from its auditors or banking regulators or to comply with legislative or tax law, including without limitation Code Section 409A of the Code and any and all regulations and guidance promulgated thereunder. 7.2 Plan Termination Generally. The Bank may unilaterally terminate this Agreement at any time. Except as provided in Section 7.3, the termination of this Agreement shall not cause a distribution of benefits under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 2 or Article 3. 7.3 Plan Terminations Under Code Section 409A. Notwithstanding anything to the contrary in Section 7.2, if the Bank terminates this Agreement in the following circumstances: (a) Within thirty (30) days before or twelve (12) months after a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation as described in Section 409A(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Agreement and further provided that all the Bank's arrangements which are substantially similar to the Agreement are terminated so the Executive and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of such terminations; (b) Upon the Bank's dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Agreement are included in the Executive's gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or (c) Upon the Bank's termination of this and all other non-account balance plans (as referenced in Code Section 409A of the Code or the regulations thereunder), provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Bank does not adopt any new non-account balance plans for a minimum of five (5) years following the date of such termination; the Bank may distribute the Accrual Balance, determined as of the date of the termination of the Agreement, to the Executive in a lump sum subject to the above terms. Article 8 Administration of Agreement 8.1 Plan Administrator Duties. The Plan Administrator shall administer this Agreement according to its express terms and shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions, including interpretations of this Agreement, as may arise in connection with the Agreement to the extent the exercise of such discretion and authority does not conflict with Code Section 409A. 8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, including acting through a duly appointed representative, and may from time to time consult with counsel who may be counsel to the Bank. 8.3 Binding Effect of Decisions. Any decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. 8.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members. 8.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the death, Disability or Separation from Service of the Executive, and such other pertinent information as the Plan Administrator may reasonably require. 8.6 Annual Statement. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the benefits to be distributed under this Agreement. Article 9 Miscellaneous 9.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees. 9.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain as an employee of the Bank, nor interfere with the Bank's right to discharge the Executive. It does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 9.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 9.4 Tax Withholding and Reporting. The Bank shall withhold any taxes that are required to be withheld, including but not limited to taxes owed under Code Section 409A from the benefits provided under this Agreement. The Executive acknowledges that the Bank's sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authorities. The Bank shall satisfy all applicable reporting requirements, including those under Code Section 409A. 9.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of South Carolina, except to the extent preempted by the laws of the United States of America. 9.6 Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Bank to distribute such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors. Any insurance on the Executive's life or other informal funding asset is a general asset of the Bank to which the Executive and Beneficiary have no preferred or secured claim. 9.7 Reorganization. The Bank shall not merge or consolidate into or with another bank, or reorganize, or sell substantially all of its assets to another bank, firm or person unless such succeeding or continuing bank, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such an event, the term "Bank" as used in this Agreement shall be deemed to refer to the successor or survivor entity. 9.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 9.9 Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural. 9.10 Alternative Action. In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Agreement due to regulatory or other constraints, the Bank or Plan Administrator may perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Bank, provided that such alternative acts do not violate Code Section 409A of the Code. 9.11 Headings. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any provision herein. 9.12 Validity. If any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 9.13 Notice. Any notice or filing required or permitted to be given to the Bank or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered or sent by registered or certified mail to the address below: Provident Community Bank, NA ----------------------------- 203 West Main St ----------------------------- Union, SC 29379-2214 ----------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered or sent by mail to the last known address of the Executive. 9.14 Deduction Limitation on Benefit Payments. If the Bank reasonably anticipates that the Bank's deduction with respect to any distribution under this Agreement would be limited or eliminated by application of Code Section 162(m), then to the extent deemed necessary by the Bank to ensure that the entire amount of any distribution from this Agreement is deductible, the Bank may delay payment of any amount that would otherwise be distributed under this Agreement. The delayed amounts shall be distributed to the Executive (or the Beneficiary in the event of the Executive's death) at the earliest date the Bank reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m). 9.15 Compliance with Code Section 409A. This Agreement shall be interpreted and administered consistent with Code Section 409A. IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Bank have signed this Agreement. Executive: BANK: Provident Community Bank, National Association /s/ Dwight V. Neese By /s/ Richard H. Flake - ------------------------------- ------------------------------------------- Dwight V. Neese Title EVP/CFO ---------------------------------------- Provident Community Bank, National Association Supplemental Executive Retirement Plan #2 Beneficiary Designation Form ================================================================================ { } New Designation { } Change in Designation I, Dwight V. Neese, designate the following as Beneficiary under the Agreement: - -------------------------------------------------------------------------------- Primary: - ---------------------------------------------------------------- ---------- % - ---------------------------------------------------------------- ---------- % - -------------------------------------------------------------------------------- Contingent: - ---------------------------------------------------------------- ---------- % - ---------------------------------------------------------------- ---------- % - -------------------------------------------------------------------------------- Notes: o Please PRINT CLEARLY or TYPE the names of the beneficiaries. o To name a trust as Beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement. o To name your estate as Beneficiary, please write "Estate of [your name]". o Be aware that none of the contingent beneficiaries will receive anything unless ALL of the primary beneficiaries predecease you. I understand that I may change these beneficiary designations by delivering a new written designation to the Plan Administrator, which shall be effective only upon receipt and acknowledgment by the Plan Administrator prior to my death. I further understand that the designations will be automatically revoked if the Beneficiary predeceases me, or, if I have named my spouse as Beneficiary and our marriage is subsequently dissolved. Name: Dwight V. Neese Signature: Date: ------------------------------ ------------- Received by the Plan Administrator this day of , 2 ------ ------------------ --- By: ------------------------------- Title: ------------------------------- EX-10 4 a5401138-ex10c.txt EXHIBIT 10(C) Exhibit 10(c) PROVIDENT COMMUNITY BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THIS AGREEMENT is made effective as of October 1, 1997 by and between Provident Community Bank (the "Bank"), and Richard H. Flake (the "Executive"). INTRODUCTION To encourage the Executive to remain an employee of the Bank, the Bank is willing to provide salary continuation benefits to the Executive. The Bank will pay such benefits from its general assets. The Executive and the Bank agree as follows: ARTICLE 1 Definitions 1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1.1 'Change in Control" shall mean an event deemed to occur if and when (a) an offeror other than the Company purchases shares of the common stock of the Company or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of the Company or the Bank representing 25% or more of the combined voting power of the Company's or the Bank's then outstanding securities, (c) the membership of the board of directors of the Company or the Bank changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Company or the Bank approve a merger, consolidation, sale or disposition of all or substantially all of the Company's or the Bank's assets, or a plan of partial or complete liquidation. 1.1.2 "Code" means the Internal Revenue Code of 1986, as amended. References to a Code section shall be deemed to be that section as it now exists and to any successor provision. 1.1.3 "Company" means Union Financial Bancshares, Inc., a Delaware corporation. 1.1.4 "Disability" means the Executive's inability to perform substantially all normal duties of the Executive's positions, as determined by the Bank's Board of Directors in its sole discretion. As a condition to any benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Board of Directors deems appropriate. 1.1.5 "Normal Retirement Date" means the date on which Executive attains age 65. 1.1.6 "Termination of Employment" means the Executive's ceasing to be employed by the Bank for any reason whatsoever, voluntary or involuntary, other than by reason of an approved leave of absence. 1.1.7 "Plan Year" means the twelve-month period ending December 31. Article 2 Lifetime Benefits 2.1 Normal Retirement Benefit. If the Executive terminates employment on or after the Normal Retirement Date for reasons other than death, the Bank shall pay to the Executive the benefit described in this Section 2.1. 2.1.1 Amount of Benefit. The benefit under this Section 2.1 is $4,075.00 per month. 2.1.2 Payment of Benefit. The Bank shall pay the benefit under Section 2.1.1 to the Executive on the first day of each month commencing with the month following his termination of employment and continuing for 239 additional months. 2.2 Early Retirement Benefit. If the Executive terminates employment before the Normal Retirement Date, and for reasons other than death or Disability, the Bank shall pay to the Executive the benefit described in Section 2.2. 2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the benefit determined under Schedule A, Column 2 based on the date of the Executive's termination of employment. 2.2.2 Payment of Benefits. The Bank shall pay the benefit under Section . 2.1.1 to the Executive on the first date of each month commencing with the month following the Executive's Normal Retirement Date and continuing for 239 additional months. Notwithstanding anything herein to the contrary, the Executive may, prior to his termination of employment, elect to commence payment of the Early Retirement Benefit on the first day of the month following his termination of employment in the form of a reduced benefit determined under Schedule A, Column 1 and continuing for 239 additional months. 2.3 Disability Benefit. If the Executive terminates employment for Disability prior to the Normal Retirement Date, the Bank shall pay the Executive the benefit described in this Section 2.3. 2 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is the benefit determined under Schedule A, Column 1 based on the date of the Executive's termination of employment for Disability. 2.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executive's termination of employment for disability and continuing for 239 additional months. 2.4 Change of Control Benefit. Upon the occurrence of a Change of Control while the Executive is in the active service of the Bank, the Bank shall pay the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement. 2.4.1 Amount of Benefit. The benefit under this Section 2.4 is the Executive's Normal Retirement Benefit as provided in Section 2.1.1. 2.4.2 Payment of Benefit. The Bank (or any successor thereto) shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executive's Normal Retirement Date and continuing for 239 additional months. Article 3 Death Benefits 3.1 Death During Active Service. If the Executive dies while in the active service of the Bank, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 3.1 3.1.1 Amount of Benefits. The benefit under Section 3.1 is the lifetime benefits that would have been paid to the Executive under Section 2.1 calculatedas if the date of the Executive's death were his Normal Retirement Date. 3.1.2 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary on the first day of each month following the Executive's death and continuing for 239 months. 3.2 Death During Benefit Period. If the Executive dies after benefit payments have commenced under this Agreement but before receiving all such payments, the Bank shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 3.3 Death After Early Retirement. If the Executive dies after terminating employment for Early Retirement under Section 2.2 but prior to commencement of benefits payments under this Agreement, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 3.3. 3 3.3.1 Amount of Benefit. The benefit under Section 3.3 is the lifetime benefits that would have been paid to the Executive under Section 2.2. 3.3.2 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary of the first day of each month commencing with the month following the Executive's death and continuing for 239 months. Article 4 Beneficiaries ti 4.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's surviving spouse, if any, and if none, to the Executive's surviving children and the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executive's estate. 4.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent or person or incapable person. The Bank may require proof of incompetency, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit. Article 5 General Limitations Notwithstanding any provisions of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement: 5.1 Excess Parachute Payment. To the extent that the benefits payable under this Agreement, taken together with any other payments of benefits to be provided to Executive upon a Change in Control, would be an excess parachute payments under Section 28OG of the Code. 5.2 Termination of Cause. if the Bank terminates the Executive's employment for: 5.2.1 Gross negligence or gross neglect of duties; 4 5.2.2 Commission of a felony or of a gross misdemeanor involving moral turpitude; or 5.2.3 Fraud, disloyalty, dishonestly or willful violation of any law, regulation or significant Bank policy committed in connection with the Executive's employment and resulting in an adverse effect on the Bank. 5.3 Suicide; Misstatement. No benefits shall be payable if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Bank. Article 6 Claims and Review Procedures 6.1 Claims Procedure. The Bank shall notify the Executive's beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Bank determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement's claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed. If the Bank determines that there are special circumstances requiring additional time to make a decision, the Bank shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period. 6.2 Review Procedure. if the beneficiary is determined by the Bank not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within sixty (60) days after the receipt of the notice issued by the Bank. Said petition shall state the specific reasons which the beneficiary believe entitle him or her to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Bank of the petition, the Bank shall afford the beneficiary (and counsel, if any) an opportunity to present his or her positions to the Bank orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents. The Bank shall notify the beneficiary of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient , the decision may be deferred for up to another sixty-day period at the election of the Bank, but notice of this deferral shall be given to the beneficiary. 5 Article 7 Amendment and Termination The Bank may amend or terminate this Agreement at any time prior to the Executive's Termination of Employment by written notice to the Executive; provided, however, that any amendment or termination of this . Agreement shall not affect the vested benefit of the Executive as of the date of such amendment or termination. Article 8 Miscellaneous 8.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees, The Bank, or the Company acting on behalf of the Bank, shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 8.2 No Guaranty of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 8.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 8.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 8.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of South Carolina, except to the extent preempted by the laws of the United States of America. 8.6 Unfunded Arrangement. The Executive and beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner or anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and beneficiary have no preferred or secured claim. 6 IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Bank have signed this Agreement on the 19th day of February, 1998. Attest: PROVIDENT COMMUNITY BANK /s/ Wanda J. Wells /s/ Carl L. Mason - --------------------------- ---------------------------------- Chairman of the Board Witness: /s/ Wanda J. Wells /s/ Richard H. Flake - --------------------------- ---------------------------------- Richard H. Flake 7 - -------------------------------------------------------------------------------- Salary Continuation Agreement Richard H. Flake Schedule A - -------------------------------------------------------------------------------- Termination After Column 1 Column 2 Plan Year Ending Immediate Monthly Benefit Age 65 Monthly Benefit - -------------------------------------------------------------------------------- 9/30/98 $123.25 $407.00 - -------------------------------------------------------------------------------- 9/30/99 266.92 815.00 - -------------------------------------------------------------------------------- 9/30/00 433.58 1,222.50 - -------------------------------------------------------------------------------- 9/30/01 626.08 1,630.00 - -------------------------------------------------------------------------------- 9/30/02 847.58 2,037.50 - -------------------------------------------------------------------------------- 9/30/03 1101.50 2,445.00 - -------------------------------------------------------------------------------- 9/30/04 1,391.75 2,852.50 - -------------------------------------------------------------------------------- 9/30/05 1,722.67 3,260.00 - -------------------------------------------------------------------------------- 9/30/06 2,098.83 3,667.50 - -------------------------------------------------------------------------------- 9/30/07 2,525.58 4,075.00 - -------------------------------------------------------------------------------- 9/30/08 2,735.17 4,075.00 - -------------------------------------------------------------------------------- 9/30/09 2,962.17 4,075.00 - -------------------------------------------------------------------------------- 9/30/10 3,208.08 4,075.00 - -------------------------------------------------------------------------------- 9/30/11 3,474.33 4,075.00 - -------------------------------------------------------------------------------- 9/30/12 3,762.67 4,075.00 - -------------------------------------------------------------------------------- 9/30/13 4,075.00 4,075.00 - -------------------------------------------------------------------------------- EX-10 5 a5401138-ex10d.txt EXHIBIT 10(D) Exhibit 10(d) PROVIDENT COMMUNITY BANK, NATIONAL ASSOCIATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN #2 THIS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN #2 (the "Agreement") is adopted this 1st day of January, 2007, by and between Provident Community Bank, National Association, a nationally-chartered commercial bank located in Union, South Carolina (the "Bank"), and Richard H. Flake (the "Executive"). The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Bank. This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended from time to time. Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Accrual Balance" means the liability that should be accrued by the Bank, under Generally Accepted Accounting Principles ("GAAP"), for the Bank's obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 ("APB 12") as amended by Statement of Financial Accounting Standards Number 106 ("FAS 106") and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied. 1.2 "Beneficiary" means each designated person or entity, or the estate of the deceased Executive, entitled to any benefits upon the death of the Executive pursuant to Article 4. 1.3 "Beneficiary Designation Form" means the form established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan Administrator to designate one or more Beneficiaries. 1.4 "Board" means the Board of Directors of the Bank as from time to time constituted. 1.5 "Change in Control" means an event deemed to occur if and when (a) an offeror other than the Company purchases shares of the common stock of the Company or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of the Company or the Bank representing twenty five percent (25%) or more of the combined voting power of the Company's of the Bank's then outstanding securities, (c) the membership of the board of directors of the Company or the Bank changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four (24) month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Company or the Bank approve a merger, consolidation, sale or disposition of all or substantially all of the Company's or Bank's assets, or a plan of partial or complete liquidation. 1.6 "Code" means the Internal Revenue Code of 1986, as amended, and all regulations and guidance thereunder, including such regulations and guidance as may be promulgated after the Effective Date of this Agreement. 1.7 "Company" means Union Financial Bancshares, Inc., a Delaware corporation. 1.8 "Disability" means the Executive suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Bank of the carrier's or Social Security Administration's determination upon the request of the Bank. 1.9 "Discount Rate" means the rate used by the Plan Administrator for determining the Accrual Balance. The initial Discount Rate is six percent (6%). However, the Plan Administrator, in its discretion, may adjust the Discount Rate to maintain the rate within reasonable standards according to GAAP and/or applicable bank regulatory guidance. 1.10 "Early Retirement" means Separation from Service before Normal Retirement Age except when such Separation from Service occurs: (i) following a Change in Control; or (ii) due to death, Disability or Termination for Cause. 1.11 "Effective Date" means January 1, 2007. 1.12 "Normal Retirement Age" means the Executive attaining age sixty-five (65). 1.13 "Normal Retirement Date" means the later of Normal Retirement Age or Separation from Service. 1.14 "Plan Administrator" means the Board or such committee or person as the Board shall appoint. 1.15 "Plan Year" means each twelve (12) month period commencing on October 1 and ending on September 30 of each year. The initial Plan Year shall commence on the Effective Date of this Agreement and end on the following September 30. 1.16 "Separation from Service" means the termination of the Executive's employment with the Bank for reasons other than death. Whether a Separation from Service takes place is determined based on the facts and circumstances surrounding the termination of the Executive's employment and whether the Bank and the Executive intended for the Executive to provide significant services for the Bank following such termination. A termination of employment will not be considered a Separation from Service if: (a) the Executive continues to provide services as an employee of the Bank at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or (b) the Executive continues to provide services to the Bank in a capacity other than as an employee of the Bank at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period). 1.17 "Specified Employee" a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Bank if any stock of the Bank is publicly traded on an established securities market or otherwise. 1.18 "Termination for Cause" shall have the meaning set forth in Article 5. Article 2 Distributions During Lifetime 2.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Bank shall distribute to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article. 2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is Thirty Two Thousand Five Hundred Dollars ($32,500). 2.1.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Normal Retirement Date. The annual benefit shall be distributed to the Executive for twenty (20) years. 2.2 Early Retirement Benefit. If Early Retirement occurs, the Bank shall distribute to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article. 2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the Normal Retirement Benefit multiplied by the applicable vesting amount. This benefit is determined by vesting the Executive in ten percent (10%) of the Normal Retirement Benefit for the first Plan Year, and an additional ten percent (10%) of said amount for each succeeding year thereafter. Upon the Executive reaching Normal Retirement Age, the Executive becomes one hundred percent (100%) vested in the Normal Retirement Benefit. 2.2.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Normal Retirement Age. The annual benefit shall be distributed to the Executive for twenty (20) years. 2.3 Disability Benefit. If the Executive experiences a Disability which results in a Separation from Service prior to Normal Retirement Age, the Bank shall distribute to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article. 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is one hundred percent (100%) of the Accrual Balance determined as of the end of the Plan Year preceding Separation from Service. 2.3.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Separation from Service. The annual benefit shall be distributed to the Executive for twenty (20) years. During the applicable installment period, interest will be applied to the Accrual Balance at the Discount Rate in effect at Separation from Service, compounded monthly. 2.4 Change in Control Benefit. If a Change in Control occurs followed by a Separation from Service, the Bank shall distribute to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article. 2.4.1 Amount of Benefit. The benefit under this Section 2.4 is one hundred percent (100%) of the Normal Retirement Benefit amount described in Section 2.1.1. 2.4.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following Normal Retirement Age. The annual benefit shall be distributed to the Executive for twenty (20) years. 2.5 Restriction on Timing of Distribution. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee at Separation from Service under such procedures as established by the Bank in accordance with Section 409A of the Code, benefit distributions that are made upon Separation from Service may not commence earlier than six (6) months after the date of such Separation from Service. Therefore, in the event this Section 2.5 is applicable to the Executive, any distribution which would otherwise be paid to the Executive within the first six months following the Separation from Service shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following the date of Separation from Service. All subsequent distributions shall be paid in the manner specified. 2.6 Distributions Upon Income Inclusion Under Code Section 409A. Upon the inclusion of any amount into the Executive's income as a result of the failure of this non-qualified deferred compensation plan to comply with the requirements of Section 409A of the Code, to the extent such tax liability can be covered by the Executive's Accrual Balance, a distribution shall be made as soon as is administratively practicable following the discovery of the plan failure. 2.7 Change in Form or Timing of Distributions. For distribution of benefits under this Article 2, the Executive and the Bank may, subject to the terms of Section 8.1, amend the Agreement to delay the timing or change the form of distributions. Any such amendment: (a) may not accelerate the time or schedule of any distribution, except as provided in Code Section 409A and the regulations thereunder; (b) must, for benefits distributable under Sections 2.2 and 2.4 be made at least twelve (12) months prior to the first scheduled distribution; (c) must, for benefits distributable under Article 2 delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and (d) must take effect not less than twelve (12) months after the amendment is made. Article 3 Distribution at Death 3.1 Death During Active Service. If the Executive dies prior to Separation from Service, the Bank shall distribute to the Beneficiary the benefit described in this Section 3.1. This benefit shall be distributed in lieu of any benefits under Article 2. 3.1.1 Amount of Benefit. The benefit under this Section 3.1 is the Normal Retirement Benefit in Section 2.1.1. 3.1.2 Distribution of Benefit. The Bank shall distribute the annual benefit to the Beneficiary in twelve (12) equal monthly installments for twenty (20) years commencing within sixty (60) days following receipt by the Bank of the Executive's death certificate. 3.2 Death During Distribution of a Benefit. If the Executive dies after any benefit distributions have commenced under this Agreement but before receiving all such distributions, the Bank shall distribute to the Beneficiary the remaining benefits at the same time and in the same amounts they would have been distributed to the Executive had the Executive survived. 3.3 Death After Early Retirement. If the Executive dies after Separation from Service for Early Retirement under Section 2.2 but prior to commencement of benefit payments under this Agreement, the Bank shall pay to the Beneficiary the benefit described in Section 3.3. 3.3.1 Amount of Benefit. The benefit under this Section 3.3 is the lifetime benefits that would have been paid to the Executive under Section 2.2. 3.3.2 Payment of Benefit. The Bank shall distribute the annual benefit to the Beneficiary in twelve (12) equal monthly installments commencing on the first day of the month following the Executive's death. The annual benefit shall be distributed to the Executive for twenty (20) years. Article 4 Beneficiaries 4.1 In General. The Executive shall have the right, at any time, to designate a Beneficiary to receive any benefit distributions under this Agreement upon the death of the Executive. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Bank in which the Executive participates. 4.2 Designation. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent. If the Executive names someone other than the Executive's spouse as a Beneficiary, the Plan Administrator may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Plan Administrator, executed by the Executive's spouse and returned to the Plan Administrator. The Executive's beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator's rules and procedures. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive's death. 4.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent. 4.4 No Beneficiary Designation. If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive's spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, any benefits shall be paid to the Executive's estate. 4.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be distributed to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person's property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be completely discharge of any liability under the Agreement for such distribution amount. Article 5 General Limitations Notwithstanding any provisions of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement: 5.1 Termination for Cause. If the Bank terminates the Executive's employment for: (a) Gross negligence or gross neglect of duties to the Bank; or (b) Conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive's employment with the Bank; or (c) Fraud, disloyalty, dishonesty or willful violation of any law or significant Bank policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Bank. 5.2 Suicide or Misstatement. No benefit shall be distributed if the Executive commits suicide within two (2) years after the Effective Date of this Agreement, or if an insurance company which issued a life insurance policy covering the Executive and owned by the Bank denies coverage (i) for material misstatements of fact made by the Executive on an application for such life insurance, or (ii) for any other reason. 5.3 Removal. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not distribute any benefit under this Agreement if the Executive is subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act. Article 6 Claims And Review Procedures 6.1 Claims Procedure. An Executive or Beneficiary ("claimant") who has not received benefits under the Agreement that he or she believes should be distributed shall make a claim for such benefits as follows: 6.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits. If such a claim relates to the contents of a notice received by the claimant, the claim must be made within sixty (60) days after such notice was received by the claimant. All other claims must be made within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the claimant. 6.1.2 Timing of Plan Administrator Response. The Plan Administrator shall respond to such claimant within ninety (90) days after receiving the claim. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional ninety (90) days by notifying the claimant in writing, prior to the end of the initial ninety (90) day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. 6.1.3 Notice of Decision. If the Plan Administrator denies part or the entire claim, the Plan Administrator shall notify the claimant in writing of such denial. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed; (d) An explanation of the Agreement's review procedures and the time limits applicable to such procedures; and (e) A statement of the claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. 6.2 Review Procedure. If the Plan Administrator denies part or the entire claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial as follows: 6.2.1 Initiation - Written Request. To initiate the review, the claimant, within sixty (60) days after receiving the Plan Administrator's notice of denial, must file with the Plan Administrator a written request for review. 6.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits. 6.2.3 Considerations on Review. In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 6.2.4 Timing of Plan Administrator Response. The Plan Administrator shall respond in writing to such claimant within sixty (60) days after receiving the request for review. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional sixty (60) days by notifying the claimant in writing, prior to the end of the initial sixty (60) day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. 6.2.5 Notice of Decision. The Plan Administrator shall notify the claimant in writing of its decision on review. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: (a) The specific reasons for the denial; (b) A reference to the specific provisions of the Agreement on which the denial is based; (c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits; and (d) A statement of the claimant's right to bring a civil action under ERISA Section 502(a). Article 7 Amendments and Termination 7.1 Amendments. This Agreement may be amended only by a written agreement signed by the Bank and the Executive. However, the Bank may unilaterally amend this Agreement to conform with written directives to the Bank from its auditors or banking regulators or to comply with legislative or tax law, including without limitation Code Section 409A of the Code and any and all regulations and guidance promulgated thereunder. 7.2 Plan Termination Generally. The Bank may unilaterally terminate this Agreement at any time. Except as provided in Section 7.3, the termination of this Agreement shall not cause a distribution of benefits under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 2 or Article 3. 7.3 Plan Terminations Under Code Section 409A. Notwithstanding anything to the contrary in Section 7.2, if the Bank terminates this Agreement in the following circumstances: (a) Within thirty (30) days before or twelve (12) months after a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation as described in Section 409A(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Agreement and further provided that all the Bank's arrangements which are substantially similar to the Agreement are terminated so the Executive and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of such terminations; (b) Upon the Bank's dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Agreement are included in the Executive's gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or (c) Upon the Bank's termination of this and all other non-account balance plans (as referenced in Code Section 409A of the Code or the regulations thereunder), provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Bank does not adopt any new non-account balance plans for a minimum of five (5) years following the date of such termination; the Bank may distribute the Accrual Balance, determined as of the date of the termination of the Agreement, to the Executive in a lump sum subject to the above terms. Article 8 Administration of Agreement 8.1 Plan Administrator Duties. The Plan Administrator shall administer this Agreement according to its express terms and shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions, including interpretations of this Agreement, as may arise in connection with the Agreement to the extent the exercise of such discretion and authority does not conflict with Code Section 409A. 8.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, including acting through a duly appointed representative, and may from time to time consult with counsel who may be counsel to the Bank. 8.3 Binding Effect of Decisions. Any decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement. 8.4 Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members. 8.5 Bank Information. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the death, Disability or Separation from Service of the Executive, and such other pertinent information as the Plan Administrator may reasonably require. 8.6 Annual Statement. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the benefits to be distributed under this Agreement. Article 9 Miscellaneous 9.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees. 9.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain as an employee of the Bank, nor interfere with the Bank's right to discharge the Executive. It does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 9.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 9.4 Tax Withholding and Reporting. The Bank shall withhold any taxes that are required to be withheld, including but not limited to taxes owed under Code Section 409A from the benefits provided under this Agreement. The Executive acknowledges that the Bank's sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authorities. The Bank shall satisfy all applicable reporting requirements, including those under Code Section 409A. 9.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of South Carolina, except to the extent preempted by the laws of the United States of America. 9.6 Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Bank for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Bank to distribute such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors. Any insurance on the Executive's life or other informal funding asset is a general asset of the Bank to which the Executive and Beneficiary have no preferred or secured claim. 9.7 Reorganization. The Bank shall not merge or consolidate into or with another bank, or reorganize, or sell substantially all of its assets to another bank, firm or person unless such succeeding or continuing bank, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such an event, the term "Bank" as used in this Agreement shall be deemed to refer to the successor or survivor entity. 9.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 9.9 Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural. 9.10 Alternative Action. In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Agreement due to regulatory or other constraints, the Bank or Plan Administrator may perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Bank, provided that such alternative acts do not violate Code Section 409A of the Code. 9.11 Headings. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any provision herein. 9.12 Validity. If any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 9.13 Notice. Any notice or filing required or permitted to be given to the Bank or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered or sent by registered or certified mail to the address below: Provident Community Bank, NA ----------------------------- 203 West Main St ----------------------------- Union, SC 29379-2214 ----------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered or sent by mail to the last known address of the Executive. 9.14 Deduction Limitation on Benefit Payments. If the Bank reasonably anticipates that the Bank's deduction with respect to any distribution under this Agreement would be limited or eliminated by application of Code Section 162(m), then to the extent deemed necessary by the Bank to ensure that the entire amount of any distribution from this Agreement is deductible, the Bank may delay payment of any amount that would otherwise be distributed under this Agreement. The delayed amounts shall be distributed to the Executive (or the Beneficiary in the event of the Executive's death) at the earliest date the Bank reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m). 9.15 Compliance with Code Section 409A. This Agreement shall be interpreted and administered consistent with Code Section 409A. IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Bank have signed this Agreement. Executive: BANK: Provident Community Bank, National Association /s/ Richard H. Flake By /s/ Dwight V. Neese - ------------------------------- ------------------------------------------- Richard H. Flake Title President & CEO ---------------------------------------- Provident Community Bank, National Association Supplemental Executive Retirement Plan #2 Beneficiary Designation Form ================================================================================ { } New Designation { } Change in Designation I, Richard H. Flake, designate the following as Beneficiary under the Agreement: - -------------------------------------------------------------------------------- Primary: - ---------------------------------------------------------------- ---------- % - ---------------------------------------------------------------- ---------- % - -------------------------------------------------------------------------------- Contingent: - ---------------------------------------------------------------- ---------- % - ---------------------------------------------------------------- ---------- % - -------------------------------------------------------------------------------- Notes: o Please PRINT CLEARLY or TYPE the names of the beneficiaries. o To name a trust as Beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement. o To name your estate as Beneficiary, please write "Estate of [your name]". o Be aware that none of the contingent beneficiaries will receive anything unless ALL of the primary beneficiaries predecease you. I understand that I may change these beneficiary designations by delivering a new written designation to the Plan Administrator, which shall be effective only upon receipt and acknowledgment by the Plan Administrator prior to my death. I further understand that the designations will be automatically revoked if the Beneficiary predeceases me, or, if I have named my spouse as Beneficiary and our marriage is subsequently dissolved. Name: Richard H. Flake Signature: Date: ------------------------------ ------------- Received by the Plan Administrator this day of , 2 ------ ------------------ --- By: ------------------------------- Title: ------------------------------- EX-31 6 a5401138-ex31a.txt EXHIBIT 31(A) EXHIBIT 31 (a) CERTIFICATION I, Dwight V. Neese, certify that: 1. I have reviewed this Form 10-Q of Provident Community Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2007 /s/ Dwight V. Neese ------------ -------------------------- Dwight V. Neese President and Chief Executive Officer EX-31 7 a5401138-ex31b.txt EXHIBIT 31(B) EXHIBIT 31 (b) CERTIFICATION I, Richard H. Flake, certify that: 1. I have reviewed this Form 10-Q of Provident Community Bancshares, Inc.; 2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2007 /s/ Richard H. Flake ------------------------ -------------------- Richard H. Flake Executive Vice President and Chief Financial Officer EX-32 8 a5401138-ex32a.txt EXHIBIT 32(A) EXHIBIT 32(a) Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Provident Community Bancshares, Inc. (the "Company") on Form 10-Q for the quarter ended March 31, 2007 as filed with the Securities and Exchange Commission (the "Report"), I, Dwight V. Neese, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Dwight V. Neese ------------------- Dwight V. Neese President and Chief Executive Officer Date: May 14, 2007 ------------ EX-32 9 a5401138-ex32b.txt EXHIBIT 32(B) EXHIBIT 32(b) Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Provident Community Bancshares, Inc. (the "Company") on Form 10-Q for the quarter ended March 31, 2007 as filed with the Securities and Exchange Commission (the "Report"), I, Richard H. Flake, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Richard H. Flake -------------------- Richard H. Flake Executive Vice President and Chief Financial Officer Date: May 14, 2007 ------------ -----END PRIVACY-ENHANCED MESSAGE-----