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 June 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 1,783,037 shares, $0.01 par value, of common stock issued and
outstanding as of August 5, 2008.
  
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 
 INDEX
 Part
      I.
              Financial Information
              PageItem
      1. Financial Statements (unaudited)Consolidated
      Balance Sheets as of June 30, 2008and
      December 31, 2007
              3Consolidated
      Statements of Income for the three and sixmonths
      ended June 30, 2008 and 2007
              4Consolidated
      Statements of Cash Flows for the sixmonths
      ended June 30, 2008 and 2007
              5Consolidated
      Statements of Shareholders’ Equity andComprehensive
      Income (Loss) for the six monthsended
      June 30, 2008 and 2007
              6Notes
      to Consolidated Financial Statements
              7-12Item
      2. Management’s Discussion and Analysis of
                Financial
      Condition and Results of Operations
              12-26Item
      3. Quantitative and Qualitative Disclosuresabout
      Market Risk
              26Item
      4T.Controls and Procedures
              26Part
      II.
              Other InformationItem
      1. Legal Proceedings
              27Item
      1A. Risk Factors
              27Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              27Item
      3. Defaults Upon Senior Securities
              27Item
      4. Submission of Matters to a Vote of Security Holders
              28Item
      5. Other Information
              28Item
      6. Exhibits
              28Signatures
              29
  
 Part
1.    Financial Information
  PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 June
30, 2008 and December 31, 2007
  June
      30,
                    
                    
                    December
      31,ASSETS
                    
                    2008
                    
                    
                    2007(Unaudited)
                    
                    
                    (Audited)(DOLLARS
      IN THOUSANDS)Cash
      and due from banks
                    
                    $
                    12,319
                    
                    
                    $
                    11,890Investment
      and mortgage-backed securitiesHeld
      to maturity
                    
                    
                    2,430
                    
                    
                    
                    3,126Available
      for sale
                    
                    
                    86,158
                    
                    
                    
                    108,061Total
      investment and mortgage-backed securities
                    
                    
                    88,588
                    
                    
                    
                    111,187Loans,
      net
                    
                    
                    276,460
                    
                    
                    
                    256,487Office
      properties and equipment, net
                    
                    
                    5,056
                    
                    
                    
                    5,145Federal
      Home Loan Bank Stock, at cost
                    
                    
                    3,907
                    
                    
                    
                    3,826Federal
      Reserve Stock, at cost
                    
                    
                    599
                    
                    
                    
                    599Accrued
      interest receivable
                    
                    
                    2,235
                    
                    
                    
                    2,625Intangible
      assets
                    
                    
                    3,053
                    
                    
                    
                    3,261Cash
      surrender value of life insurance
                    
                    
                    9,374
                    
                    
                    
                    9,175Other
      assets
                    
                    
                    3,472
                    
                    
                    
                    3,446TOTAL
      ASSETS
                    
                    $
                    405,063
                    
                    
                    $
                    407,641LIABILITIESDeposits
                    
                    $
                    272,185
                    
                    
                    $
                    270,399Advances
      from the Federal Home Loan Bank
                    
                    
                    71,161
                    
                    
                    
                    69,500Securities
      sold under agreements to repurchase
                    
                    
                    19,966
                    
                    
                    
                    24,131Floating
      rate junior subordinated deferrable interest debentures
                    
                    
                    12,372
                    
                    
                    
                    12,372Accrued
      interest payable
                    
                    
                    643
                    
                    
                    
                    742Other
      liabilities
                    
                    
                    2,115
                    
                    
                    
                    3,184TOTAL
      LIABILITIES
                    
                    
                    378,442
                    
                    
                    
                    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 - 1,783,037 shares at 6/30/08 and 1,794,866 at
      12/31/07
                    
                    
                    20
                    
                    
                    
                    20Additional
      paid-in capital
                    
                    
                    12,844
                    
                    
                    
                    12,781Accumulated
      other comprehensive gain (loss)
                    
                    
                    (513
                    )
                    
                    
                    191Retained
      earnings, substantially restricted
                    
                    
                    20,541
                    
                    
                    
                    20,276Treasury
      stock, at cost
                    
                    
                    (6,271
                    )
                    
                    
                    (5,955
                    )TOTAL
      SHAREHOLDERS' EQUITY
                    
                    
                    26,621
                    
                    
                    
                    27,313TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                    
                    $
                    405,063
                    
                    
                    $
                    407,641
 See notes
to consolidated financial statements.
  3
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME
 Three
and Six Months Ended June 30, 2008 and 2007 (unaudited)
  Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(DOLLARS
      IN THOUSANDS
                EXCEPT
      PER SHARE)
              
              
              (DOLLARS
      IN THOUSANDS
                EXCEPT
      PER SHARE)Interest
      Income:Loans
              
              $
              4,378
              
              
              $
              4,803
              
              
              $
              9,000
              
              
              $
              9,579Deposits
      and federal funds sold
              
              
              6
              
              
              
              54
              
              
              
              22
              
              
              
              81Mortgage-backed
      securities
              
              
              687
              
              
              
              306
              
              
              
              1,363
              
              
              
              596Interest
      and dividends on investment securities
              
              
              629
              
              
              
              1,297
              
              
              
              1,490
              
              
              
              2,623Total
      Interest Income
              
              
              5,700
              
              
              
              6,460
              
              
              
              11,875
              
              
              
              12,879Interest
      Expense:Deposit
      accounts
              
              
              2,218
              
              
              
              2,397
              
              
              
              4,680
              
              
              
              4,786Floating
      rate junior subordinated deferrable interest debentures
              
              
              175
              
              
              
              223
              
              
              
              384
              
              
              
              445Advances
      from the FHLB and other borrowings
              
              
              843
              
              
              
              1,093
              
              
              
              1,845
              
              
              
              2,167Total
      Interest Expense
              
              
              3,236
              
              
              
              3,713
              
              
              
              6,909
              
              
              
              7,398Net
      Interest Income
              
              
              2,464
              
              
              
              2,747
              
              
              
              4,966
              
              
              
              5,481Provision
      for loan losses
              
              
              365
              
              
              
              85
              
              
              
              675
              
              
              
              245Net
      Interest Income AfterProvision
      for Loan Losses
              
              
              2,099
              
              
              
              2,662
              
              
              
              4,291
              
              
              
              5,236Non-Interest
      Income:Fees
      for financial services
              
              
              756
              
              
              
              792
              
              
              
              1,507
              
              
              
              1,493Other
      fees, net
              
              
              28
              
              
              
              21
              
              
              
              50
              
              
              
              43Net
      gain (loss) on sale of investments
              
              
              66
              
              
              
              (1
              )
              
              
              177
              
              
              
              (1
              )Total
      Non-Interest Income
              
              
              850
              
              
              
              812
              
              
              
              1,734
              
              
              
              1,535Non-Interest
      Expense:Compensation
      and employee benefits
              
              
              1,288
              
              
              
              1,281
              
              
              
              2,601
              
              
              
              2,464Occupancy
      and equipment
              
              
              636
              
              
              
              719
              
              
              
              1,257
              
              
              
              1,303Deposit
      insurance premiums
              
              
              7
              
              
              
              7
              
              
              
              15
              
              
              
              15Professional
      services
              
              
              104
              
              
              
              114
              
              
              
              203
              
              
              
              225Advertising
      and public relations
              
              
              81
              
              
              
              98
              
              
              
              143
              
              
              
              167Loan
      operations
              
              
              32
              
              
              
              28
              
              
              
              66
              
              
              
              68Intangible
      amortization
              
              
              104
              
              
              
              112
              
              
              
              208
              
              
              
              271Items
      processing
              
              
              66
              
              
              
              55
              
              
              
              116
              
              
              
              111Telephone
              
              
              45
              
              
              
              47
              
              
              
              94
              
              
              
              91Other
              
              
              187
              
              
              
              250
              
              
              
              369
              
              
              
              436Total
      Non-Interest Expense
              
              
              2,550
              
              
              
              2,711
              
              
              
              5,072
              
              
              
              5,151Income
      Before Income Taxes
              
              
              399
              
              
              
              763
              
              
              
              953
              
              
              
              1,620Income
      tax expense
              
              
              83
              
              
              
              162
              
              
              
              217
              
              
              
              370Net
      Income
              
              $
              316
              
              
              $
              601
              
              
              $
              736
              
              
              $
              1,250Basic
      Net Income Per Common Share
              
              $
              0.18
              
              
              $
              0.33
              
              
              $
              0.41
              
              
              $
              0.69Diluted
      Net Income Per Common Share
              
              $
              0.18
              
              
              $
              0.32
              
              
              $
              0.41
              
              
              $
              0.67Dividend
      Per Common Share
              
              $
              0.115
              
              
              $
              0.115
              
              
              $
              0.230
              
              
              $
              0.215Weighted
      Average Number ofCommon
      Shares OutstandingBasic
              
              
              1,782,395
              
              
              
              1,819,761
              
              
              
              1,783,436
              
              
              
              1,823,546Diluted
              
              
              1,783,708
              
              
              
              1,857,730
              
              
              
              1,794,027
              
              
              
              1,859,950
 See notes
to consolidated financial statements.
  4
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS Six
Months Ended June 30, 2008 and 2007 (unaudited)
  Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007(IN
      THOUSANDS)OPERATING
      ACTIVITIES:Net
      income
              
              $
              736
              
              
              $
              1,250Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Provision
      for loan losses
              
              
              675
              
              
              
              245Amortization
      of intangibles
              
              
              208
              
              
              
              271Depreciation
      expense
              
              
              343
              
              
              
              321Recognition
      of deferred income, net of costs
              
              
              (265
              )
              
              
              (258
              )Deferral
      of fee income, net of costs
              
              
              209
              
              
              
              311Stock
      compensation expense
              
              
              --
              
              
              
              22(Gain)
      loss on investment transactions
              
              
              (177
              )
              
              
              1Loss
      on writedown of fixed asset
              
              
              --
              
              
              
              135Changes
      in operating assets and liabilities:Decrease
      in accrued interest receivable
              
              
              390
              
              
              
              252Increase
      in cash surrender value of life insurance
              
              
              (199
              )
              
              
              (159
              )Increase
      in other assets
              
              
              (26
              )
              
              
              (680
              )Increase
      (decrease) in other liabilities
              
              
              (1,069
              )
              
              
              1,080Increase
      (decrease) in accrued interest payable
              
              
              (99
              )
              
              
              30Net
      cash  provided by operating activities
              
              
              726
              
              
              
              2,821INVESTING
      ACTIVITIES:Purchase
      of investment and mortgage-backed securities:Available
      for sale
              
              
              (14,242
              )
              
              
              (25,298
              )Proceeds
      from sale of investment and mortgage-backed securities available
      for sale
              
              
              6,821
              
              
              
              4,965Proceeds
      from maturity of investment and mortgage-backed
      securities:Available
      for sale
              
              
              23,813
              
              
              
              25,946Held
      to maturity
              
              
              696
              
              
              
              49Principal
      repayments on mortgage-backed securities:Available
      for sale
              
              
              4,984
              
              
              
              2,533Purchase
      of bank owned life insurance
              
              
              --
              
              
              
              (3,200
              )Net
      increase in loans
              
              
              (20,592
              )
              
              
              (5,108
              )(Purchase)
      redemption of FHLB stock
              
              
              (81)
              
              
              
              742Purchase
      of office properties and equipment
              
              
              (254
              )
              
              
              (315
              )Net
      cash provided by investing activities
              
              
              1,145
              
              
              
              314FINANCING
      ACTIVITIES:Proceeds
      from the dividend reinvestment plan
              
              
              61
              
              
              
              57Dividends
      paid in cash
              
              
              (411
              )
              
              
              (411
              )Proceeds
      from the exercise of stock options
              
              
              2
              
              
              
              --Split
      dollar post retirement liability recapitalization
              
              
              (60
              )
              
              
              --Share
      repurchase program
              
              
              (316
              )
              
              
              (630
              )Increase
      (decrease) in term borrowings
              
              
              1,661
              
              
              
              (13,500
              )Increase
      (decrease) in other borrowings
              
              
              (4,165
              )
              
              
              4,275Increase
      in deposit accounts
              
              
              1,786
              
              
              
              10,185Net
      cash used by financing activities
              
              
              (1,442
              )
              
              
              (24
              )NET
      INCREASE IN CASHAND CASH EQUIVALENTS
              
              
              429
              
              
              
              3,111CASH
      AND CASH EQUIVALENTSAT BEGINNING OF PERIOD
              
              
              11,890
              
              
              
              9,124CASH
      AND CASH EQUIVALENTSAT END OF PERIOD
              
              $
              12,319
              
              
              $
              12,235SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for:Income
      taxes
              
              $
              281
              
              
              $
              717Interest
              
              
              7,008
              
              
              
              7,368Non-cash
      transactions:Loans
      foreclosed
              
              
              --
              
              
              
              --
 See notes
to consolidated financial statements.
  5
 PROVIDENT
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Six
Months Ended June 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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,250
              
              
              
              
              
              
              
              
              
              
              
              1,250Other
      comprehensive income, net of tax onunrealized
      holding losses on securities available for salearising
      during period
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (315
              )
              
              
              
              
              
              
              (315
              )Less
      reclassification adjustment for gains included
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              --in
      net incomeComprehensive
      incomeStock
      option activity, net
              
              
              396
              
              
              
              
              
              
              
              22
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22Dividend  reinvestment
      plan contributions
              
              
              2,823
              
              
              
              
              
              
              
              57
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              57Share
      repurchase program
              
              
              (30,285
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (630
              )
              
              
              (630
              )Cash
      dividend ($.215 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (411
              )
              
              
              
              
              
              
              
              
              
              
              (411
              )BALANCE
      AT JUNE 30, 2007
              
              
              1,803,462
              
              
              $
              20
              
              
              $
              12,585
              
              
              $
              19,751
              
              
              $
              (925
              )
              
              $
              (5,491
              )
              
              $
              25,940BALANCE
      AT DECEMBER 31, 2007
              
              
              1,794,866
              
              
              $
              20
              
              
              $
              12,781
              
              
              $
              20,276
              
              
              $
              191
              
              
              $
              (5,955
              )
              
              $
              27,313Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              736
              
              
              
              
              
              
              
              
              
              
              
              736Other
      comprehensive loss, net of tax onunrealized
      holding losses on securities available for salearising
      during period
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (837
              )
              
              
              
              
              
              
              (837
              )Less
      reclassification adjustment for gains included
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              133
              
              
              
              
              
              
              
              133in
      net incomeComprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              32Stock
      option activity, net
              
              
              1,424
              
              
              
              
              
              
              
              2
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2Dividend  reinvestment
      plan contributions
              
              
              3,667
              
              
              
              
              
              
              
              61
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              61Cumulative
      effect of change in accounting principal
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (60
              )
              
              
              
              
              
              
              
              
              
              
              (60
              )Share
      repurchase program
              
              
              (16,920
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (316
              )
              
              
              (316
              )Cash
      dividend ($.23 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (411
              )
              
              
              
              
              
              
              
              
              
              
              (411
              )BALANCE
      AT JUNE 30, 2008
              
              
              1,783,037
              
              
              $
              20
              
              
              $
              12,844
              
              
              $
              20,541
              
              
              $
              (513
              )
              
              $
              (6,271
              )
              
              $
              26,621
  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 six months ended June 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.
 
 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.
  8
 2. Income Per
Share
 
 Basic
income per share amounts for the three and six months ended June 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 six months ended June 30, 2008 and 2007 were
10,591 and 36,404, respectively.
 
 3. Assets
Pledged
 
 Approximately
$67,997,000 and $74,410,000 of marketable debt securities at June 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 June 30, 2008 related to
these items is summarized below:
 
 Loan Commitments:
              
              Contract
      AmountApproved
      loan commitments
              
              $
              1,334,420Unadvanced
      portions of loans and credit lines
              
              
              55,002,000Total
      loan commitments
              
              $
              56,336,420
 
 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 June 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
$142,800,000 at June 30, 2008. Of these lines, the outstanding loan balances
totaled approximately $87,798,000.
  9
 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 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
                    June
      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
                  
                  
                  
                  4.42
                  %
                  
                  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
  10
 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 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 June 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
              $
              86,946,000
              $
              --
              $
              --
 
 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 June 30, 2008
  11
 was
$2,214,000.
 
 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 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.
  12
 Forward Looking
Statements
 
 Management’s
discussion and analysis of financial condition and results of operations and
other portions of this Form 10-Q may contain certain “forward-looking
statements” concerning the future operations of the Corporation and the Bank.
These forward-looking statements are generally identified by the use of the
words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or
similar expressions. Management intends to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing the Corporation of
the protections of such safe harbor with respect to all forward-looking
statements contained in this report. Management’s ability to predict results or
the effect of future plans or strategies is inherently uncertain. Factors which
could effect actual results include interest rate trends, the general economic
climate in the Corporation’s and the Bank’s market area and the country as a
whole, the ability of the Corporation and the Bank to control costs and
expenses, competitive products and pricing, loan delinquency rates, the quality
and composition of the loan and investment portfolios, changes in accounting
principles and guidelines and changes in federal and state regulation. 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 $2,578,000, or 0.63%, to $405,063,000 at
June 30, 2008 from $407,641,000 at December 31, 2007. Investments and
mortgage-backed securities decreased $22,599,000, or 20.33%, from December 31,
2007 to June 30, 2008, as proceeds from the maturity and sale of investment
securities were utilized to fund growth in higher-yielding loans. Net loans
increased $19,973,000, or 7.79%, from December 31, 2007 to June 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):
 
 June 30, 2008
              
              
              December 31, 2007Amortized
                Cost
              
              
              Fair
                Value
              
              
              Amortized
                Cost
              
              
              Fair
                ValueMunicipal
      Securities
              
              $
              2,430
              
              
              $
              2,409
              
              
              $
              3,126
              
              
              $
              3,135
  13
 Available for
Sale-Securities classified as available for sale consisted of the
following (in thousands):
 
 
 June30, 2008
              
              
              December 31, 2007Amortized
              
              
              Fair
              
              
              Amortized
              
              
              FairCost
              
              
              Value
              
              
              Cost
              
              
              ValueInvestment
      Securities:U.S.
      Agency Obligations
              
              $
              7
              
              
              $
              7
              
              
              $
              507
              
              
              $
              488Government
      Sponsored Enterprises
              
              
              17,999
              
              
              
              18,142
              
              
              
              40,457
              
              
              
              40,665Municipal
      Securities
              
              
              6,888
              
              
              
              7,141
              
              
              
              9,296
              
              
              
              9,601Other
              
              
              12,381
              
              
              
              11,293
              
              
              
              12,458
              
              
              
              12,093Total
      Investment Securities
              
              
              37,275
              
              
              
              36,583
              
              
              
              62,718
              
              
              
              62,847Mortgage-backed
      Securities:Fannie
      Mae
              
              
              39,462
              
              
              
              39,198
              
              
              
              27,511
              
              
              
              27,479Ginnie
      Mae
              
              
              410
              
              
              
              416
              
              
              
              1,187
              
              
              
              1,200Freddie
      Mac
              
              
              8,888
              
              
              
              9,059
              
              
              
              12,860
              
              
              
              13,080Collateralized
      Mortgage Obligations
              
              
              911
              
              
              
              902
              
              
              
              3,492
              
              
              
              3,455Total
      Mortgage-backed Securities
              
              
              49,671
              
              
              
              49,575
              
              
              
              45,050
              
              
              
              45,214Total
      Available for Sale
              
              $
              86,946
              
              
              $
              86,158
              
              
              $
              107,768
              
              
              $
              108,061
 14
 Loans
 
 Loans
increased to $276,460,000 at June 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):
  June
30,
                    2008
                  
                  
                  December
      31,
                    2007Mortgage
      loans:Fixed
      rate residential
                  
                  $
                  14,254
                  
                  
                  $
                  16,214Adjustable-rate
      residential
                  
                  
                  8,072
                  
                  
                  
                  8,775Commercial
      real estate
                  
                  
                  95,713
                  
                  
                  
                  76,864Construction
                  
                  
                  4,149
                  
                  
                  
                  4,764Total
      mortgage loans
                  
                  
                  122,188
                  
                  
                  
                  106,617Commercial
      loans:Commercial
      non-real estate
                  
                  
                  31,829
                  
                  
                  
                  32,091Commercial
      lines of credit
                  
                  
                  70,767
                  
                  
                  
                  72,170Total
      commercial loans
                  
                  
                  102,596
                  
                  
                  
                  104,261Consumer
      loans:Home
      equity
                  
                  
                  16,833
                  
                  
                  
                  15,185Consumer
      and installment
                  
                  
                  40,718
                  
                  
                  
                  36,315Consumer
      lines of credit
                  
                  
                  339
                  
                  
                  
                  346Total
      consumer loans
                  
                  
                  57,890
                  
                  
                  
                  51,846Total
      loans
                  
                  
                  282,674
                  
                  
                  
                  262,724Less:Undisbursed
      portion of interimconstruction
      loans
                  
                  
                  (2,043
                  )
                  
                  
                  (2,379
                  )Unamortized
      loan discount
                  
                  
                  (423
                  )
                  
                  
                  (476
                  )Allowance
      for loan losses
                  
                  
                  (3,773
                  )
                  
                  
                  (3,344
                  )Net
      deferred loan origination costs
                  
                  
                  25
                  
                  
                  
                  (38
                  )Total,
      net
                  
                  $
                  276,460
                  
                  
                  $
                  256,487Weighted-average
      interest rate of loans
                  
                  
                  6.34
                  %
                  
                  
                  7.56
                  %
 Liabilities
 Total
liabilities decreased $1,886,000 to $378,442,000 at June 30, 2008 from
$380,328,000 at December 31, 2007. Deposits increased $1,786,000, or 0.66%, to
$272,185,000 at June 30, 2008 from $270,399,000 at December 31, 2007. The
overall growth includes a $5,860,000 increase in transaction accounts as a
result of a special product promotion, while certificate accounts decreased
$4,074,000. The Corporation continues to target lower-cost demand deposit
accounts through media advertising and special product promotions.
   15
 Deposit
accounts were as follows (in thousands):
 
 June 30,
    2008
                  
                  
                  December 31,
      2007Rate
                  
                  
                  Balance
                  
                  
                  %
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  %Account
      TypeNOW
      accounts:Commercial
      non-interest-bearing
                  
                  
                  --
                  
                  
                  $
                  17,773
                  
                  
                  
                  6.53
                  %
                  
                  
                  --
                  
                  
                  $
                  16,568
                  
                  
                  
                  6.13
                  %Non-commercial
                  
                  
                  2.34
                  %
                  
                  
                  64,103
                  
                  
                  
                  23.55
                  %
                  
                  
                  2.14
                  %
                  
                  
                  56,282
                  
                  
                  
                  20.81
                  %Money
      market checking accounts
                  
                  
                  2.47
                  %
                  
                  
                  19,843
                  
                  
                  
                  7.29
                  %
                  
                  
                  4.44
                  %
                  
                  
                  23,160
                  
                  
                  
                  8.57
                  %Regular
      savings
                  
                  
                  0.64
                  %
                  
                  
                  12,945
                  
                  
                  
                  4.76
                  %
                  
                  
                  0.79
                  %
                  
                  
                  12,794
                  
                  
                  
                  4.73
                  %Total
      demand and savings deposits
                  
                  
                  1.82
                  %
                  
                  
                  114,664
                  
                  
                  
                  42.13
                  %
                  
                  
                  2.47
                  %
                  
                  
                  108,804
                  
                  
                  
                  40.24
                  %Time
      deposits:Up
      to 3.00%
                  
                  
                  
                  
                  
                  
                  28,504
                  
                  
                  
                  10.47
                  %
                  
                  
                  
                  
                  
                  
                  5,768
                  
                  
                  
                  2.13
                  %3.01
      %- 4.00%
                  
                  
                  
                  
                  
                  
                  42,783
                  
                  
                  
                  15.72
                  %
                  
                  
                  
                  
                  
                  
                  26,265
                  
                  
                  
                  9.71
                  %4.01
      %- 5.00%
                  
                  
                  
                  
                  
                  
                  42,873
                  
                  
                  
                  15.75
                  %
                  
                  
                  
                  
                  
                  
                  34,988
                  
                  
                  
                  12.94
                  %5.01
      %- 6.00%
                  
                  
                  
                  
                  
                  
                  43,334
                  
                  
                  
                  15.92
                  %
                  
                  
                  
                  
                  
                  
                  94,548
                  
                  
                  
                  34.97
                  %6.01
      %- 7.00%
                  
                  
                  
                  
                  
                  
                  27
                  
                  
                  
                  0.01
                  %
                  
                  
                  
                  
                  
                  
                  26
                  
                  
                  
                  0.01
                  %Total
      time deposits
                  
                  
                  4.14
                  %
                  
                  
                  157,521
                  
                  
                  
                  57.87
                  %
                  
                  
                  4.67
                  %
                  
                  
                  161,595
                  
                  
                  
                  59.76
                  %Total
      deposit accounts
                  
                  
                  3.17
                  %
                  
                  $
                  272,185
                  
                  
                  
                  100.00
                  %
                  
                  
                  3.78
                  %
                  
                  $
                  270,399
                  
                  
                  
                  100.00
                  %
 At June
30, 2008 and December 31, 2007, the Bank had $71,161,000 and $69,500,000,
respectively, of advances outstanding from the FHLB. The maturity of the
advances from the FHLB is as follows (in
thousands):
  June
      30, 2008
                      Wtd
      Avg Rate
                    
                    
                    December
      31,2007
                      Wtd
      Avg RateContractual
      Maturity:Within
      one year - adjustable rate
                    
                    $
                    6,661
                    
                    
                    
                    2.70
                    %
                    
                    $
                    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
                    
                    $
                    71,161
                    
                    
                    
                    4.06
                    %
                    
                    $
                    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 $1,661,000, or 2.39%, to $71,161,000 at June 30, 2008 from $69,500,000
at December 31, 2007. Securities sold under agreement to repurchase decreased
$4,165,000 to $19,966,000 at June 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, borrowings from the Federal Home Loan Bank were used
to pay down matured borrowings under these arrangements.
   16
 Shareholders’
Equity
 
 Shareholders’
equity decreased $692,000, or 2.53%, to $26,621,000 at June 30, 2008 from
$27,313,000 at December 31, 2007 due primarily to the repurchase of 16,920
shares at a cost of $316,000, dividend payments of $0.23 per share at a cost of
$411,000, and a $704,000 increase in unrealized losses on securities available
for sale, offset by net income of $736,000.
 
 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 June
30, 2008, the Corporation’s investment in marketable securities totaled
$88,588,000, nearly all of which is available for sale. Approximately
$67,997,000 and $74,410,000 of debt securities at June 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
$142,800,000 at June 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 June 30, 2008,
totaled $139,388,000. 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 June 30, 2008, the Corporation had outstanding $71,161,000 of FHLB
borrowings and $19,966,000 of securities sold under agreements to repurchase. At
June 30, 2008, the Corporation had unused short-term lines of credit to purchase
federal funds from unrelated banks totaling $30,000,000 and the ability to
borrow an additional $20,000,000 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 discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Corporation’s
   17
 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 June 30, 2008, that the
Bank and the Corporation met the capital adequacy requirements to which they are
subject.
 As of
June 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).
 June 30, 2008Actual
                  
                  
                  Regulatory Minimum
                  
                  
                  “Well Capitalized”Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio$
                  
                  
                  
                  %
                  
                  
                  $
                  
                  
                  
                  %
                  
                  
                  $
                  
                  
                  
                  %Leverage
      ratioCorporation
                  
                  
                  33,216
                  
                  
                  
                  8.21
                  %
                  
                  
                  16,180
                  
                  
                  
                  4.00
                  %
                  
                  
                  n/a
                  
                  
                  
                  n/aBank
                  
                  
                  35,397
                  
                  
                  
                  8.76
                  %
                  
                  
                  16,351
                  
                  
                  
                  4.00
                  %
                  
                  
                  20,439
                  
                  
                  
                  5.00
                  %Tier
      1 capital ratioCorporation
                  
                  
                  33,216
                  
                  
                  
                  10.70
                  %
                  
                  
                  12,403
                  
                  
                  
                  4.00
                  %
                  
                  
                  n/a
                  
                  
                  
                  n/aBank
                  
                  
                  35,397
                  
                  
                  
                  11.42
                  %
                  
                  
                  12,403
                  
                  
                  
                  4.00
                  %
                  
                  
                  18,605
                  
                  
                  
                  6.00
                  %Total
      risk-based capital ratioCorporation
                  
                  
                  39,853
                  
                  
                  
                  12.84
                  %
                  
                  
                  24,807
                  
                  
                  
                  8.00
                  %
                  
                  
                  n/a
                  
                  
                  
                  n/aBank
                  
                  
                  39,170
                  
                  
                  
                  12.63
                  %
                  
                  
                  24,807
                  
                  
                  
                  8.00
                  %
                  
                  
                  31,009
                  
                  
                  
                  10.00
                  %
   During
fiscal 2003, the Corporation implemented a share repurchase program under which
the Board of Directors of the Corporation authorized the repurchase of up to 5%
of the outstanding shares or 98,000 shares. The program was expanded by an
additional 5%, or 98,000 shares, in fiscal 2004, by an additional 5%, or 95,000
shares in fiscal 2005 and by an additional 5%, or 92,000 shares in fiscal 2006.
The shares are to be repurchased, either through open market purchases or
privately negotiated transactions, depending on market conditions and other
factors.
   18
 Repurchased
shares will be held in treasury and will be available for the Corporation’s
benefit plans. During the six months ended June 30, 2008, the Corporation
repurchased 16,920 shares. As of June 30, 2008, the Corporation had repurchased
a total of 346,180 shares and had 38,820 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 $142,800,000 at
June 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 June 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 endedJune30, 2008and 2007
 
 General
 Net
income decreased $285,000, or 47.42%, to $316,000 for the three months ended
June 30, 2008 as compared to $601,000 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 nonperforming
loans, offset by a decrease in non-interest expense.
   19
 Average Yields and
Rates
 (dollars
in thousands)
 Three Months Ended
      June 30,2008
                  
                  
                  
                  
                  
                  
                  
                  
                  2007Average
                      Balance
                  
                  
                  Interest
                  
                  
                  Average
                      Yield/Cost
                  
                  
                  Average
                      Balance
                  
                  
                  Interest
                  
                  
                  Average
                      Yield/CostInterest-earning
      assets:Loans
      (1)
                  
                  $
                  276,355
                  
                  
                  $
                  4,378
                  
                  
                  
                  6.34
                  %
                  
                  $
                  237,514
                  
                  
                  $
                  4,803
                  
                  
                  
                  8.09
                  %Mortgage-backed
      securities
                  
                  
                  52,041
                  
                  
                  
                  687
                  
                  
                  
                  5.28
                  %
                  
                  
                  26,102
                  
                  
                  
                  306
                  
                  
                  
                  4.69
                  %Investment
      securities
                  
                  
                  40,655
                  
                  
                  
                  562
                  
                  
                  
                  5.53
                  %
                  
                  
                  91,077
                  
                  
                  
                  1,234
                  
                  
                  
                  5.42
                  %Other
      interest-earning assets
                  
                  
                  5,658
                  
                  
                  
                  73
                  
                  
                  
                  5.18
                  %
                  
                  
                  8,294
                  
                  
                  
                  117
                  
                  
                  
                  5.62
                  %Total
      interest-earning assets
                  
                  
                  374,709
                  
                  
                  
                  5,700
                  
                  
                  
                  6.08
                  %
                  
                  
                  362,987
                  
                  
                  
                  6,460
                  
                  
                  
                  7.12
                  %Non-interest-earning
      assets
                  
                  
                  32,608
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  31,698Total
      assets
                  
                  $
                  407,317
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  394,685Interest-bearing
      liabilities:Deposits
                  
                  
                  273,403
                  
                  
                  
                  2,218
                  
                  
                  
                  3.25
                  %
                  
                  
                  259,778
                  
                  
                  
                  2,397
                  
                  
                  
                  3.69
                  %Floating
      rate junior subordinated deferrable interest
    debentures
                  
                  
                  12,372
                  
                  
                  
                  175
                  
                  
                  
                  5.65
                  %
                  
                  
                  12,372
                  
                  
                  
                  223
                  
                  
                  
                  7.20
                  %FHLB
      advances and other borrowings
                  
                  
                  91,084
                  
                  
                  
                  843
                  
                  
                  
                  3.70
                  %
                  
                  
                  92,846
                  
                  
                  
                  1,093
                  
                  
                  
                  4.71
                  %Total
      interest-bearing liabilities
                  
                  
                  376,859
                  
                  
                  
                  3,236
                  
                  
                  
                  3.43
                  %
                  
                  
                  364,996
                  
                  
                  
                  3,713
                  
                  
                  
                  4.07
                  %Non-interest-bearing
      liabilities
                  
                  
                  3,838
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,780Total
      liabilities
                  
                  
                  380,697
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  367,776Shareholders’
      equity
                  
                  
                  26,620
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  26,909Total
      liabilities and shareholders’ equity
                  
                  $
                  407,317
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  394,685Net
      interest income/spread
                  
                  
                  
                  
                  
                  $
                  2,464
                  
                  
                  
                  2.65
                  %
                  
                  
                  
                  
                  
                  $
                  2,747
                  
                  
                  
                  3.05
                  %Net
      yield on earning assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.63
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.03
                  %
 (1)
Average balances of loans include non-accrual loans.
 Interest
Income
 Interest
income decreased $760,000, or 11.76%, to $5,700,000 for the three months ended
June 30, 2008 as compared to the same period in 2007. Interest income on loans
decreased by 8.85%, or $425,000, to $4,378,000 for the three months ended June
30, 2008 from $4,803,000 for the three months ended June 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 $335,000 for
the three months ended June 30, 2008 to $1,322,000 from $1,657,000 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.
   20
 Interest
Expense
 Interest
expense decreased $477,000, or 12.85%, to $3,236,000 for the three months ended
June 30, 2008 as compared to the three months ended June 30, 2007. Interest
expense on deposit accounts decreased $179,000, or 7.47%, to $2,218,000 for the
three months ended June 30, 2008 from $2,397,000 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 $250,000, or 22.87%, for the three months ended June 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
$48,000, or 21.52%, to $175,000 for the three months ended June 30, 2008 from
$223,000 during the same period in 2007 due to lower market rates.
 Provision for Loan
Losses
 
 During
the three months ended June 30, 2008, the provision for loan losses was $365,000
as compared to $85,000 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 June 30, 2008, bad debt charge-offs, net of
recoveries, were $56,000 as compared to $50,000 for the same period in the
previous year. Real estate acquired in foreclosure and nonperforming loans
increased $3,600,000 from $2,253,000 at June 30, 2007 to $5,853,000 at June 30,
2008. The increase in nonperforming loans over the previous year related
primarily to four commercial real estate relationships that has be affected by
the downturn in the residential housing market. Slow housing conditions have
affected some of these borrowers’ ability to sell the completed projects in a
timely manner. Specific reserves for nonperforming loans at June 30, 2008 were
$967,000 compared to $258,000 for nonperforming loans at June 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 $38,000, or 4.68%, to $850,000 for the three
months ended June 30, 2008 from $812,000 for the same period in the previous
year, primarily due to a gain in the sale of securities, offset by a decrease in
fees for financial services. During the quarter ended June 30, 2008, the
Corporation sold approximately $1.6 million in investment securities at a gain
of $66,000 in order to improve yield spreads and to fund growth in
higher-yielding loans. Fees from financial services decreased $36,000, or 4.55%,
to $756,000 for the three months ended June 30, 2008, from $792,000 for the same
period in the previous year. The decrease was due primarily to lower fees
generated from third party investment brokerage and financing receivables
programs as a result of lower product volumes.
 Non-Interest
Expense
 For the
three months ended June 30, 2008, total non-interest expense decreased $161,000,
or 5.94%, to $2,550,000 from $2,711,000 for the same period in 2007.
Compensation and employee benefits increased $7,000, or 0.55%, to $1,288,000 for
the three months ended June 30, 2008 from $1,281,000 for the same period in 2007
due primarily to higher compensation costs from normal merit salary increases,
offset by reductions in accrued incentive
   21
 compensation
expense and reductions in employee pension benefits costs. Occupancy and
equipment expense decreased $83,000, or 11.54%, to $636,000 for the three months
ended June 30, 2008 from $719,000 for the same period in 2007, due the previous
year including expenses related to the closing of a banking center. Professional
services expense decreased $10,000, or 8.77%, to $104,000 for the three months
ended June 30, 2008 from $114,000 for the same period in 2007, due to lower
legal expenses. Advertising/public relations expense decreased $17,000, or
17.35%, to $81,000 for the three months ended June 30, 2008 from $98,000 for the
same period in 2007 due primarily to lower product and promotion expenses.
Intangible amortization expense decreased $8,000, or 7.14%, to $104,000 for the
three months ended June 30, 2008 from $112,000 for the same period in 2007, due
to deposit premiums related to branch acquisitions becoming fully amortized.
Other expense decreased $63,000, or 25.20%, to $187,000 for the three months
ended June 30, 2008 from $250,000 for the same period in 2007, due primarily to
lower costs associated with deposit account charge-offs.
 Results of operations for
the six months ended June 30, 2008and 2007
 
 General
 Net
income decreased $514,000, or 41.12%, to $736,000 for the six months ended June
30, 2008 as compared to $1,250,000 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 nonperforming
loans, offset by a decrease in non-interest expense.
  22
 Average Yields and
Rates
 (dollars
in thousands)
 Period Ended June
      30,2008
              
              
              
              
              
              
              
              
              2007Average
                  Balance
              
              
              Interest
              
              
              Average
                  Yield/Cost
              
              
              Average
                  Balance
              
              
              Interest
              
              
              Average
                  Yield/CostInterest-earning
      assets:Loans
      (1)
              
              $
              270,184
              
              
              $
              9,000
              
              
              
              6.66
              %
              
              $
              235,785
              
              
              $
              9,579
              
              
              
              8.13
              %Mortgage-backed
      securities
              
              
              51,472
              
              
              
              1,363
              
              
              
              5.30
              %
              
              
              25,132
              
              
              
              596
              
              
              
              4.74
              %Investment
      securities
              
              
              49,128
              
              
              
              1,365
              
              
              
              5.56
              %
              
              
              93,705
              
              
              
              2,503
              
              
              
              5.34
              %Other
      interest-earning assets
              
              
              6,089
              
              
              
              147
              
              
              
              4.84
              %
              
              
              7,327
              
              
              
              201
              
              
              
              5.50
              %Total
      interest-earning assets
              
              
              376,873
              
              
              
              11,875
              
              
              
              6.30
              %
              
              
              361,949
              
              
              
              12,879
              
              
              
              7.12
              %Non-interest-earning
      assets
              
              
              32,791
              
              
              
              
              
              
              
              
              
              
              
              31,658Total
      assets
              
              $
              409,664
              
              
              
              
              
              
              
              
              
              
              $
              393,607Interest-bearing
      liabilities:Deposits
              
              
              272,595
              
              
              
              4,680
              
              
              
              3.43
              %
              
              
              260,578
              
              
              
              4,786
              
              
              
              3.67
              %Floating
      rate junior subordinated deferrable interest
    debentures
              
              
              12,372
              
              
              
              384
              
              
              
              6.21
              %
              
              
              12,372
              
              
              
              445
              
              
              
              7.19
              %FHLB
      advances and other borrowings
              
              
              94,244
              
              
              
              1,845
              
              
              
              3.92
              %
              
              
              91,259
              
              
              
              2,167
              
              
              
              4.75
              %Total
      interest-bearing liabilities
              
              
              379,211
              
              
              
              6,909
              
              
              
              3.64
              %
              
              
              364,209
              
              
              
              7,398
              
              
              
              4.06
              %Non-interest-bearing
      liabilities
              
              
              2,951
              
              
              
              
              
              
              
              
              
              
              
              2,738Total
      liabilities
              
              
              382,162
              
              
              
              
              
              
              
              
              
              
              
              366,947Shareholders’
      equity
              
              
              27,502
              
              
              
              
              
              
              
              
              
              
              
              26,660Total
      liabilities and shareholders’ equity
              
              $
              409,664
              
              
              
              
              
              
              
              
              
              
              $
              393,607Net
      interest income/spread
              
              
              
              
              
              $
              4,966
              
              
              
              2.66
              %
              
              
              
              
              
              $
              5,481
              
              
              
              3.05
              %Net
      yield on earning assets
              
              
              
              
              
              
              
              
              
              
              2.64
              %
              
              
              
              
              
              
              
              
              
              
              3.03
              %
 (1)
Average balances of loans include non-accrual loans.
 
 Interest
Income
 Interest
income decreased $1,004,000, or 7.80%, to $11,875,000 for the six months ended
June 30, 2008 as compared to the same period in 2007. Interest income on loans
decreased by 6.04%, or $579,000, to $9,000,000 for the six months ended June 30,
2008 from $9,579,000 for the six months ended June 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 $425,000 for the six months
ended June 30, 2008 to $2,875,000 from $3,300,000 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.
   23
 Interest
Expense
 Interest
expense decreased $489,000, or 6.61%, to $6,909,000 for the six months ended
June 30, 2008 as compared to the six months ended June 30, 2007. Interest
expense on deposit accounts decreased $106,000, or 2.21%, to $4,680,000 for the
six months ended June 30, 2008 from $4,786,000 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 $322,000, or 14.86%, for the six months ended June 30, 2008
as compared to the same period in the previous year due to lower market interest
rates, offset by higher average balances. Interest expense on floating rate
junior subordinated deferrable interest debentures decreased $61,000, or 13.71%,
to $384,000 for the six months ended June 30, 2008 from $445,000 during the same
period in 2007 due to lower market rates.
 Provision for Loan
Losses
 During
the six months ended June 30, 2008, the provision for loan losses was $675,000
as compared to $245,000 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 six months ended June 30, 2008, bad debt charge-offs, net of
recoveries, was $246,000 as compared to $58,000 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 six months ended June 30, 2008. The Corporation’s loan loss
allowance at June 30, 2008 was approximately 1.35% of the Corporation’s
outstanding loan portfolio and 64.46% 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
              
              
              675
 Charge-offs,
      net
              
              
              (246
              )Balance
      at end of period
              
              $
              3,773
   24
 The
following table sets forth information with respect to the Bank’s non-performing
assets at the dates indicated (dollars in thousands):
 June 30,
                  2008
              
              
              December 31,
                  2007Non-accruing
      loans which are contractually
      past due 90 days or
      more:Residential
      real estate
              
              $
              199
              
              
              $
              356Commercial
              
              
              4,857
              
              
              
              2,445Consumer
              
              
              797
              
              
              
              171Total
      non-accruing loans
              
              
              5,853
              
              
              
              2,972Real
      estate acquired throughforeclosure
      and repossessed assets
              
              
              28
              
              
              
              856Total
      non-performing assets
              
              $
              5,881
              
              
              $
              3,828Percentage
      of loans receivable
              
              
              2.08
              %
              
              
              1.49
              %Percentage
      of allowance for loan lossesto total loans
      outstanding
              
              
              1.35
              %
              
              
              1.28
              %Allowance
      for loan losses
              
              $
              3,773
              
              
              $
              3,344
 
 Nonperforming
assets increased $2,053,000 to $5,881,000 at June 30, 2008, or 1.45% of total
assets, as compared to $3,828,000 or 0.94% of total assets, at December 31,
2007. Approximately 34% or $2,000,000 of nonperforming assets as of June 30,
2008 related to two commercial loan relationships that were also nonperforming
at December 31, 2007. Consumer and Commercial nonperforming loans increased
approximately $3,038,000 since the year ended December 31, 2007 due to the
continuing downturn in the economy leading to the deterioration in these loans.
This increase in nonperforming 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 June 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 $199,000, or 12.96%, to $1,734,000 for the six
months ended June 30, 2008 from $1,535,000 for the same period in the previous
year. Fees from financial services increased $14,000, or
  25
 0.94%, to
$1,507,000 for the six months ended June 30, 2008 from $1,493,000 for the same
period in the previous year. The increase was due to higher 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
$177,000  for the six months ended June 30, 2008 as
the  Corporation sold approximately $6.8 million in investment
securities in order to improve  yield spreads and to fund growth in
higher-yielding loans.
 
 Non-Interest
Expense
 For the
six months ended June 30, 2008, total non-interest expense decreased $79,000, or
1.53%, to $5,072,000 from $5,151,000 for the same period in 2007. Compensation
and employee benefits increased $137,000, or 5.56%, to $2,601,000 for the six
months ended June 30, 2008 from $2,464,000 for the same period in 2007 due
primarily  to higher compensation costs from normal merit salary
increases, offset by lower incentive compensation. Occupancy and equipment
expense decreased $46,000, or 3.53%, to $1,257,000 for the six months ended June
30, 2008 from $1,303,000 for the same period in 2007 due primarily
to previous year including expenses related to the closing of a banking
center. Professional services expense decreased $22,000, or 9.78%, to $203,000
for the six months ended June 30, 2008 from $225,000 for the same period in
2007, due to lower legal expenses. Advertising/public relations expense
decreased $24,000, or 14.37%, to $143,000 for the six months ended June 30, 2008
from $167,000 for the same period in 2007 due primarily to lower product and
promotion expenses. Intangible amortization expense decreased $63,000, or
23.25%, to $208,000 for the six months ended June 30, 2008 from $271,000 for the
same period in 2007, due to deposit premiums related to branch acquisitions
becoming fully amortized. Other expense decreased $67,000, or 15.37%, to
$369,000 for the six months ended June 30, 2008 from $436,000 for the same
period in 2007, due primarily to lower costs associated with deposit account
charge-offs.
 
 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 Corporation’s last fiscal quarter that has materially
affected or is reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
  26
 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 first 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
                  ProgramApril
      1, 2008 through April 30, 2008
              49
              $13.00
              49
              38,820May
      1, 2008 through May 31, 2008
              --
              --
              --
              38,820June
      1, 2008 through June 30, 2008
              --
              --
              --
              38,820Total
              49
              $13.00
              49
              N/A
 
 In May
2005, the Corporation implemented a share repurchase program under which the
Corporation could repurchase up to 5% of the outstanding shares or 98,000
shares. In August 2006, the program was expanded by an additional 5% or 92,000
shares. The repurchase program will continue until it is completed or terminated
by the Board of Directors.
 Item  3.                 Defaults upon Senior
Securities
 Not
applicable.
  27
 Item  4.                 Submission of Matters to a
Vote of Security Holders
 The
Annual Meeting of the Stockholders of the Corporation was held on April 23,
2008. The results of the vote on the matters presented at the meeting are as
follows:
 
 1.
                The
      following individuals were elected as directors, each for a three-year
      term by the following vote:
 Votes
      For
              Votes WithheldWilliam
      M. Graham
              1,400,312
              18,297Carl
      L. Mason
              1,377,962
              40,647
 
 2.
                The
      appointment of Elliott Davis, LLC, as auditors for the Corporation for the
      year ending December 31, 2008 was ratified by the stockholders by the
      following vote:
 
 For
      1,395,350
                  Against
      19,779
                  Abstain
      3,480
 
 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
  28
 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:
      August
      8, 2008
              By:     
      /s/ Dwight V.
      Neese
                Dwight
      V. Neese, President and
                Chief
      Executive OfficerDate:
      August
      8, 2008
              By:     
      /s/ Richard H.
      Flake
                Richard
      H. Flake, Executive Vice President
                and
      Chief Financial Officer