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 September 30, 2008
 
 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
                Incorporation
      or Organization)
              (I.R.S.
      Employer
                Identification
      No.)
  2700 Celanese
Road,Rock
Hill,South
Carolina29732
 (Address
of Principal Executive Offices)
 
 (803)-325-9400
 (Registrant’s
telephone number, including area code)
 
 Not
Applicable
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes  X                      No__
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):
  Large
accelerated filer □Accelerated filer □
 Non-accelerated
filer  □ Smaller
Reporting Company ■
  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 1,784,454 shares, $0.01 par value, of common stock issued and
outstanding as of November 5, 2008.
  
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 
 INDEXPart
      I.
                                Financial Information
                                PageItem
      1.  Financial Statements (unaudited)Consolidated
      Balance Sheets as of September 30, 2008 and
      December 31, 2007
                                3Consolidated
      Statements of Income for the three and nine months
      ended September 30, 2008 and 2007
                                4Consolidated
      Statements of Cash Flows for the nine months
      ended September 30, 2008 and 2007
                                5Consolidated
      Statements of Shareholders’ Equity and Comprehensive
      Income for the nine months ended
      September 30, 2008 and 20076Notes
      to Consolidated Financial Statements
                                7-12Item
      2.  Management’s Discussion and Analysis ofFinancial
      Condition and Results of Operations
                                12-27Item
      3.  Quantitative and Qualitative Disclosures about
      Market Risk
                                27Item
      4T.Controls and Procedures
                                27Part
      II.
                                Other InformationItem
      1.   Legal Proceedings
                                28Item
      1A. Risk Factors
                                28Item
      2.   Unregistered Sales of Equity Securities and Use of
      Proceeds
                                28Item
      3.   Defaults Upon Senior Securities
                                28Item
      4.   Submission of Matters to a Vote of Security
      Holders
                                29Item
      5.   Other Information
                                29Item
      6.   Exhibits
                                29Signatures
                                30
  Part
1.    Financial Information PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS September
30, 2008 and December 31, 2007
 September
      30,
                                                                              
                                                                              
                                                                              December
      31,2008
                                                                              
                                                                              
                                                                              2007(Unaudited)
                                                                              
                                                                              
                                                                              (Audited)(DOLLARS
      IN THOUSANDS)ASSETSCash
      and due from banks
                                                                              
                                                                              $
                                                                              9,123
                                                                              
                                                                              
                                                                              $
                                                                              11,890Investment
      and mortgage-backed securitiesHeld
      to maturity
                                                                              
                                                                              
                                                                              2,430
                                                                              
                                                                              
                                                                              
                                                                              3,126Available
      for sale
                                                                              
                                                                              
                                                                              87,654
                                                                              
                                                                              
                                                                              
                                                                              108,061Total
      investment and mortgage-backed securities
                                                                              
                                                                              
                                                                              90,084
                                                                              
                                                                              
                                                                              
                                                                              111,187Loans,
      net
                                                                              
                                                                              
                                                                              279,556
                                                                              
                                                                              
                                                                              
                                                                              256,487Office
      properties and equipment, net
                                                                              
                                                                              
                                                                              5,010
                                                                              
                                                                              
                                                                              
                                                                              5,145Federal
      Home Loan Bank Stock, at cost
                                                                              
                                                                              
                                                                              3,929
                                                                              
                                                                              
                                                                              
                                                                              3,826Federal
      Reserve Stock, at cost
                                                                              
                                                                              
                                                                              599
                                                                              
                                                                              
                                                                              
                                                                              599Accrued
      interest receivable
                                                                              
                                                                              
                                                                              1,778
                                                                              
                                                                              
                                                                              
                                                                              2,625Intangible
      assets
                                                                              
                                                                              
                                                                              2,949
                                                                              
                                                                              
                                                                              
                                                                              3,261Cash
      surrender value of life insurance
                                                                              
                                                                              
                                                                              9,475
                                                                              
                                                                              
                                                                              
                                                                              9,175Other
      assets
                                                                              
                                                                              
                                                                              3,779
                                                                              
                                                                              
                                                                              
                                                                              3,446TOTAL
      ASSETS
                                                                              
                                                                              $
                                                                              406,282
                                                                              
                                                                              
                                                                              $
                                                                              407,641LIABILITIESDeposits
                                                                              
                                                                              $
                                                                              273,547
                                                                              
                                                                              
                                                                              $
                                                                              270,399Advances
      from the Federal Home Loan Bank
                                                                              
                                                                              
                                                                              70,500
                                                                              
                                                                              
                                                                              
                                                                              69,500Securities
      sold under agreements to repurchase
                                                                              
                                                                              
                                                                              20,771
                                                                              
                                                                              
                                                                              
                                                                              24,131Floating
      rate junior subordinated deferrable interest debentures
                                                                              
                                                                              
                                                                              12,372
                                                                              
                                                                              
                                                                              
                                                                              12,372Accrued
      interest payable
                                                                              
                                                                              
                                                                              653
                                                                              
                                                                              
                                                                              
                                                                              742Other
      liabilities
                                                                              
                                                                              
                                                                              1,964
                                                                              
                                                                              
                                                                              
                                                                              3,184TOTAL
      LIABILITIES
                                                                              
                                                                              
                                                                              379,807
                                                                              
                                                                              
                                                                              
                                                                              380,328Commitments
      and contingencies-Note 4SHAREHOLDERS'
      EQUITYSerial
      preferred stock, no par value,authorized
      - 500,000 shares, issuedand
      outstanding - None
                                                                              
                                                                              
                                                                              --
                                                                              
                                                                              
                                                                              
                                                                              --Common
      stock - $0.01 par value,authorized
      - 5,000,000 shares,issued
      and outstanding - 1,784,454 shares at September 30, 2008
                                                                              
                                                                              
                                                                              20
                                                                              
                                                                              
                                                                              
                                                                              20and
      1,794,866 at December 31, 2007, respectivelyAdditional
      paid-in capital
                                                                              
                                                                              
                                                                              12,873
                                                                              
                                                                              
                                                                              
                                                                              12,781Accumulated
      other comprehensive income (loss)
                                                                              
                                                                              
                                                                              (770
                                                                              )
                                                                              
                                                                              
                                                                              191Retained
      earnings, substantially restricted
                                                                              
                                                                              
                                                                              20,642
                                                                              
                                                                              
                                                                              
                                                                              20,276Treasury
      stock, at cost
                                                                              
                                                                              
                                                                              (6,290
                                                                              )
                                                                              
                                                                              
                                                                              (5,955
                                                                              )TOTAL
      SHAREHOLDERS' EQUITY
                                                                              
                                                                              
                                                                              26,475
                                                                              
                                                                              
                                                                              
                                                                              27,313TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                              
                                                                              $
                                                                              406,282
                                                                              
                                                                              
                                                                              $
                                                                              407,641
 See notes
to consolidated financial statements.
  3
 PROVIDENT
      COMMUNITY BANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOMEThree
      and Nine Months Ended September 30, 2008 and 2007
    (unaudited)Three
      Months Ended
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Nine
      Months EndedSeptember
      30,
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                September
      30,
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                September
      30,
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                September
      30,2008
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2007
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2008
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2007(DOLLARS
      IN THOUSANDS EXCEPT PER SHARE)Interest
      Income:Loans
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                4,240
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                4,793
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                13,240
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                14,373Deposits
      and federal funds sold
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                23
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                28
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                45
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                110Mortgage-backed
      securities
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                618
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                355
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,981
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                951Interest
      and dividends oninvestment
      securities
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                652
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,398
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,142
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                4,020Total
      Interest Income
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                5,533
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6,574
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                17,408
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                19,454Interest
      Expense:Deposit
      accounts
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,104
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,469
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6,784
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                7,254Floating
      rate junior subordinated deferrable interest debentures
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                169
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                227
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                554
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                673Advances
      from the FHLB and other borrowings
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                864
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,165
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,708
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,332Total
      Interest Expense
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,137
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,861
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                10,046
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                11,259Net
      Interest Income
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,396
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,713
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                7,362
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                8,195Provision
      for loan losses
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                615
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                20
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,290
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                265Net
      Interest Income AfterProvision
      for Loan Losses
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,781
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,693
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6,072
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                7,930Non-Interest
      Income:Fees
      for financial services
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                823
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                760
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,330
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,253Other
      fees, net
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                21
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                23
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                70
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                66Net
      gain (loss) on sale of investments
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                218
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (1
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                396
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (2
                                                                                                                                                                                                                                                )Total
      Non-Interest Income
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,062
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                782
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,796
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,317Non-Interest
      Expense:Compensation
      and employee benefits
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,127
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,313
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,728
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,776Occupancy
      and equipment
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                618
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                609
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,875
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,902Deposit
      insurance premiums
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                30
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                8
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                45
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                22Professional
      services
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                79
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                90
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                282
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                316Advertising
      and public relations
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                44
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                36
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                186
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                203Loan
      operations
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                38
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                48
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                104
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                116Intangible
      amortization
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                104
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                104
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                312
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                375Items
      processing
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                71
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                53
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                187
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                164Telephone
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                56
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                47
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                151
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                139Other
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                289
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                197
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                658
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                644Total
      Non-Interest Expense
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,456
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,505
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                7,528
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                7,657Income
      Before Income Taxes
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                387
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                970
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,340
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                2,590Income
      tax expense
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                81
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                243
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                298
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                613Net
      Income
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                306
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                727
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                1,042
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                1,977Basic
      Net Income Per Common Share
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.17
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.40
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.58
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                1.09Diluted
      Net Income Per Common Share
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.17
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.40
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.58
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                1.07Dividend
      Per Common Share
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.115
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.115
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                0.345
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                0.34Weighted
      Average Number ofCommon
      Shares OutstandingBasic
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,784,549
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,801,405
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,783,810
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,816,085Diluted
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,786,274
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,839,097
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,791,424
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,852,923See
      notes to consolidated financial statements.
 4
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS Nine
Months Ended September 30, 2008 and 2007 (unaudited)
  Nine
      Months EndedSeptember
      30,
                                                                        
                                                                        
                                                                        September
      30,2008
                                                                        
                                                                        
                                                                        2007(IN
      THOUSANDS)OPERATING
      ACTIVITIES:Net
      income
                                                                        
                                                                        $
                                                                        1,042
                                                                        
                                                                        
                                                                        $
                                                                        1,977Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Provision
      for loan losses
                                                                        
                                                                        
                                                                        1,290
                                                                        
                                                                        
                                                                        
                                                                        265Amortization
      of intangibles
                                                                        
                                                                        
                                                                        312
                                                                        
                                                                        
                                                                        
                                                                        376Depreciation
      expense
                                                                        
                                                                        
                                                                        501
                                                                        
                                                                        
                                                                        
                                                                        485Recognition
      of deferred income, net of costs
                                                                        
                                                                        
                                                                        (366
                                                                        )
                                                                        
                                                                        
                                                                        (401
                                                                        )Deferral
      of fee income, net of costs
                                                                        
                                                                        
                                                                        303
                                                                        
                                                                        
                                                                        
                                                                        486Stock
      compensation expense
                                                                        
                                                                        
                                                                        --
                                                                        
                                                                        
                                                                        
                                                                        34(Gain)
      loss on investment transactions
                                                                        
                                                                        
                                                                        (396
                                                                        )
                                                                        
                                                                        
                                                                        2Loss
      on writedown of fixed asset
                                                                        
                                                                        
                                                                        --
                                                                        
                                                                        
                                                                        
                                                                        135Changes
      in operating assets and liabilities:(Increase)decrease
      in accrued interest receivable
                                                                        
                                                                        
                                                                        847
                                                                        
                                                                        
                                                                        
                                                                        (86
                                                                        )Increase
      in cash surrender value of life insurance
                                                                        
                                                                        
                                                                        (300
                                                                        )
                                                                        
                                                                        
                                                                        (255
                                                                        )Increase
      in other assets
                                                                        
                                                                        
                                                                        (339
                                                                        )
                                                                        
                                                                        
                                                                        (276
                                                                        )Increase
      (decrease) in other liabilities
                                                                        
                                                                        
                                                                        (1,220
                                                                        )
                                                                        
                                                                        
                                                                        212Increase(decrease)
      in accrued interest payable
                                                                        
                                                                        
                                                                        (89
                                                                        )
                                                                        
                                                                        
                                                                        1Net
      cash provided by operating activities
                                                                        
                                                                        
                                                                        1,585
                                                                        
                                                                        
                                                                        
                                                                        2,955INVESTING
      ACTIVITIES:Purchase
      of investment and mortgage-backed securities:Available
      for sale
                                                                        
                                                                        
                                                                        (44,702
                                                                        )
                                                                        
                                                                        
                                                                        (50,701
                                                                        )Proceeds
      from sale of investment and mortgage-backed
      securities available for sale
                                                                        
                                                                        
                                                                        22,676
                                                                        
                                                                        
                                                                        
                                                                        8,840Proceeds
      from maturity of investment and mortgage-backed
      securities:Available
      for sale
                                                                        
                                                                        
                                                                        35,328
                                                                        
                                                                        
                                                                        
                                                                        26,208Held
      to maturity
                                                                        
                                                                        
                                                                        696
                                                                        
                                                                        
                                                                        
                                                                        52Purchase
      of bank owned life insurance
                                                                        
                                                                        
                                                                        --
                                                                        
                                                                        
                                                                        
                                                                        (3,200
                                                                        )Principal
      repayments on mortgage-backed securities:Available
      for sale
                                                                        
                                                                        
                                                                        6,546
                                                                        
                                                                        
                                                                        
                                                                        3,661Net
      increase in loans
                                                                        
                                                                        
                                                                        (24,296
                                                                        )
                                                                        
                                                                        
                                                                        (10,427
                                                                        )Purchase
      of FHLB stock
                                                                        
                                                                        
                                                                        (103
                                                                        )
                                                                        
                                                                        
                                                                        (541
                                                                        )Purchase
      of office properties and equipment
                                                                        
                                                                        
                                                                        (366
                                                                        )
                                                                        
                                                                        
                                                                        (306
                                                                        )Net
      cash used by investing activities
                                                                        
                                                                        
                                                                        (4,221
                                                                        )
                                                                        
                                                                        
                                                                        (26,414
                                                                        )FINANCING
      ACTIVITIES:Proceeds
      from the dividend reinvestment plan
                                                                        
                                                                        
                                                                        90
                                                                        
                                                                        
                                                                        
                                                                        87Dividends
      paid in cash
                                                                        
                                                                        
                                                                        (616
                                                                        )
                                                                        
                                                                        
                                                                        (619
                                                                        )Proceeds
      from the exercise of stock options
                                                                        
                                                                        
                                                                        2
                                                                        
                                                                        
                                                                        
                                                                        150Split
      dollar post retirement liability recapitalization
                                                                        
                                                                        
                                                                        (60
                                                                        )
                                                                        
                                                                        
                                                                        --Share
      repurchase program
                                                                        
                                                                        
                                                                        (335
                                                                        )
                                                                        
                                                                        
                                                                        (986
                                                                        )Increase
      in  term borrowings
                                                                        
                                                                        
                                                                        1,000
                                                                        
                                                                        
                                                                        
                                                                        15,250Decrease  in
      other borrowings
                                                                        
                                                                        
                                                                        (3,360
                                                                        )
                                                                        
                                                                        
                                                                        (3,506
                                                                        )Increase
      in deposit accounts
                                                                        
                                                                        
                                                                        3,148
                                                                        
                                                                        
                                                                        
                                                                        14,676Net
      cash (used) provided by financing activities
                                                                        
                                                                        
                                                                        (131
                                                                        )
                                                                        
                                                                        
                                                                        25,052NET
      INCREASE (DECREASE) IN CASHAND
      CASH EQUIVALENTS
                                                                        
                                                                        
                                                                        (2,767
                                                                        )
                                                                        
                                                                        
                                                                        1,593CASH
      AND CASH EQUIVALENTSAT
      BEGINNING OF PERIOD
                                                                        
                                                                        
                                                                        11,890
                                                                        
                                                                        
                                                                        
                                                                        9,124CASH
      AND CASH EQUIVALENTSAT
      END OF PERIOD
                                                                        
                                                                        $
                                                                        9,123
                                                                        
                                                                        
                                                                        $
                                                                        10,717SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for:Income
      taxes
                                                                        
                                                                        $
                                                                        331
                                                                        
                                                                        
                                                                        $
                                                                        977Interest
                                                                        
                                                                        
                                                                        10,135
                                                                        
                                                                        
                                                                        
                                                                        11,258Non-cash
      transactions:Loans
      foreclosed
                                                                        
                                                                        $
                                                                        50
                                                                        
                                                                        
                                                                        
                                                                        --
  See notes to consolidated financial
statements.
 5
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Nine
Months Ended September 30, 2008 and 2007 (unaudited)
  Retained
                                                                                                
                                                                                                
                                                                                                AccumulatedAdditional
                                                                                                
                                                                                                
                                                                                                Earnings,
                                                                                                
                                                                                                
                                                                                                Other
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                TotalCommon
      Stock
                                                                                                
                                                                                                
                                                                                                Paid-in
                                                                                                
                                                                                                
                                                                                                Substantially
                                                                                                
                                                                                                
                                                                                                Comprehensive
                                                                                                
                                                                                                
                                                                                                Treasury
      Stock
                                                                                                
                                                                                                
                                                                                                Shareholders'Shares
                                                                                                
                                                                                                
                                                                                                Amount
                                                                                                
                                                                                                
                                                                                                Capital
                                                                                                
                                                                                                
                                                                                                Restricted
                                                                                                
                                                                                                
                                                                                                Income (loss)
                                                                                                
                                                                                                
                                                                                                at Cost
                                                                                                
                                                                                                
                                                                                                Equity(Dollars
      in Thousands, Except Share Data)BALANCE
      AT DECEMBER 31, 2006
                                                                                                
                                                                                                
                                                                                                1,830,528
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20
                                                                                                
                                                                                                
                                                                                                $
                                                                                                12,506
                                                                                                
                                                                                                
                                                                                                $
                                                                                                18,912
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (610
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                (4,861
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                25,967Net
      income
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,977
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,977Other
      comprehensive income, net of tax onunrealized
      holding gains on securitiesavailable
      for sale arising during period
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                208
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                208Less
      reclassification adjustment for
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                --
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                --losses
      included in net incomeComprehensive
      income
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,185Stock
      option activity, net
                                                                                                
                                                                                                
                                                                                                9,172
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                150
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                150Dividend  reinvestment
      plan contributions
                                                                                                
                                                                                                
                                                                                                4,324
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                87
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                87Share
      repurchase program
                                                                                                
                                                                                                
                                                                                                (47,504
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (986
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (986
                                                                                                )Cash
      dividend ($0.34 per share)
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (619
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (619
                                                                                                )BALANCE
      AT SEPTEMBER 30, 2007
                                                                                                
                                                                                                
                                                                                                1,796,520
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20
                                                                                                
                                                                                                
                                                                                                $
                                                                                                12,743
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20,270
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (402
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                (5,847
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                26,784BALANCE
      AT DECEMBER 31, 2007
                                                                                                
                                                                                                
                                                                                                1,794,866
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20
                                                                                                
                                                                                                
                                                                                                $
                                                                                                12,781
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20,276
                                                                                                
                                                                                                
                                                                                                $
                                                                                                191
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (5,955
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                27,313Net
      income
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,042
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,042Other
      comprehensive loss, net of tax onunrealized
      holding losses on securitiesavailable
      for sale arising during period
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (1,269
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (1,269
                                                                                                )Less
      reclassification adjustment for
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                308
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                308gains
      included in net incomeComprehensive
      income
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                81Stock
      option activity, net
                                                                                                
                                                                                                
                                                                                                1,424
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2Dividend  reinvestment
      plan contributions
                                                                                                
                                                                                                
                                                                                                6,784
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                90
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                90Cumulative
      effect of change in accounting principal
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (60
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (60
                                                                                                )Share
      repurchase program
                                                                                                
                                                                                                
                                                                                                (18,620
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (335
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (335
                                                                                                )Cash
      dividend ($.345 per share)
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (616
                                                                                                )
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (616
                                                                                                )BALANCE
      AT SEPTEMBER 30, 2008
                                                                                                
                                                                                                
                                                                                                1,784,454
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20
                                                                                                
                                                                                                
                                                                                                $
                                                                                                12,873
                                                                                                
                                                                                                
                                                                                                $
                                                                                                20,642
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (770
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                (6,290
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                26,475
  6
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.           Presentation of Consolidated
Financial Statements
 
 The
accompanying unaudited consolidated financial statements of Provident Community
Bancshares, Inc. (the “Corporation”) were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include all disclosures
necessary for a complete presentation of consolidated financial condition,
results of operations, and cash flows in conformity with accounting principles
generally accepted in the United States of America. However, all adjustments
which are, in the opinion of management, necessary for the fair presentation of
the interim consolidated financial statements have been included. All such
adjustments are of a normal and recurring nature. The results of operations for
the nine months ended September 30, 2008 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 to
current year classifications.
 
 Recently
Issued Accounting Standards
 
 The
following is a summary of recent authoritative pronouncements that may affect
accounting, reporting, and disclosure of financial information by the
Corporation:
 
 In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is effective for acquisitions by the Corporation taking
place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a
calendar year-end company is required to record and disclose business
combinations following existing accounting guidance until January 1, 2009. The
Corporation will assess the impact of SFAS 141(R) if and when a future
acquisition occurs.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is reported in the mezzanine section between liabilities and equity.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financials statements and
separate from the parent’s equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interests. SFAS 160
is effective for the Corporation on January 1, 2009.   Earlier
adoption is prohibited. The Corporation is currently evaluating the impact, if
any, the adoption of SFAS 160 will have on its financial position, results of
operations and cash flows.
  7
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”).  SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improving the transparency of financial reporting.  It is intended to
enhance the current disclosure framework in SFAS 133 by requiring that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. This disclosure better conveys the purpose of
derivative use in terms of the risks that the entity is intending to manage.
SFAS 161 is effective for the Corporation on January 1, 2009. This pronouncement
does not impact accounting measurements but will result in additional
disclosures if the Corporation is involved in material derivative and hedging
activities at that time.
 
 In
February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP
140-3”).  This FSP provides guidance on accounting for a transfer of a
financial asset and the transferor’s repurchase financing of the asset.
 This FSP presumes that an initial transfer of a financial asset and a
repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS No. 140. However, if certain criteria are met, the
initial transfer and repurchase financing are not evaluated as a linked
transaction and are evaluated separately under Statement 140.  FSP 140-3
will be effective for financial statements issued for fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years and
earlier application is not permitted. Accordingly, this FSP is effective for the
Corporation on January 1, 2009.  The Corporation is currently evaluating
the impact, if any, the adoption of FSP 140-3 will have on its financial
position, results of operations and cash flows.
 
 In April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”).  This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets”.  The intent of this
FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R), “Business
Combinations,”and
other U.S. generally accepted accounting principles.  This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years and early
adoption is prohibited.  Accordingly, this FSP is effective for the
Corporation on January 1, 2009.  The Corporation does not believe the
adoption of FSP 142-3 will have a material impact on its financial position,
results of operations or cash flows.
 
 In May,
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles,” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy).  SFAS No. 162 will be effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board’s amendments to
AU Section 411, “The Meaning
ofPresent Fairly in Conformity With Generally Accepted Accounting
Principles.”  The FASB has stated that it does not expect SFAS No. 162
will result in a change in current practice. The application of SFAS No. 162
will have no effect on the Corporation’s financial position, results of
operations or cash flows.
 
 FSP SFAS
133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP
SFAS 133-1 and FIN 45-4”) was issued September 2008, effective for reporting
periods (annual or interim) ending after November 15, 2008.  FSP SFAS
133-1 and FIN 45-4 amends SFAS 133 to require the seller of credit derivatives
to disclose the nature of the credit derivative, the maximum potential amount of
future payments, fair value of the derivative, and the nature of any
recourse
  8
 provisions.  Disclosures
must be made for entire hybrid instruments that have embedded credit
derivatives.
 
 The staff
position also amends FIN 45 to require disclosure of the current status of the
payment/performance risk of the credit derivative guarantee.  If an
entity utilizes internal groupings as a basis for the risk, how the groupings
are determined must be disclosed as well as how the risk is
managed.
 
 The staff
position encourages that the amendments be applied in periods earlier than the
effective date to facilitate comparisons at initial adoption.  After
initial adoption, comparative disclosures are required only for subsequent
periods.
 
 FSP SFAS
133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that required
disclosures should be provided for any reporting period (annual or quarterly
interim) beginning after November 15, 2008.  The adoption of this
Staff Position will have no material effect on the Corporation’s financial
position, results of operations or cash flows.
 
 The SEC’s
Office of the Chief Accountant and the staff of the FASB issued press release
2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on
fair value accounting.  The press release includes guidance on the use
of management’s internal assumptions and the use of “market”
quotes.  It also reiterates the factors in SEC Staff Accounting
Bulletin (“SAB”) Topic 5M which should be considered when determining
other-than-temporary impairment: the length of time and extent to which the
market value has been less than cost; financial condition and near-term
prospects of the issuer; and the intent and ability of the holder to retain its
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
 
 On October
10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS
157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value
Measurements” in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that asset is not active. The FSP is effective upon
issuance, including prior periods for which financial statements have not been
issued. For the Company, this FSP is effective for the quarter ended September
30, 2008.
 
 The
Company considered the guidance in the Press Release and in FSP SFAS 157-3 when
conducting its review for other-than-temporary impairment as of September 30,
2008 and determined that it did not result in a change to its impairment
estimation techniques.
 
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Corporation’s financial position, results of operations or cash
flows.
 
 2.          
Income Per
Share
 
 Basic
income per share amounts for the three and nine months ended September 30, 2008
and 2007 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 nine months ended September 30, 2008 and 2007 were
7,614 and 36,838, respectively. Anti-dilutive common stock equivalents that were
excluded in the diluted earnings per share calculation for the nine months ended
September 30, 2008 and 2007 were 85,157 and 0 respectively.
  9
 3.          
Assets
Pledged
 
 Approximately
$71,818,000 and $74,088,000 of marketable debt securities at September 30, 2008
and December 31, 2007, respectively, were pledged by Provident Community Bank,
N.A. (the “Bank”) as collateral to secure deposits of the State of South
Carolina, and Union, Laurens and York counties along with additional borrowings
and repurchase agreements. The Bank pledges as collateral for Federal Home Loan
Bank advances commercial and residential real estate mortgage loans under a
collateral agreement with the Federal Home Loan Bank whereby the Bank maintains,
free of other encumbrances, qualifying mortgages (as defined) with unpaid
principal balances equal to, when discounted at 75% of the unpaid principal
balances, 100% of total advances. As part of the total assets pledged, the Bank
will also pledge securities to cover additional advances from the Federal Home
Loan Bank that exceed the qualifying mortgages balance along with security
repurchase lines with various brokerage houses.
 
 4.          
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 September 30, 2008
related to these items is summarized below:
  Loan Commitments:
                                  
                                  Contract AmountApproved
      loan commitments
                                  
                                  $
                                  1,140,940Unadvanced
      portions of loans and credit lines
                                  
                                  
                                  56,861,000Total
      loan commitments
                                  
                                  $
                                  58,001,940
  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 September 30, 2008 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
$144,900,000 at September 30, 2008. Of these lines, the outstanding loan
balances totaled approximately $88,071,000.
 
 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 fixed/floating rate capital securities
through a pooled trust preferred securities offering. The proceeds from this
issuance, along with the Corporation’s $124,000
  10
 capital
contribution for Capital Trust I’s common securities, were used to acquire
$4,124,000 aggregate principal amount of the Corporation’s floating rate junior
subordinated deferrable interest debentures due October 1, 2036, which
constitute the sole asset of Capital Trust I. The interest rate on the
debentures and the capital securities 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 debentures are subject to redemption at
par at the option of the Corporation, subject to prior regulatory approval, in
whole or in part on any interest payment date after October 1, 2011. The
debentures are also subject to redemption prior to October 1, 2011 at up to
103.7% of par after the occurrence of certain events.
 
 On
November 28, 2006, 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
issued on December 18, 2001. The proceeds from this issuance, along with the
Corporation’s $248,000 capital contribution for the Trust’s common securities,
were used to acquire $8,247,000 aggregate principal amount of the Corporation’s
floating rate junior subordinated deferrable interest debentures due March 1,
2037, which constitute the sole asset of the Capital Trust II. The interest rate
on the debentures and the capital securities is variable and adjustable
quarterly at 1.74% over the three-month LIBOR. The debentures are subject to
redemption at par at the option of the Corporation, subject to prior regulatory
approval, in whole or in part on any interest payment date after March 1, 2012.
The debentures are also subject to redemption prior to March 1, 2012 at 103.5%
of par after the occurrence of certain events.
 
 A summary
of the Subordinated Deferrable Interest Debentures issued and outstanding
follows:
  Amount
                          Outstanding
      at
                          September
      30,Name
                        
                        2008
                        
                        2007
                        
                        Rate
                        
                        Prepayment
                          Option Date
                        
                        Maturity
                        
                        Distribution
                          Payment
                          FrequencyProvident
      Community  Bancshares Capital Trust I
                        
                        4,000,000
                        
                        4,000,000
                        
                        7.39%
                        
                        October
      1, 2011
                        
                        October
      1, 2036
                        
                        QuarterlyProvident
      Community  Bancshares Capital Trust II
                        
                        8,000,000
                        
                        8,000,000
                        
                        4.55%
                        
                        March
      1, 2012
                        
                        March
      1, 2037
                        
                        QuarterlyTotal
                        
                        $12,000,000
                        
                        $12,000,000
  6.          
Fair Value
Measurements
 
 Effective
January 1, 2008, the Corporation adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”) which provides a framework for measuring and disclosing fair value
under generally accepted accounting principles. SFAS 157 requires disclosures
about the fair value of assets and liabilities recognized in the balance sheet
in periods subsequent to initial recognition, whether the measurements are made
on a recurring basis (for example, available-for-sale investment securities) or
on a nonrecurring basis (for example, impaired loans).
 
 SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
  11
 transaction
between market participants on the measurement date. SFAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
 
 Level
      1
                Quoted
      prices in active markets for identical assets or liabilities. Level 1
      assets and liabilities include debt and equity securities and derivative
      contracts that are traded in an active exchange market, as well as U.S.
      Treasuries and money market funds.Level
      2
                Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or liabilities. Level 2
      assets and liabilities include debt securities with quoted prices that are
      traded less frequently than exchange-traded instruments, mortgage-backed
      securities, municipal bonds, corporate debt securities and derivative
      contracts whose value is determined using a pricing model with inputs that
      are observable in the market or can be derived principally from or
      corroborated by observable market data. This category generally includes
      certain derivative contracts and impaired loans.Level
      3
                Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities. Level 3 assets
      and liabilities include financial instruments whose value is determined
      using pricing models, discounted cash flow methodologies, or similar
      techniques, as well as instruments for which the determination of fair
      value requires significant management judgment or estimation. For example,
      this category generally includes certain private equity investments,
      retained residual interests in securitizations, residential mortgage
      servicing rights, and highly-structured or long-term derivative
      contracts.
 
 Assets and
liabilities measured at fair value on a recurring basis at September 30, 2008
are as follows:
 
 Quoted
      Market Price in active markets
                    (Level
      1)
                  
                  Significant
      Other
                    Observable
      Inputs
                    (Level
      2)
                  
                  Significant
      Unobservable
                    Inputs
                    (Level
      3)Available
      for
                    Sale
      Securities
                  $
                  76,381,000
                  $
                  $11,273,000
                  $
                  --
 
 Available-for-sale
investment securities are the only assets whose fair values are measured on a
recurring basis using Level 1 inputs (active market quotes). The Corporation has
no liabilities carried at fair value or measured at fair value on a nonrecurring
basis.
 
 The
Corporation is predominantly an asset based lender with real estate serving as
collateral on a substantial majority of loans. Loans which are deemed to be
impaired are primarily valued at the fair values of the underlying real estate
collateral. Such fair values are obtained using independent appraisals, which
the Corporation considers to be level 2 inputs. The aggregate carrying amount of
impaired loans at September 30, 2008 was $1,452,000.
 
 Goodwill
and other intangible assets measured at fair value on a nonrecurring basis
relate to intangible assets (deposit premium intangible) that were acquired in
connection with acquisitions and were valued at their fair
  12
 market
values at the time of acquisition using level 3 inputs.  FASB Staff
Position No. FAS 157-2 delays the measurement of Goodwill and other intangible
assets measured at fair value on a nonrecurring basis until the first quarter of
2009.
 
 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,
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 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
  13
 to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing the Corporation of the protections of such safe harbor with respect to
all forward-looking statements contained in this report. Management’s ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could effect actual results include interest rate
trends, the general economic climate in the Corporation’s and the Bank’s market
area and the country as a whole, the ability of the Corporation and the Bank to
control costs and expenses, competitive products and pricing, loan delinquency
rates, the quality and composition of the loan and investment portfolios,
changes in accounting principles and guidelines and changes in federal and state
laws and regulations. The Corporation provides greater detail regarding some of
these factors in its Form 10-K for the year ended December 31, 2007, including
in the Risk Factors section of that report, and in its other SEC reports. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.
 
 Except as
required by applicable law or regulation, the Corporation does not undertake,
and specifically disclaims any obligation, to release publicly the result of any
revisions that may be made to any forward looking statements to reflect events
or circumstances after the date of these statements or to reflect the occurrence
of anticipated or unanticipated events.
 
 Financial
Condition
 
 Assets
 Total
assets of the Corporation decreased $1,359,000, or 0.33%, to $406,282,000 at
September 30, 2008 from $407,641,000 at December 31, 2007. Investments and
mortgage-backed securities decreased $21,103,000, or 18.98%, from December 31,
2007 to September 30, 2008, as proceeds from the maturity and sale of investment
securities were utilized to fund growth in higher-yielding loans. Net loans
increased $23,069,000, or 8.99%, from December 31, 2007 to September 30, 2008,
due primarily to growth in commercial real estate and consumer loans partially
offset by reductions in residential mortgage and commercial business
loans.
 Investment and
Mortgage-backed Securities
 Held to
Maturity-Securities classified as held to maturity consisted of the
following (in thousands):
  September 30, 2008
                    
                    
                    December 31, 2007Amortized
                      Cost
                    
                    
                    Fair
                      Value
                    
                    
                    Amortized
                      Cost
                    
                    
                    Fair
                      ValueMunicipal
      Securities
                    
                    $
                    2,430
                    
                    
                    $
                    2,292
                    
                    
                    $
                    3,126
                    
                    
                    $
                    3,135
  14
 Available for
Sale-Securities classified as available for sale consisted of the
following (in thousands):
  September30,
      2008
                                                                                                                  
                                                                                                                  
                                                                                                                  December
      31, 2007Amortized
                                                                                                                      Cost
                                                                                                                  
                                                                                                                  
                                                                                                                  Fair
                                                                                                                      Value
                                                                                                                  
                                                                                                                  
                                                                                                                  Amortized
                                                                                                                    Cost
                                                                                                                  
                                                                                                                  
                                                                                                                  Fair
                                                                                                                      ValueInvestment
      Securities:U.S.
      Agency Obligations
                                                                                                                  
                                                                                                                  $
                                                                                                                  12,466
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  12,307
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  507
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  488Government
      Sponsored Enterprises
                                                                                                                  
                                                                                                                  
                                                                                                                  5,000
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  4,952
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  40,457
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  40,665Municipal
      Securities
                                                                                                                  
                                                                                                                  
                                                                                                                  6,136
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,311
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  9,296
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  9,601Other
                                                                                                                  
                                                                                                                  
                                                                                                                  12,344
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11,273
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,458
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,093Total
      Investment Securities
                                                                                                                  
                                                                                                                  
                                                                                                                  35,946
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  34,843
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  62,718
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  62,847Mortgage-backed
      Securities:Fannie
      Mae
                                                                                                                  
                                                                                                                  
                                                                                                                  38,050
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  37,853
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  27,511
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  27,479Ginnie
      Mae
                                                                                                                  
                                                                                                                  
                                                                                                                  13,345
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  13,491
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,187
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,200Freddie
      Mac
                                                                                                                  
                                                                                                                  
                                                                                                                  665
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  663
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,860
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  13,080Collateralized
      Mortgage Obligations
                                                                                                                  
                                                                                                                  
                                                                                                                  832
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  804
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,492
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,455Total
      Mortgage-backed Securities
                                                                                                                  
                                                                                                                  
                                                                                                                  52,892
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  52,811
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  45,050
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  45,214Total
      Available for Sale
                                                                                                                  
                                                                                                                  $
                                                                                                                  88,838
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  87,654
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  107,768
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  108,061
  15
 Loans
 
 Loans
increased to $279,556,000 at September 30, 2008 compared to $256,487,000 at
December 31, 2007. The Corporation continues to focus on growth of higher
yielding consumer loans and specific commercial lending products that minimizes
concentration risk to the loan portfolio.
 
 Loans
receivable consisted of the following (in thousands):
 
 Mortgage
      loans:
                  
                  September30,
                    2008
                  
                  
                  December
      31,
                    2007Fixed
      rate residential
                  
                  $
                  13,499
                  
                  
                  $
                  16,214Adjustable-rate
      residential
                  
                  
                  7,817
                  
                  
                  
                  8,775Commercial
      real estate
                  
                  
                  103,160
                  
                  
                  
                  76,864Construction
                  
                  
                  5,057
                  
                  
                  
                  4,764Total
      mortgage loans
                  
                  
                  129,533
                  
                  
                  
                  106,617Commercial
      loans:Commercial
      non-real estate
                  
                  
                  28,384
                  
                  
                  
                  32,091Commercial
      lines of credit
                  
                  
                  70,417
                  
                  
                  
                  72,170Total
      commercial loans
                  
                  
                  98,801
                  
                  
                  
                  104,261Consumer
      loans:Home
      equity
                  
                  
                  17,321
                  
                  
                  
                  15,185Consumer
      and installment
                  
                  
                  40,500
                  
                  
                  
                  36,315Consumer
      lines of credit
                  
                  
                  333
                  
                  
                  
                  346Total
      consumer loans
                  
                  
                  58,154
                  
                  
                  
                  51,846Total
      loans
                  
                  
                  286,488
                  
                  
                  
                  262,724Less:Undisbursed
      portion of interimconstruction
      loans
                  
                  
                  (2,371
                  )
                  
                  
                  (2,379
                  )Unamortized
      loan discount
                  
                  
                  (404
                  )
                  
                  
                  (476
                  )Allowance
      for loan losses
                  
                  
                  (4,185
                  )
                  
                  
                  (3,344
                  )Net
      deferred loan origination costs
                  
                  
                  28
                  
                  
                  
                  (38
                  )Total,
      net
                  
                  $
                  279,556
                  
                  
                  $
                  256,487Weighted-average
      interest rate of loans
                  
                  
                  6.14
                  %
                  
                  
                  7.56
                  %
 Liabilities
 Total
liabilities decreased $521,000 to $379,807,000 at September 30, 2008 from
$380,328,000 at December 31, 2007. Deposits increased $3,148,000, or 1.16%, to
$273,547,000 at September 30, 2008 from $270,399,000 at December 31, 2007. The
overall growth includes an $8,390,000 increase in transaction accounts as a
result of a special product promotion, while certificate accounts decreased
$4,330,000. The Corporation continues to target lower-cost demand deposit
accounts through media advertising and special product promotions.
  16
 Deposit
accounts were as follows (in thousands):
 
 September30,
      2008
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        December
      31, 2007Rate
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Balance
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Rate
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Rate
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Balance
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        RateAccount TypeNOW
      accounts:Commercial
      non-interest-bearing
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        --
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        15,656
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        5.72
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        --
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        16,568
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        6.13
                                                                                                                                                                                        %Non-commercial
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        2.58
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        66,564
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        24.33
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        2.14
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        56,282
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        20.81
                                                                                                                                                                                        %Money
      market checking accounts
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        2.48
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        21,174
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        7.74
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        4.44
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        23,160
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        8.57
                                                                                                                                                                                        %Regular
      savings
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        0.62
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        12,888
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        4.72
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        0.79
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        12,794
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        4.73
                                                                                                                                                                                        %Total
      demand and savings deposits
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        1.99
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        116,282
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        42.51
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        2.47
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        108,804
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        40.24
                                                                                                                                                                                        %Time
      deposits:Up
      to 3.00%
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        37,289
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        13.63
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        5,768
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        2.13
                                                                                                                                                                                        %3.01
      %- 4.00%
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        46,380
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        16.96
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        26,265
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        9.71
                                                                                                                                                                                        %4.01
      %- 5.00%
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        54,982
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        20.10
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        34,988
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        12.94
                                                                                                                                                                                        %5.01
      %- 6.00%
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        18,586
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        6.79
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        94,548
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        34.97
                                                                                                                                                                                        %6.01
      %- 7.00%
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        28
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        0.01
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        26
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        0.01
                                                                                                                                                                                        %Total
      time deposits
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        3.75
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        157,265
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        57.49
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        4.67
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        161,595
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        59.76
                                                                                                                                                                                        %Total
      deposit accounts
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        3.01
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        273,547
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        100.00
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        3.78
                                                                                                                                                                                        %
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        270,399
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        100.00
                                                                                                                                                                                        %
 At
September 30, 2008 and December 31, 2007, the Bank had $70,500,000 and
$69,500,000, respectively, of advances outstanding from the FHLB. The maturity
of the advances from the FHLB is as follows (in thousands):
 September30,
      2008
                  
                  
                  December
      31, 2007Contractual
      Maturity:
                  
                  Balance
                  
                  
                  Wtd
      Avg Rate
                  
                  
                  Balance
                  
                  
                  Wtd
      Avg RateWithin
      one year - adjustable rate
                  
                  $
                  6,000
                  
                  
                  
                  3.00
                  %
                  
                  $
                  5,000
                  
                  
                  
                  4.88
                  %After
      one but within three years - fixed rate
                  
                  
                  5,000
                  
                  
                  
                  4.93
                  %
                  
                  
                  5,000
                  
                  
                  
                  4.93
                  %After
      one but within three years - adjustable rate
                  
                  
                  --
                  
                  
                  
                  --
                  %
                  
                  
                  7,500
                  
                  
                  
                  5.30
                  %After
      three but within five years - adjustable rate
                  
                  
                  22,000
                  
                  
                  
                  4.58
                  %
                  
                  
                  28,000
                  
                  
                  
                  4.61
                  %Greater
      than five years - adjustable rate
                  
                  
                  37,500
                  
                  
                  
                  3.89
                  %
                  
                  
                  24,000
                  
                  
                  
                  4.10
                  %Total
      advances
                  
                  $
                  70,500
                  
                  
                  
                  4.10
                  %
                  
                  $
                  69,500
                  
                  
                  
                  4.55
                  %
 
 The Bank
pledges as collateral for the advances its investment securities and has entered
into a blanket collateral agreement with the FHLB whereby the Bank maintains,
free of other encumbrances, qualifying loans with unpaid principal balances
equal to, when discounted at 50% to 75% of the unpaid principal balances, 100%
of total advances. Borrowings from the Federal Home Loan Bank (the “FHLB”)
increased $1,000,000, or 1.44%, to $70,500,000 at September 30, 2008 from
$69,500,000 at December 31, 2007. Securities sold under agreement to repurchase
decreased $3,360,000 to $20,771,000 at September 30, 2008 from $24,131,000 at
December 31, 2007. Excess funds from deposit growth, the sale and maturation of
securities and, to a lesser extent, new borrowings from the Federal Home Loan
Bank were used to pay down borrowings.
  17
 Shareholders’
Equity
 
 Shareholders’
equity decreased $838,000, or 3.07%, to $26,475,000 at September 30, 2008 from
$27,313,000  at December 31, 2007 due primarily to the repurchase of 18,620
shares at a cost of $335,000, dividend payments of $0.345 per share at a cost of
$616,000, and a $961,000 increase in unrealized losses on securities
available for sale, offset by net income of $1,042,000.
 
 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 FHLB advances.
 
 At
September 30, 2008, the Corporation’s investment in marketable securities
totaled $90,084,000, nearly  all of which is available for sale.
Approximately $71,818,000 and $74,088,000 of debt securities at September 30,
2008 and December 31, 2007, 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
$144,900,000 at September 30, 2008. Management of the Corporation anticipates
that it will have sufficient funds available to meet its current loan
commitments.
 
 The
Corporation closely monitors its liquidity position on a daily basis. Time
deposits that are scheduled to mature in one year or less from September 30,
2008, totaled $115,130,000. 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 September 30, 2008, the Corporation had outstanding
$70,500,000 of FHLB borrowings and $20,771,000 of securities sold under
agreements to repurchase. At September 30, 2008, the Corporation had unused
short-term lines of credit to purchase federal funds from unrelated banks
totaling $12,000,000 and the ability to borrow an additional $35,000,000 from
the 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.
 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
  18
 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 September 30, 2008,
that the Bank and the Corporation met the capital adequacy requirements to which
they are subject.
 As of
September 30, 2008, the Bank was "well capitalized" under the regulatory
framework for prompt corrective action based on its capital ratio calculations.
In order to be "well capitalized", the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table.
 Under
present regulations of the Office of the Comptroller of the Currency, the Bank
must have core capital (leverage requirement) equal to 4.0% of assets, of which
1.5% must be tangible capital, excluding intangible assets. The Bank must also
maintain risk-based regulatory capital as a percent of risk weighted assets at
least equal to 8.0%.  In measuring compliance with capital standards,
certain adjustments must be made to capital and total assets.
 The
following tables present the total risk-based, Tier 1 risk-based and Tier 1
leverage requirements for the Corporation and the Bank (dollars in
thousands).
 September 30, 2008Actual
                  
                  
                  Regulatory Minimum
                  
                  
                  “Well Capitalized”Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio$
                  
                  
                  
                  %
                  
                  
                  $
                  
                  
                  
                  %
                  
                  
                  $
                  
                  
                  
                  %Leverage
      ratioCorporation
                  
                  
                  33,521
                  
                  
                  
                  8.26
                  %
                  
                  
                  16,230
                  
                  
                  
                  4.00
                  %
                  
                  
                  n/a
                  
                  
                  
                  n/aBank
                  
                  
                  36,000
                  
                  
                  
                  8.88
                  %
                  
                  
                  16,216
                  
                  
                  
                  4.00
                  %
                  
                  
                  20,270
                  
                  
                  
                  5.00
                  %Tier
      1 capital ratioCorporation
                  
                  
                  33,521
                  
                  
                  
                  10.83
                  %
                  
                  
                  12,369
                  
                  
                  
                  4.00
                  %
                  
                  
                  n/a
                  
                  
                  
                  n/aBank
                  
                  
                  36,000
                  
                  
                  
                  11.64
                  %
                  
                  
                  12,369
                  
                  
                  
                  4.00
                  %
                  
                  
                  18,553
                  
                  
                  
                  6.00
                  %Total
      risk-based capital ratioCorporation
                  
                  
                  40,626
                  
                  
                  
                  13.12
                  %
                  
                  
                  24,737
                  
                  
                  
                  8.00
                  %
                  
                  
                  n/a
                  
                  
                  
                  n/aBank
                  
                  
                  40,186
                  
                  
                  
                  13.00
                  %
                  
                  
                  24,737
                  
                  
                  
                  8.00
                  %
                  
                  
                  30,921
                  
                  
                  
                  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
  19
 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  nine months ended September 30, 2008, the Corporation repurchased
18,620 shares. As of September 30, 2008, the Corporation had repurchased a total
of 347,880 shares and had 37,120 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 $144,900,000 at September 30, 2008. Each customer's credit worthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on the credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. The credit risk on these commitments is managed by subjecting each
customer to normal underwriting and risk management processes. For the
period ended September 30, 2008, 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 endedSeptember30, 2008and 2007
 
 General
 Net income
decreased $421,000, or 57.91%, to $306,000 for the three months ended September
30, 2008 as compared to $727,000 for the same period in 2007. The decrease in
net income for the period was due primarily to a compression of the net interest
margin caused by declining interest rates along with an increase in the
provision for loan losses due to loan growth and the increase in non-performing
loans and charge-offs, offset by an increase in non-interest income and a
reduction in non-interest expense.
  20
 Average Yields and
Rates
 (dollars
in thousands)
 Three
      Months Ended September30,2008
                
                
                2007Average
      Balance
                
                
                Interest
                
                
                Average
      Yield/Cost
                
                
                Average
      Balance
                
                
                Interest
                
                
                Average
      Yield/CostInterest-earning
      assets:Loans
      (1)
                
                $
                276,411
                
                
                $
                4,240
                
                
                
                6.14
                %
                
                $
                239,372
                
                
                $
                4,793
                
                
                
                8.01
                %Mortgage-backed
      securities
                
                
                45,984
                
                
                
                618
                
                
                
                5.38
                %
                
                
                29,365
                
                
                
                355
                
                
                
                4.84
                %Investment
      securities
                
                
                42,431
                
                
                
                608
                
                
                
                5.73
                %
                
                
                95,016
                
                
                
                1,330
                
                
                
                5.60
                %Other
      interest-earning assets
                
                
                9,642
                
                
                
                67
                
                
                
                2.75
                %
                
                
                6,771
                
                
                
                96
                
                
                
                5.67
                %Total
      interest-earning assets
                
                
                374,468
                
                
                
                5,533
                
                
                
                5.91
                %
                
                
                370,524
                
                
                
                6,574
                
                
                
                7.10
                %Non-interest-earning
      assets
                
                
                33,974
                
                
                
                
                
                
                
                
                
                
                
                31,146Total
      assets
                
                $
                408,442
                
                
                
                
                
                
                
                
                
                
                $
                401,670Interest-bearing
      liabilities:Deposits
                
                
                274,376
                
                
                
                2,104
                
                
                
                3.07
                %
                
                
                261,025
                
                
                
                2,469
                
                
                
                3.78
                %Floating
      rate junior subordinated deferrable interest
    debentures
                
                
                12,372
                
                
                
                169
                
                
                
                5.48
                %
                
                
                12,372
                
                
                
                227
                
                
                
                7.34
                %FHLB
      advances and other borrowings
                
                
                91,577
                
                
                
                864
                
                
                
                3.77
                %
                
                
                98,527
                
                
                
                1,165
                
                
                
                4.73
                %Total
      interest-bearing liabilities
                
                
                378,325
                
                
                
                3,137
                
                
                
                3.32
                %
                
                
                371,924
                
                
                
                3,861
                
                
                
                4.15
                %Non-interest-bearing
      liabilities
                
                
                3,098
                
                
                
                
                
                
                
                
                
                
                
                3,404Total
      liabilities
                
                
                381,423
                
                
                
                
                
                
                
                
                
                
                
                375,328Shareholders’
      equity
                
                
                27,019
                
                
                
                
                
                
                
                
                
                
                
                26,342Total
      liabilities and shareholders’ equity
                
                $
                408,442
                
                
                
                
                
                
                
                
                
                
                $
                401,670Net
      interest income/spread
                
                
                
                
                
                $
                2,396
                
                
                
                2.59
                %
                
                
                
                
                
                $
                2,713
                
                
                
                2.94
                %Net
      yield on earning assets
                
                
                
                
                
                
                
                
                
                
                2.56
                %
                
                
                
                
                
                
                
                
                
                
                2.93
                %
 (1)
Average balances of loans include non-accrual loans.
 Interest
Income
 Interest
income decreased $1,041,000, or 15.84%, to $5,533,000 for the three months ended
September 30, 2008 as compared to the same period in 2007. Interest income on
loans decreased by 11.54%, or $553,000, to $4,240,000 for the three months ended
September 30, 2008 from $4,793,000 for the three months ended September 30,
2007, due to declining market interest rates, offset by higher average balance
of loans. Interest on deposits and federal funds sold, combined with interest
and dividends on investment and mortgage-backed securities decreased $488,000
for the three months ended September 30, 2008 to $1,293,000 from $1,781,000
during the same period in 2007 due to lower average balances, offset by higher
investment yields as a result of a higher concentration of mortgage-backed
securities.
  21
 Interest
Expense
 Interest
expense decreased $724,000, or 18.75%, to $3,137,000 for the three months ended
September 30, 2008 as compared to the three months ended September 30, 2007.
Interest expense on deposit accounts decreased $365,000, or 14.78%, to
$2,104,000 for the three months ended September 30, 2008 from $2,469,000 during
the same period in 2007 due primarily to lower market interest rates and a shift
in the composition of the deposit portfolio from certificates of deposits to
transaction accounts, offset by higher average balances. The Corporation
continues to target lower cost demand deposit accounts versus traditional higher
cost certificates of deposits in order to reduce overall funding costs. Interest
expense on borrowings decreased $301,000, or 25.84%, for the three months ended
September 30, 2008 as compared to the same period in the previous year due to
lower market interest rates and, to a lesser extent, lower average balances.
Interest expense on floating rate junior subordinated deferrable interest
debentures decreased $58,000, or 25.55%, to $169,000 for the three months ended
September 30, 2008 from $227,000 during the same period in 2007 due to lower
market rates.
 Provision for Loan
Losses
 
 During the
three months ended September 30, 2008, the provision for loan losses was
$615,000 as compared to $20,000 for the same period in the previous year due to
an increase in nonperforming loans and loans charged-off and 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. During the three months ended September 30, 2008, bad debt
charge-offs, net of recoveries, were $203,000 as compared to $6,000 for the same
period in the previous year. The increase in bad debt charge-offs over the
previous year relates to additional write-downs required in the disposition of
commercial loans during the three months ended September 30, 2008. Real estate
acquired in foreclosure and nonperforming loans increased $8,132,000 from
$3,394,000 at September 30, 2007 to $11,526,000 at September 30, 2008. The
increase in nonperforming loans over the previous year related primarily to four
commercial real estate relationships that have be affected by the downturn in
the residential housing market. Slow housing conditions have affected these
borrowers’ ability to sell the completed projects in a timely manner. Specific
reserves for nonperforming loans at September 30, 2008 were $1,309,000 compared
to $252,000 for nonperforming loans at September 30, 2007. Management believes
the specific reserves allocated to these and other non accrual loans will offset
losses, if any, arising from less than full recovery of the loans from the
supporting collateral. Management continues to evaluate and assess all
nonperforming assets on a regular basis as part of its well-established loan
monitoring and review process.
 Non-Interest
Income
 
 Total
non-interest income increased $280,000, or 35.81%, to $1,062,000 for the three
months ended September 30, 2008 from $782,000 for the same period in the
previous year, primarily due to a gain in the sale of securities, along with an
increase in fees for financial services. During the quarter ended September
30, 2008 the Corporation sold approximately $15.8 million in investment
securities at a gain of $218,000 to fund growth in higher-yielding loans. Fees
from financial services increased $63,000, or 8.29%, to $823,000 for the three
months ended September 30, 2008 from $760,000 for the same period in the
previous year as a result of an increase in transaction
accounts.
 Non-Interest
Expense
 For the
three months ended September 30, 2008, total non-interest expense decreased
$49,000, or 1.96%, to $2,456,000 from $2,505,000 for the same period in 2007.
Compensation and employee benefits decreased $186,000, or 14.17%, to $1,127,000
for the three months ended September 30, 2008 from $1,313,000 for the
same
  22
 period in
2007 due primarily to reductions in accrued incentive compensation expense and
reductions in employee pension benefits costs, offset by higher compensation
costs from normal merit salary increases. Deposit insurance premiums expense
increased $22,000, or 275.00%, to $30,000 for the three months ended September
30, 2008 from $8,000 for the same period in 2007, due to higher FDIC premium
assessments as a result of a one-time assessment credit under the Federal
Insurance Reform Act becoming fully amortized. Professional services expense
decreased $11,000, or 12.22%, to $79,000 for the three months ended September
30, 2008 from $90,000 for the same period in 2007, due to lower legal
expenses. Advertising/public relations expense increased $8,000, or 22.22%,
to $44,000 for the three months ended September 30, 2008 from $36,000 for the
same period in 2007 due primarily to higher deposit product and promotion
expenses. Loan operations expense decreased $10,000, or 20.83%, to $38,000 for
the three months ended September 30, 2008 from $48,000 for the same period in
2007, due primarily to lower costs associated with loan foreclosures. Items
processing expense increased $18,000, or 33.96%, to $71,000 for the three months
ended September 30, 2008 from $53,000 for the same period in 2007, due primarily
to an increase in transaction accounts. Other expense increased $92,000, or
46.70%, to $289,000 for the three months ended September 30, 2008 from $197,000
for the same period in 2007, due primarily to higher costs associated with
deposit account charge-offs and higher printing and postage costs.
 Results of operations for
theninemonths endedSeptember30, 2008and 2007
 
 General
 Net income
decreased $935,000, or 47.29%, to $1,042,000 for the nine months ended September
30, 2008 as compared to $1,977,000 for the same period in 2007. The decrease in
net income for the period was due primarily to a compression of the net interest
margin caused by declining interest rates along with an increase in the
provision for loan losses due to loan growth and the increase in non-performing
loans and charge-offs, offset by an increase in non-interest income and a
reduction in non-interest expense.
  23
 Average Yields and
Rates
 (dollars
in thousands)
 Nine
      Months EndedSeptember30,2008
                
                
                2007Average
                    Balance
                
                
                Interest
                
                
                Average
                    Yield/Cost
                
                
                Average
                    Balance
                
                
                Interest
                
                
                Average
                    Yield/CostInterest-earning
      assets:Loans
      (1)
                
                $
                272,961
                
                
                $
                13,240
                
                
                
                6.47
                %
                
                $
                237,503
                
                
                $
                14,373
                
                
                
                8.07
                %Mortgage-backed
      securities
                
                
                49,630
                
                
                
                1,981
                
                
                
                5.32
                %
                
                
                26,895
                
                
                
                951
                
                
                
                4.71
                %Investment
      securities
                
                
                46,879
                
                
                
                1,943
                
                
                
                5.53
                %
                
                
                94,421
                
                
                
                3,833
                
                
                
                5.41
                %Other
      interest-earning assets
                
                
                7,282
                
                
                
                244
                
                
                
                4.45
                %
                
                
                7,140
                
                
                
                297
                
                
                
                5.55
                %Total
      interest-earning assets
                
                
                376,752
                
                
                
                17,408
                
                
                
                6.16
                %
                
                
                365,959
                
                
                
                19,454
                
                
                
                7.09
                %Non-interest-earning
      assets
                
                
                32,502
                
                
                
                
                
                
                
                
                
                
                
                30,361Total
      assets
                
                $
                409,254
                
                
                
                
                
                
                
                
                
                
                $
                396,320Interest-bearing
      liabilities:Deposits
                
                
                273,193
                
                
                
                6,784
                
                
                
                3.31
                %
                
                
                260,728
                
                
                
                7,254
                
                
                
                3.71
                %Floating
      rate junior subordinated deferrable interest
    debentures
                
                
                12,372
                
                
                
                554
                
                
                
                5.96
                %
                
                
                12,372
                
                
                
                673
                
                
                
                7.25
                %FHLB
      advances and other borrowings
                
                
                93,348
                
                
                
                2,708
                
                
                
                3.87
                %
                
                
                93,709
                
                
                
                3,332
                
                
                
                4.74
                %Total
      interest-bearing liabilities
                
                
                378,913
                
                
                
                10,046
                
                
                
                3.54
                %
                
                
                366,809
                
                
                
                11,259
                
                
                
                4.09
                %Non-interest-bearing
      liabilities
                
                
                3,001
                
                
                
                
                
                
                
                
                
                
                
                2,963Total
      liabilities
                
                
                381,914
                
                
                
                
                
                
                
                
                
                
                
                369,772Shareholders’
      equity
                
                
                27,340
                
                
                
                
                
                
                
                
                
                
                
                26,548Total
      liabilities and shareholders’ equity
                
                $
                409,254
                
                
                
                
                
                
                
                
                
                
                $
                396,320Net
      interest income/spread
                
                
                
                
                
                $
                7,362
                
                
                
                2.63
                %
                
                
                
                
                
                $
                8,195
                
                
                
                3.00
                %Net
      yield on earning assets
                
                
                
                
                
                
                
                
                
                
                2.61
                %
                
                
                
                
                
                
                
                
                
                
                2.99
                %
 (1)
Average balances of loans include non-accrual loans.
 
 Interest
Income
 Interest
income decreased $2,046,000, or 10.52%, to $17,408,000 for the nine months ended
September 30, 2008 as compared to the same period in 2007. Interest income on
loans decreased by 7.88%, or $1,133,000, to $13,240,000 for the nine months
ended September 30, 2008 from $14,373,000 for the nine months ended September
30, 2007, due to declining market interest rates, offset by higher average
balance of loans. Interest on deposits and federal funds sold, combined with
interest and dividends on investment and mortgage-backed securities decreased
$913,000 for the nine months ended September 30, 2008 to $4,168,000 from
$5,081,000 during the same period in 2007 due to lower average balances, offset
by higher investment yields as a result of a higher concentration of
mortgage-backed securities.
  24
 Interest
Expense
 Interest
expense decreased $1,213,000, or 10.77%, to $10,046,000 for the nine months
ended September 30, 2008 as compared to the nine months ended September 30,
2007. Interest expense on deposit accounts decreased $470,000, or 6.48%, to
$6,784,000 for the nine months ended September 30, 2008 from $7,254,000 during
the same period in 2007 due primarily to lower market interest rates and a shift
in the composition of the deposit portfolio from certificates of deposit to
transaction accounts, offset by higher average balances. 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 decreased $624,000, or 18.73%, for the nine months ended
September 30, 2008 as compared to the same period in the previous year due to
lower market interest rates. Interest expense on floating rate junior
subordinated deferrable interest debentures decreased $119,000, or 17.68%, to
$554,000 for the nine months ended September 30, 2008 from $673,000 during the
same period in 2007 due to lower market rates.
 Provision for Loan
Losses
 During the
nine months ended September 30, 2008, the provision for loan losses was
$1,290,000 as compared to $265,000 for the same period in the previous year due
to an increase in nonperforming loans and loans charged-off and 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 real estate loans. Consumer and commercial
loans carry higher risk weighted rates in the reserve calculation as compared to
residential mortgage loans. During the nine months ended September 30, 2008, bad
debt charge-offs, net of recoveries, was $449,000 as compared to $64,000 for the
same period in the previous year. The increase in bad debt charge-offs over the
previous year relates to additional write-downs required in the disposition of
commercial loans during the nine months ended September 30, 2008. The
Corporation’s loan loss allowance at September 30, 2008 was approximately 1.47%
of the Corporation’s outstanding loan portfolio and 36.30% of non-performing
loans compared to 1.28% of the Corporation’s outstanding loan portfolio and
88.37% of non-performing loans at December 31, 2007.
 
 The
changes in the allowance for loan losses consisted of the following (in
thousands):
 
 Balance
      at beginning of period
                
                $
                3,344Provision
      for loan losses
                
                
                1,290Charge-offs,
      net
                
                
                (449
                )Balance
      at end of period
                
                $
                4,185
  25
 The
following table sets forth information with respect to the Bank’s non-performing
assets at the dates indicated (dollars in thousands):
 September 30, 2008
                
                
                December 31, 2007Non-accruing
      loans which are contractually past due 90 days or
    more:Residential
      real estate
                
                $
                141
                
                
                $
                356Commercial
                
                
                10,399
                
                
                
                2,445Consumer
                
                
                986
                
                
                
                171Total
      non-accruing loans
                
                
                11,526
                
                
                
                2,972Real
      estate acquired throughforeclosure and repossessed
      assets
                
                
                88
                
                
                
                856Total
      non-performing assets
                
                $
                11,614
                
                
                $
                3,828Percentage
      of loans receivable
                
                
                4.05
                %
                
                
                1.49
                %Percentage
      of allowance for loan losses to total loans
      outstanding
                
                
                1.47
                %
                
                
                1.28
                %Allowance
      for loan losses
                
                $
                4,185
                
                
                $
                3,344
 
 Non-performing
assets increased $7,786,000 to $11,614,000 at September 30, 2008, or 2.86% of
total assets, as compared to $3,828,000 or 0.94% of total assets, at December
31, 2007. Loans made to three residential real estate developers with total
exposure of $6.7 million as of September 30, 2008 represent 78% of the
commercial real estate non-performing balance as of this date. Loans made for
two residential real estate building lots with total exposure of $502,000 as of
September 30, 2008 represent 51% of the consumer non-performing balance as of
this date. The current downturn in the residential housing market is the primary
factor leading to the deterioration in these loans. This increase in
non-performing loans was offset by an $828,000 decline in other real estate
owned due to the disposition of properties during the first quarter of 2008.
Management has allocated specific reserves to these and other non-accrual loans
that it believes will offset losses, if any, arising from less than full
recovery of the loans from the supporting collateral. These additional reserves
are based on management’s evaluation of a number of factors including the
estimated value of the collateral supporting each of these loans. Management
believes that the combination of specific reserves in the allowance for loan
losses and established impairment of these loans will be adequate to account for
the current risk associated with these loans as of September 30,
2008.
 
 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 $479,000, or 20.67%, to $2,796,000 for the nine
months ended September 30, 2008 from $2,317,000 for the same period in the
previous year. Fees from financial services increased $77,000,
or
  26
 3.42%, to
$2,330,000 for the nine months ended September 30, 2008 from $2,253,000 for the
same period in the previous year. The increase was due to higher deposit service
fees as a result of an increase in transaction accounts, offset by lower fees
generated from third party investment brokerage and financing receivables
programs as a result of lower product volumes. Gain on sale of investments were
$396,000 for the nine months ended September 30, 2008 as
the  Corporation sold approximately $22.7 million in investment
securities in order to improve  yield spreads and to fund growth in
higher-yielding loans.
 
 Non-Interest
Expense
 For the
nine months ended September 30, 2008, total non-interest expense decreased
$129,000, or 1.68%, to $7,528,000 from $7,657,000 for the same period in 2007.
Compensation and employee benefits decreased $48,000, or 1.27%, to $3,728,000
for the nine months ended September 30, 2008 from $3,776,000 for the same period
in 2007 due primarily to reductions in accrued incentive compensation
expense and reductions in employee pension benefits costs, offset by higher
compensation costs from normal merit salary increases. Occupancy and
equipment expense decreased $27,000, or 1.42%, to $1,875,000 for the nine months
ended September 30, 2008 from $1,902,000 for the same period in 2007 due
primarily to the closing of a banking center in the previous year. Deposit
insurance premiums expense increased $23,000, or 104.55%, to $45,000 for the
nine months ended September 30, 2008 from $22,000 for the same period in 2007,
due to higher FDIC premium assessments as a result of a one-time assessment
credit under the Federal Insurance Reform Act becoming fully amortized.
Professional services expense decreased $34,000, or 10.76%, to $282,000 for the
nine months ended September 30, 2008 from $316,000 for the same period in 2007,
due to lower legal expenses. Advertising/public relations expense decreased
$17,000, or 8.37%, to $186,000 for the nine months ended September 30, 2008 from
$203,000 for the same period in 2007 due primarily to lower product and
promotion expenses. Intangible amortization expense decreased $63,000, or
16.80%, to $312,000 for the nine months ended September 30, 2008 from $375,000
for the same period in 2007, due to deposit premiums related to branch
acquisitions becoming fully amortized. Items processing expense increased
$23,000, or 14.02%, to $187,000 for the nine months ended September 30, 2008
from $164,000 for the same period in 2007, due primarily to higher costs
associated with an increase in transaction accounts.
 
 Item
3.  Quantitative and Qualitative
Disclosures about Market Risk
 Not
applicable as the registrant is a smaller reporting company.
 
 Item
4T. Controls and
Procedures
 
 The
Corporation’s management, including the Corporation’s principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Corporation’s “disclosure controls and procedures,” as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end
of the period covered by this report, the Corporation’s disclosure controls and
procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that the Corporation files or submits
under the Exchange Act with the Securities and Exchange Commission (the “SEC”)
(1) is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and (2) is accumulated and
communicated to the Corporation’s management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
 There has
been no change in the Corporation’s internal control over financial reporting
identified in connection with the evaluation required by Rule 13(a)-15(e) that
occurred during the quarter that has materially affected or is reasonably likely
to materially affect, the Corporation’s internal control over financial
reporting.
  27
 PART
II - OTHER INFORMATION
 
 Item  1.              Legal
Proceedings
 The
Corporation is not involved in any legal proceedings. The Bank is not involved
in any pending legal proceedings other than routine legal proceedings occurring
in the normal course of business. Management believes that these proceedings are
immaterial to the Corporation’s financial condition and results of
operations.
 Item  1A.           Risk
Factors
 
 In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2007, 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 third quarter of 2008.
 
 Period
              (a)
                Total
      Number of Shares Purchased
              (b)
                Average
      Price Paid per share
              (c)
                Total
      Number of Shares Purchased as part of Publicly Announced
      Programs
              (d)
                Maximum
      Number of Shares that may be purchased under
  ProgramJuly
      1, 2008 through July 31, 2008
              --
              --
              --
              38,820August
      1, 2008 through August 31, 2008
              --
              --
              --
              38,820September
      1, 2008 through September 30, 2008
              1,700
              $11.29
              1,700
              37,120Total
              1,700
              $11.29
              1,700
              N/A
 
 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.
  28
 Item  4.              Submission of Matters to a
Vote of Security Holders
 
 None
 Item
5.               Other
Information
 
 None
 
 Item  6.              Exhibits
 
 31(a)                   Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 31(b)                   Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 32(a) Chief
Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 
 32(b)                   Chief
Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
  29
 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:
      November 7, 2008
                By:
      /s/ Dwight V.
      Neese
                  Dwight
      V. Neese, President and
                  Chief
      Executive OfficerDate:
      November 7, 2008
                By:  /s/ Richard H.
      Flake
                  Richard
      H. Flake, Executive Vice President
                  and
      Chief Financial Officer
  30