UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

 X      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---     ACT OF 1934

        For the quarterly period ended September 30, 2006

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---     EXCHANGE ACT OF 1934

        For the transition period from               to
                                       ------------     ------------

                          COMMISSION FILE NUMBER 1-5735

                      PROVIDENT COMMUNITY BANCSHARES, INC.
                      ------------------------------------
             (Exact name of registrant as specified in its Charter)

        Delaware                                                 57-1001177
        --------                                                 ----------
(State or other Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)


                203 West Main Street, Union, South Carolina 29379
                -------------------------------------------------
                    (Address of Principal Executive Offices)

                                 (864) 429-1864
                                 --------------
              (Registrant's telephone number, including area code)

                                 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
by  Section  13 or 15(d)  of the  Securities  Exchange  Act of 1934  during  the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. Yes  X        No
                      ---         ---

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer"in  Rule 12b-2 of the Exchange  Act.  (Check
one):

 Large accelerated filer      Accelerated filer      Non-accelerated filer X
                         ---                    ---                       ---

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes    No X
                                          ---

The  Corporation had 1,838,906  shares,  $0.01 par value, of common stock issued
and outstanding as of October 26, 2006.




<PAGE>

              PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                                      INDEX

Part I.   Financial Information                                            Page
          ---------------------                                            ----

          Item 1.  Consolidated Financial Statements (unaudited)

          Consolidated Balance Sheets as of September 30, 2006
           and December 31, 2005                                             3

          Consolidated Statements of Income for the three
           and nine months ended September 30, 2006 and 2005                 4

          Consolidated Statements of Cash Flows for the nine
           months ended September 30, 2006 and 2005                          5

          Consolidated Statements of Shareholders' Equity for the
           nine months ended September 30, 2006 and 2005                     6

          Notes to Consolidated Financial Statements                        7-12

          Item 2. Management's  Discussion and Analysis of Financial
          Condition and Results of Operations                              12-27

          Item 3. Quantitative and Qualitative Disclosures about
          Market Risk                                                      27-29

          Item 4. Controls and Procedures                                    29

Part II.  Other Information
          -----------------

          Item 1. Legal Proceedings                                          30

          Item 1A. Risk Factors                                              30

          Item 2. Unregistered Sales of Equity Securities and
          Use of Proceeds                                                    30

          Item 3. Defaults Upon Senior Securities                            31

          Item 4. Submission of Matters to a Vote of Security Holders        31

          Item 5. Other Information                                          31

          Item 6. Exhibits                                                   31

          Signatures                                                         32




<PAGE>

                         Part 1. Financial Information
             PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                  (FORMERLY UNION FINANCIAL BANCSHARES, INC.)
                          CONSOLIDATED BALANCE SHEETS
              September 30, 2006 (unaudited) and December 31, 2005
<TABLE>
<CAPTION>

                                                             September 30,       December 31,
ASSETS                                                          2006                2005
                                                           ----------------    ---------------
<S>                                                             <C>                  <C>
                                                                 (DOLLARS IN THOUSANDS)
Cash and due from banks                                    $      10,804       $         8,380
Investment and mortgage-backed securities
  Held to maturity                                                   3,187               3,204
  Available for sale                                               117,091             143,079
                                                           ----------------    ---------------
Total investment and mortgage-backed securities                    120,278             146,283
                                                           ----------------    ---------------
Loans, net                                                         217,429             192,577
Office properties and equipment, net                                 5,632               5,148
Federal Home Loan Bank Stock, at cost                                3,663               3,976
Federal Reserve Stock, at cost                                         539                 539
Accrued interest receivable                                          2,375               2,429
Intangible assets                                                    3,100               3,576
Cash surrender value of life insurance                               5,557               5,404
Other assets                                                         2,858               2,730
                                                           ----------------    ---------------
TOTAL ASSETS                                               $       372,235     $       371,042
                                                           ================    ===============
LIABILITIES

Deposits                                                   $       240,007     $       239,603
Advances from the Federal Home Loan Bank                            66,900              75,715
Securities sold under agreements to repurchase                      25,000              20,000
Floating rate junior subordinated deferrable interest
 debentures                                                         12,371               8,247
Accrued interest  payable                                              716                 520
Advances from borrowers for taxes and insurance                        213                  33
Other liabilities                                                    1,619               1,591
                                                           ----------------    ---------------
TOTAL LIABILITIES                                                  346,826             345,709
                                                           ----------------    ---------------
Commitments and contingencies-Note 4

SHAREHOLDERS' EQUITY

Serial preferred stock, no par value,
  authorized - 500,000 shares, issued
  and outstanding - None                                                --                 --
Common stock - $0.01 par value,
  authorized - 5,000,000 shares,
  issued and outstanding - 1,838,906 shares at
  9/30/06 and 1,905,897 at 12/31/05                                     20                  20
Additional paid-in capital                                          12,468              12,346
Accumulated other comprehensive loss                                  (717)               (612)
Retained earnings, substantially restricted                         18,301              16,916
Treasury stock, at cost                                             (4,663)             (3,337)
                                                           ----------------    ---------------
TOTAL SHAREHOLDERS' EQUITY                                          25,409              25,333
                                                           ----------------    ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 $       372,235     $       371,042
                                                           ================    ===============
</TABLE>

See notes to consolidated financial statements.



                                        3

<PAGE>

             PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                  (FORMERLY UNION FINANCIAL BANCSHARES, INC.)
                       CONSOLIDATED STATEMENTS OF INCOME
      Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)
<TABLE>
<CAPTION>

                                                               Three Months Ended                   Nine Months Ended
                                                       September 30,      September 30,      September 30,       September 30,
                                                           2006              2005               2006                2005
                                                     ----------------    ----------------   ----------------    ----------------
                                                                   (DOLLARS IN THOUSANDS EXCEPT PER SHARE)
<S>                                                      <C>                     <C>            <C>                  <C>
Interest Income:
  Loans                                              $          4,387    $          3,243   $         12,306    $          9,108
  Deposits and federal funds sold                                   9                  37                 38                 109
  Mortgage-backed securities                                      248                 305                808               1,050
  Interest and dividends on
   investment securities                                        1,374               1,319              4,062               3,756
                                                     ----------------    ----------------   ----------------    ----------------
Total Interest Income                                           6,018               4,904             17,214              14,023
                                                     ----------------    ----------------   ----------------    ----------------
Interest Expense:
  Deposit accounts                                              2,037               1,349              5,647               3,770
  Floating rate junior subordinated deferrable
   interest debentures                                            249                 150                596                 417
  Advances from the FHLB and other borrowings                   1,181                 827              3,084               2,308
                                                     ----------------    ----------------   ----------------    ----------------
Total Interest Expense                                          3,467               2,326              9,327               6,495
                                                     ----------------    ----------------   ----------------    ----------------
Net Interest Income                                             2,551               2,578              7,887               7,528
  Provision for loan losses                                        45                 220                355                 768
                                                     ----------------    ----------------   ----------------    ----------------
Net Interest Income After
   Provision for Loan Losses                                    2,506               2,358              7,532               6,760
                                                     ----------------    ----------------   ----------------    ----------------
Non-Interest Income:
  Fees for financial services                                     693                 667              2,055               1,856
  Other  fees, net                                                 24                  25                 88                  81
  Net gain (loss) on sale of investments                            3                  --                (10)                  5
                                                     ----------------    ----------------   ----------------
Total Non-Interest Income                                         720                 692              2,133               1,942
                                                     ----------------    ----------------   ----------------    ----------------

Non-Interest Expense:
  Compensation and employee benefits                            1,095               1,012              3,327               3,010
  Occupancy and equipment                                         465                 492              1,477               1,523
  Deposit insurance premiums                                        8                   8                 23                  24
  Professional services                                           107                  86                330                 276
  Advertising/public relations                                    118                  46                214                 106
  Loan operations                                                  30                 101                 60                 179
  Deposit premium intangible                                      159                 159                477                 477
  Items processing                                                 46                  49                145                 110
  Telephone                                                        38                  50                128                 135
  Other                                                           228                 167                673                 523
                                                     ----------------    ----------------   ----------------    ----------------
Total Non-Interest Expense                                      2,294               2,170              6,854               6,363
                                                     ----------------    ----------------   ----------------    ----------------

Income Before Income Taxes                                        932                 880              2,811               2,339
Income tax expense                                                281                 242                822                 613
                                                     ----------------    ----------------   ----------------    ----------------
Net Income                                           $            651   $             638   $          1,989    $          1,726
                                                     ================    ================   ================    ================
Basic Net Income Per Common Share                    $           0.35   $            0.33   $           1.06    $           0.90
                                                     ================    ================   ================    ================
Diluted Net Income Per Common Share                  $           0.35   $            0.33   $           1.05    $           0.88
                                                     ================    ================   ================    ================
Weighted Average Number of
  Common Shares Outstanding

Basic                                                       1,846,643           1,906,555          1,876,630           1,914,269

Diluted                                                     1,876,417           1,952,840          1,901,830           1,971,592

</TABLE>

See notes to consolidated financial statements.



                                        4

<PAGE>

              PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                   (FORMERLY UNION FINANCIAL BANCSHARES, INC.)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
            Nine Months Ended September 30, 2006 and 2005 (unaudited)
<TABLE>
<CAPTION>
                                                                   Nine Months Ended
                                                           September 30,       September 30,
                                                                2006                2005
                                                          -----------------   -----------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                                 <C>             <C>
OPERATING ACTIVITIES:

Net income                                                       $1,989              $1,726
Adjustments to reconcile net income to
  net cash provided by operating activities:
  Provision for loan losses                                         355                 768
  Amortization of intangibles                                       477                 477
  Depreciation expense                                              456                 672
  Recognition of deferred income, net of costs                     (388)               (272)
  Deferral of fee income, net of costs                              407                 238
  (Gain) loss on investment transactions                             10                 (42)
  Changes in operating assets and liabilities:
   Decrease in accrued interest receivable                           54                 107
   Increase in other assets                                        (281)               (587)
   Increase in other liabilities                                    208               1,238
   Increase in accrued interest payable                             196                 173
                                                          -----------------   -----------------
Net cash provided by operating activities                         3,483               4,498
                                                          -----------------   -----------------
INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
   Available for sale                                            (9,218)            (49,746)
   Held to maturity                                                  --              (4,605)
Proceeds from sale of investment and mortgage-
 backed securities                                               18,257              10,911
Proceeds from maturity of investment and mortgage-
  backed securities:
   Available for sale                                            12,126              31,705
   Held to maturity                                                  --               3,000
Principal repayments on mortgage-backed securities:
   Available for sale                                             4,724               8,360
Net increase in loans                                           (25,226)            (11,075)
Purchase of FHLB stock                                               --                 (39)
Redemption of FHLB stock                                            313                  --
Purchase of office properties and equipment                        (940)               (185)
                                                          -----------------   -----------------
Net cash (used) provided by investing activities                     36             (11,674)
                                                          -----------------   -----------------
FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan                         85                  78
Dividends paid in cash ($0.32 per share -2006
 and $0.30 per share - 2005)                                       (604)               (577)
Proceeds from the exercise of stock options                          37                  84
Share repurchase program                                         (1,326)             (1,349)
Proceeds from the issuance of trust preferred securities          4,124                  --
Decrease in other borrowings                                     (3,815)             (5,000)
Increase in deposit accounts                                        404              11,727
                                                          -----------------   -----------------
Net cash  (used) provided by financing activities                (1,095)              4,963
                                                          -----------------   -----------------
NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                             2,424              (2,213)

CASH AND CASH EQUIVALENTS
 AT BEGINNING OF PERIOD                                           8,380              13,197
                                                          -----------------   -----------------
CASH AND CASH EQUIVALENTS
 AT END OF PERIOD                                               $10,804             $10,984
                                                          =================   =================
SUPPLEMENTAL DISCLOSURES:

Cash paid for:
  Income taxes                                                     $791              $1,652
  Interest                                                        9,131               6,292

Non-cash transactions:
  Loans foreclosed                                                 $188                 $54
</TABLE>


See notes to consolidated financial statements.




                                        5

<PAGE>
              PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                   (FORMERLY UNION FINANCIAL BANCSHARES, INC.)
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
            Nine Months Ended September 30, 2006 and 2005 (unaudited)
<TABLE>
<CAPTION>
                                                                             Retained       Accumulated
                                                               Additional     Earnings,        Other         Treasury     Total
                                                  Common Stock   Paid-in    Substantially    Comprehensive    Stock   Shareholders'
                                                Shares  Amount  Capital      Restricted     Income (loss)    At Cost      Equity
                                                ------  ------  -------      ----------     -------------    -------      ------
                                                               (Dollars in Thousands, Except Share Data)
<S>                                               <C>     <C>    <C>                <C>             <C>         <C>           <C>
BALANCE AT DECEMBER 31, 2004                 1,957,989   $20   $12,109       $15,221        $109             ($1,440)    $26,019

Net income                                                                     1,726                                       1,726

Other comprehensive income, net of tax
 Unrealized holding losses on securities
  available for sale arising during period,
  net of tax effect of $185                                                                 (450)                           (450)
 Reclassification adjustment for gains
  included in net income, net of tax of $2                                                     5                               5

  Comprehensive income                                                                                                     1,281

Stock option activity, net                      35,044              84                                                        84

Dividend reinvestment plan contributions         4,557              78                                                        78

Share repurchase program                       (81,108)   (1)                      1                     (1,349)          (1,349)

Cash dividend ($.30 per share)                                                  (577)                                       (577)
                                            ------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2005                1,916,482   $19   $12,271       $16,371       ($336)       ($2,789)         $25,536
                                            ====================================================================================
BALANCE AT DECEMBER 31, 2005                 1,905,897   $20   $12,346       $16,916       ($612)       ($3,337)         $25,333

Net income                                                                     1,989                                       1,989

Other comprehensive income, net of tax
  Unrealized holding losses on securities
   available for sale arising during period,
   net of tax effect of $386                                                                 (98)                            (98)
  Reclassification adjustment for losses
   included in net income, net of tax of $3                                                   (7)                             (7)

  Comprehensive income                                                                                                     1,084
Stock option activity, net                       2,203              37                                                        37

Dividend reinvestment plan contributions         4,864              85                                                        85

Share repurchase program                       (74,058)                                                  (1,326)          (1,326)

Cash dividend ($.32 per share)                                                  (604)                                       (604)
                                            ------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2006                1,838,906   $20   $12,468       $18,301       ($717)       ($4,663)         $25,409
                                            ====================================================================================
</TABLE>


                                        6

<PAGE>


              PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
                   (FORMERLY UNION FINANCIAL BANCSHARES, INC.)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   Presentation of Consolidated Financial Statements
     -------------------------------------------------

The  accompanying  unaudited  consolidated  financial  statements  of  Provident
Community  Bancshares,  Inc. (the "Corporation" or "Provident") were prepared in
accordance with  instructions for Form 10-Q and,  therefore,  do not include all
disclosures  necessary for a complete  presentation  of  consolidated  financial
condition,  results of operations,  and cash flows in conformity with accounting
principles  generally  accepted in the United  States of America.  However,  all
adjustments  which are, in the  opinion of  management,  necessary  for the fair
presentation  of  the  interim  consolidated   financial  statements  have  been
included. All such adjustments are of a normal and recurring nature. The results
of operations for the nine months ended  September 30, 2006 are not  necessarily
indicative  of the results which may be expected for the entire  calendar  year.
Certain amounts in the prior year's financial  statements have been reclassified
to conform with current year classifications.

Recently Issued Accounting Standards

The following is a summary of recent  authoritative  pronouncements  that affect
accounting,   reporting,   and  disclosure  of  financial   information  by  the
Corporation:

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial  Instruments--an  amendment of FASB  Statements No. 133 and 140." This
Statement  amends SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities," and SFAS No. 140,  "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement resolves
issues addressed in SFAS No. 133  Implementation  Issue No. D1,  "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS No.
155 is  effective  for all  financial  instruments  acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The  Corporation  does not believe that the adoption of SFAS No. 155 will have a
material impact on its financial position, results of operations and cash flows.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial


                                       7
<PAGE>

adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  An entity should adopt SFAS No. 156
as of the  beginning of its first fiscal year that begins  after  September  15,
2006.  The  Corporation  believes  the  adoption of SFAS No. 156 will not have a
material impact on its financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for  Uncertainty  in  Income  Taxes".   FIN  48  clarifies  the  accounting  for
uncertainty in income taxes recognized in an enterprises'  financial  statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48
prescribes  a  recognition  threshold  and  measurement   attributable  for  the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosures  and  transitions.  FIN 48 is  effective  for fiscal years
beginning  after December 15, 2006. The  Corporation is currently  analyzing the
effects of FIN 48.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value,  establishes  a framework  for  measuring  fair value in
generally accepted  accounting  principles,  and expands  disclosures about fair
value measurements. SFAS 157 is effective for the Corporation on January 1, 2008
and is not expected to have a significant impact on the Corporation's  financial
statements.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit  Pension and Other  Postretirement  Plans" ("SFAS 158"),  which
amends  SFAS  87 and  SFAS  106 to  require  recognition  of the  overfunded  or
underfunded  status of pension  and other  postretirement  benefit  plans on the
balance  sheet.  Under  SFAS 158,  gains and  losses,  prior  service  costs and
credits,  and any remaining  transition  amounts under SFAS 87 and SFAS 106 that
have  not  yet  been  recognized  through  net  periodic  benefit  cost  will be
recognized in accumulated other comprehensive income, net of tax effects,  until
they are amortized as a component of net periodic cost. The measurement  date --
the date at which the  benefit  obligation  and plan  assets are  measured -- is
required  to be the  company's  fiscal  year  end.  SFAS  158 is  effective  for
publiclyaheld  companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after December 15, 2008. The  Corporation is currently  analyzing the effects of
SFAS 158 but does not expect its  implementation  will have a significant impact
on the Corporation's financial conditions or results of operations.

In  September,  2006,  The FASB ratified the  consensuses  reached by the FASB's
Emerging  Issues Task Force  (EITF)  relating to EITF 06-4  "Accounting  for the
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance   Arrangements".   EITF  06-4  addresses  employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability for future  benefits in accordance  with FASB Statement of Financial


                                       8
<PAGE>

Accounting Standards (SFAS) No. 106,  "Employers'  Accounting for Postretirement
Benefits Other Than Pensions",  or Accounting Principles Board (APB) Opinion No.
12, "Omnibus  Opinion--1967".  EITF 06-4 is effective for fiscal years beginning
after December 15, 2006.  Entities should recognize the effects of applying this
Issue  through   either  (a)  a  change  in  accounting   principle   through  a
cumulative-effect  adjustment  to retained  earnings or to other  components  of
equity or net assets in the statement of financial  position as of the beginning
of the  year  of  adoption  or (b) a  change  in  accounting  principle  through
retrospective application to all prior periods. The Corporation does not believe
the adoption of EITF 06-4 will have a material impact on its financial position,
results of operations and cash flows.

On September 13, 2006, the SEC issued Staff  Accounting  Bulleting No. 108 ("SAB
108").  SAB  108  provides  interpretive  guidance  on how  the  effects  of the
carryover  or  reversal  of prior year  misstatements  should be  considered  in
quantifying a potential current year  misstatement.  Prior to SAB 108, Companies
might evaluate the materiality of financial statement misstatements using either
the  income  statement  or balance  sheet  approach,  with the income  statement
approach  focusing  on new  misstatements  added in the  current  year,  and the
balance sheet approach focusing on the cumulative amount of misstatement present
in a company's  balance  sheet.  Misstatements  that would be material under one
approach  could be viewed  as  immaterial  under  another  approach,  and not be
corrected.  SAB  108  now  requires  that  companies  view  financial  statement
misstatements  as material if they are  material  according to either the income
statement or balance sheet  approach.  The  Corporation has analyzed SAB 108 and
determined that upon adoption it will have no impact on the reported  results of
operations or financial conditions.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting  bodies that do not require adoption until a future date
are not  expected  to  have a  material  impact  on the  consolidated  financial
statements upon adoption.

2.   Income Per Share
     ----------------

Basic income per share amounts for the three and nine months ended September 30,
2006 and 2005  were  computed  based on the  weighted  average  number of common
shares outstanding  during the period.  Diluted income per share adjusts for the
dilutive effect of outstanding common stock options during the periods utilizing
the treasury  stock  method.  Common stock  equivalents  included in the diluted
earnings per share  calculation for the nine months ended September 30, 2006 and
2005 were 25,200 and 57,323, respectively.

3.   Assets Pledged
      -------------

Approximately  $65,858,000  and  $83,170,000 of debt securities at September 30,
2006 and December 31, 2005,  respectively,  were pledged by Provident  Community
Bank,  N.A. (the "Bank") as collateral to secure  deposits of the State of South
Carolina,  and Union, Laurens and York counties along with additional borrowings
and repurchase agreements.  The Bank pledges as collateral for Federal Home Loan
Bank  advances  the Bank's  Federal  Home Loan Bank stock and has entered into a
blanket  collateral  agreement  with the Federal Home Loan Bank whereby the Bank
maintains,  free of other encumbrances,  qualifying  mortgages (as defined) with
unpaid  principal  balances  equal  to,  when  discounted  at 75% of the  unpaid


                                       9
<PAGE>

principal balances, 100% of total advances. As part of the total assets pledged,
the Bank will also  pledge  securities  to cover  additional  advances  from the
Federal Home Loan Bank that exceed the qualifying  mortgages  balance along with
security repurchase lines with various brokerage houses.

4.   Contingencies and Loan Commitments
     ----------------------------------

In the ordinary course of business,  the Bank enters into financial  instruments
with off-balance-sheet risk to meet the financing needs of its customers.  These
instruments expose the Bank to credit risk in excess of the amount recognized on
the balance sheet.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party  to  the  financial   instrument  for  commitments  to  extend  credit  is
represented by the contractual  amount of those  instruments.  The Bank uses the
same credit policies in making  commitments  and  conditional  obligations as it
does for  on-balance-sheet  instruments.  Total credit exposure at September 30,
2006 related to these items is summarized below:

          Loan Commitments:                                     Contract Amount

          Approved loan commitments                                 $ 2,545,000
          Unadvanced portions of loans and credit lines              45,787,000
                                                                     ----------
          Total loan commitments                                    $48,332,000
                                                                     ==========

Loan  commitments  to extend credit are agreements to lend to a customer as long
as there is no violation of any  condition  established  in the  contract.  Loan
commitments  generally have fixed expiration dates or other termination  clauses
and  may  require   payment  of  a  fee.  The  Bank  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on  management's  credit  evaluation of the counter
party.  Collateral  held  is  primarily  residential  and  commercial  property.
Commitments  outstanding at September 30, 2006 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   $110,052,000  at  September  30,  2006.  Of  these  lines,   the
outstanding loan balances totaled approximately $64,265,000.

5.   Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
     ----------------------------------------------------------------------

On July 21, 2006, the Corporation completed a private placement of $4 million in
trust preferred  securities.  In connection with the sale of the trust preferred
securities,  the Corporation  issued  $4,124,000  aggregate  principal amount of
Fixed/Floating  Rate Junior  Subordinated  Debt Securities due 2036. The Company
intends to use the proceeds from the issuance of the trust preferred  securities
for general  corporate  purposes and to increase the  regulatory  capital of the
Bank. The trust  preferred  securities  will bear a rate equal to 7.393% for the
first  five years  following  the  offering.  After the first  five  years,  the
securities  will bear a rate  equal to 174  basis  points  over the  three-month
LIBOR.  The  Subordinated  Debt Securities bear an identical  interest rate. The
trust preferred  securities were issued by a statutory  business trust formed by
the Corporation and were sold in a private  placement  pursuant to an applicable
exemption from registration under the Securities Act of 1933, as amended.


                                       10
<PAGE>

A  summary  of  the  Subordinated  Deferrable  Interest  Debentures  issued  and
outstanding follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                     Amount Outstanding                                                 Distribution
                                           at                     Prepayment                              Payment
                                       September 30,              Option Date        Maturity            Frequency
--------------------------------------------------------------------------------------------------------------------
      Name                        2006       2005     Rate
--------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>       <C>             <C>              <C>                   <C>
Union Financial Statutory      $8,000,000 $8,000,000  8.99%    December 18, 2006   December 18, 2031      Quarterly
Trust I
--------------------------------------------------------------------------------------------------------------------
Provident Community             4,000,000     -       7.39%     October 1, 2011     October 1, 2036       Quarterly
Bancshares Capital Trust I
--------------------------------------------------------------------------------------------------------------------
          Total               $12,000,000
</TABLE>

6.   Stock-Based Compensation
     ------------------------

On January 1, 2006, the Company adopted the fair value recognition
provisions  of  Financial  Accounting  Standards  Board  ("FASB")  Statement  of
Financial Accounting  Standards ("SFAS") No. 123(R),  Accounting for Stock-Based
Compensation,  to account for  compensation  costs under its stock option plans.
The Company  previously  utilized the  intrinsic  value method under  Accounting
Principles  Board Opinion No. 25,  Accounting  for Stock Issued to Employees (as
amended) ("APB 25").  Under the intrinsic value method  prescribed by APB 25, no
compensation  costs were  recognized for the Company's stock options because the
option exercise price in its plans equals the market price on the date of grant.
Prior to January 1, 2006,  the Company only  disclosed  the pro forma effects on
net income and earnings per share as if the fair value recognition provisions of
SFAS 123(R) had been utilized.

In adopting SFAS No. 123(R), the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the fair
value recognition method.  Under the modified  prospective method,  compensation
cost is  recognized  from the adoption  date  forward for all new stock  options
granted and for any outstanding  unvested awards as if the fair value method had
been  applied  to those  awards as of the date of  grant.  The  following  table
illustrates the effect on net income and earnings per share as if the fair value
based method had been  applied to all  outstanding  and unvested  awards in each
period (in thousands, except per share amounts).


                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                                  Nine Months Ended
                                                                                     September 30,
                                                                                 2006           2005
                                                                            -----------------------------
<S>                                                                              <C>            <C>
Net income as reported                                                         $1,989          $1,726

Add: Stock-based employee compensation expense included in reported
     net income, net of related tax effects.                                       34              --
Deduct: Total stock-based employee compensation expense determined
     under fair value based method for all awards, net of related tax
     effects                                                                      (34)           (144)
Pro forma net income including stock-based compensation cost based
 on fair-value method                                                          $1,989          $1,582
                                                                            ============   =============
Earnings per share:

  Basic--as reported                                                           $ 1.06          $ 0.90
                                                                            ============   =============
  Basic--pro forma                                                             $ 1.06          $ 0.83
                                                                            ============   =============
  Diluted--as reported                                                         $ 1.05          $ 0.88
                                                                            ============   =============
  Diluted--pro forma                                                           $ 1.05          $ 0.80
                                                                            ============   =============
</TABLE>


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 could have a material  impact on the carrying value of certain
assets and  liabilities.  Management  considers such  accounting  policies to be
critical accounting  policies.  The judgments and assumptions used by management
are based on historical  experience and other factors,  which are believed to be
reasonable under the  circumstances.  Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and  estimates  which  could have a material  impact on the  carrying  values of
assets and liabilities and the results of operations of the Corporation.

The Corporation  believes the allowance for loan losses is a critical accounting
policy that requires significant judgments and estimates used in the preparation
of  consolidated  financial  statements.  Management  reviews  the  level of the
allowance on a monthly basis and establishes the provision for loan losses based
on the nature  and  volume of the loan  portfolio,  overall  portfolio  quality,
delinquency  levels,  a review  of  specific  problem  loans,  loss  experience,
economic conditions, and other factors related to the collectibility of the loan
portfolio. A portion of the allowance is established by segregating the loans by
residential  mortgage,  commercial and consumer  loans and assigning  allocation
percentages  based on historical  loss experience and  delinquency  trends.  The
applied allocation percentages are reevaluated at least annually to ensure their
relevance in the current  economic  environment.  Accordingly,  increases in the
size of the loan portfolio and the increased  emphasis on commercial real estate
and commercial  business  loans,  which carry a higher degree of risk of default
and,   thus,  a  higher   allocation   percentage,   increases  the   allowance.
Additionally,  a portion of the allowance is  established  based on the level of
classified assets.


                                       12
<PAGE>

Although the Corporation believes that it uses the best information available to
establish the allowance for loan losses,  future  additions to the allowance may
be necessary  based on estimates  that are  susceptible to change as a result of
changes in economic conditions and other factors. In addition, the Office of the
Comptroller  of the Currency,  as an integral part of its  examination  process,
will  periodically  review the  Corporation's  allowance  for loan losses.  Such
agency may require the  Corporation  to recognize  adjustments  to the allowance
based on its  judgments  about  information  available  to it at the time of its
examination.

Forward Looking Statements
--------------------------

Management's  discussion  and  analysis of  financial  condition  and results of
operations   and  other   portions  of  this  Form  10-Q  may  contain   certain
"forward-looking statements" concerning the future operations of the Corporation
and the Bank. These  forward-looking  statements are generally identified by the
use  of the  words  "believe,"  "expect,"  "intend,"  "anticipate,"  "estimate,"
"project," or similar  expressions.  Management intends to take advantage of the
safe harbor provisions of the Private  Securities  Litigation Reform Act of 1995
and is  including  this  statement  for the  express  purpose  of  availing  the
Corporation  of  the  protections  of  such  safe  harbor  with  respect  to all
forward-looking statements contained in this report to describe future plans and
strategies.  Management's  ability  to  predict  results or the effect of future
plans or strategies is inherently  uncertain.  Factors which could effect actual
results  include  interest  rate  trends,  the general  economic  climate in the
Corporation's and the Bank's market area and the country as a whole, the ability
of the  Corporation  and the Bank to  control  costs and  expenses,  competitive
products and pricing, loan delinquency rates, the quality and composition of the
loan and investment portfolios,  changes in accounting principles and guidelines
and changes in federal and state regulation.  These factors should be considered
in evaluating the forward-looking  statements,  and undue reliance should not be
placed on such statements.

Except as required by applicable law or  regulation,  the  Corporation  does not
undertake,  and specifically  disclaims any obligation,  to release publicly the
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 increased $1,193,000,  or 0.32%, to $372,235,000
at September 30, 2006 from  $371,042,000  at December 31, 2005.  Investments and
mortgage-backed securities decreased approximately $26,005,000,  or 17.78%, from
December  31,  2005 to  September  30,  2006,  due to the sale and  maturity  of
securities.  Proceeds from the maturity and sale of investment  securities  were
utilized to fund growth in higher-yielding loans.


                                       13
<PAGE>

Investment and Mortgage-backed Securities
-----------------------------------------

Held to  Maturity-Securities  classified  as held to maturity  consisted  of the
following (in thousands):

                              September 30, 2006       December 31, 2005
                             -------------------      ------------------
                              Fair     Amortized       Fair    Amortized
                              Cost       Value         Cost      Value
                             ------      ------       ------     ------
Municipal Securities         $3,187      $3,236       $3,204     $3,247
                             ======      ======       ======     ======

Available for Sale-Securities  classified as available for sale consisted of the
following (in thousands):
<TABLE>
<CAPTION>
                                                 September 30, 2006        December 31, 2005
                                                 ------------------        -----------------
                                                  Fair     Amortized        Fair    Amortized
                                                  Cost       Value           Cost      Value
                                                 ------     ------         ------     ------
<S>                                               <C>         <C>            <C>        <C>
Investment Securities:
  U.S. Agency Obligations                       $70,474    $69,501        $84,631    $83,443
  Municipal Securities                           10,598     10,966         17,328     18,180
  Other                                          15,302     15,395         14,530     14,621
                                                 ------     ------         ------     ------
Total Investment Securities                      96,374     95,862        116,489    116,244
                                                 ------     ------         ------     ------
Mortgage-backed Securities:
  Fannie Mae                                     13,786     13,298         17,370     16,771
  Ginnie Mae                                         57         59             67         69
  Freddie Mac                                     3,390      3,398          4,572      4,579
  Collateralized Mortgage Obligations             4,586      4,474          5,523      5,416
                                                 ------     ------         ------     ------
Total Mortgage-backed Securities                 21,819     21,229         27,532     26,835
                                                 ------     ------         ------     ------
Total Available for Sale                       $118,193   $117,091       $144,021   $143,079
                                                 ======     ======         ======     ======
</TABLE>

Loans
-----

Loans increased  $24,852,000,  or 12.90%, to $217,429,000 at September 30, 2006.
The  Corporation  continues  to focus on consumer  and  commercial  lending with
specialized loan officers and products.


                                       14
<PAGE>

Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                                 September 30,   December 31,
                                                     2006           2005
                                                 -------------   ------------
<S>                                                     <C>          <C>
Mortgage loans:
  Fixed rate residential                            $19,560         $23,859
  Adjustable-rate residential                         9,906          12,701
  Commercial real estate                             56,281          45,665
  Construction                                        6,655           4,842
                                                     ------          ------
Total mortgage loans                                 92,402          87,067
Commercial loans:
  Commercial non-real estate                         37,779          39,453
  Commercial lines of credit                         47,519          31,215
                                                     ------          ------
Total commercial loans                               85,298          70,668
                                                     ------          ------
Consumer loans:
  Home equity                                        16,374          16,427
  Consumer and installment                           28,991          23,067
  Consumer lines of credit                              372             382
                                                     ------          ------
Total consumer loans                                 45,737          39,876
                                                     ------          ------
Total loans                                         223,437         197,611
                                                     ------          ------
Less:
  Undisbursed portion of interim
   construction loans                                (2,842)         (1,980)
  Unamortized loan discount                            (631)           (764)
  Allowance for loan losses                          (2,615)         (2,394)
  Net deferred loan origination costs                    80             104
                                                     ------          ------
Total, net                                         $217,429        $192,577
                                                     ======          ======
Weighted-average interest rate of loans                7.99%           7.64%

</TABLE>

Liabilities
-----------

Total liabilities increased  $1,117,000,  or 0.32%, to $346,826,000 at September
30, 2006 from $345,709,000 at December 31, 2005. Deposits increased $404,000, or
0.17%, to  $240,007,000 at September 30, 2006 from  $239,603,000 at December 31,
2005.  The  increase was due  primarily to growth in lower cost demand  accounts
offset by a  reduction  in higher cost  certificates  of deposit  accounts.  The
Corporation continues to target lower cost demand deposit accounts through media
advertising.








                                       15
<PAGE>
Deposit accounts were as follows (in thousands):
<TABLE>
<CAPTION>
                                                September 30, 2006                December 31, 2005
                                           --------------------------        -------------------------
                                             Rate      Balance     %           Rate     Balance     %
                                           --------    -------    ---        --------   -------    ---
<S>                                         <C>           <C>     <C>            <C>      <C>      <C>
Account Type
------------
NOW accounts:
 Commercial non-interest-bearing                --     $15,854    6.61%          --     $14,651    6.11%
 Non-commercial                               2.62%     52,380   21.82%         1.93%    51,447   21.47%
 Money market checking accounts               4.34%     14,818    6.17%         2.55%    14,414    6.02%
 Regular savings                              0.63%     15,447    6.44%         0.43%    16,733    6.98%
                                                       -------- --------                -------- --------
Total demand and savings deposits             2.33%     98,499   41.04%         1.50%    97,245   40.58%
                                                       -------- --------                -------- --------
Savings certificates:
 Up to 3.00%                                            23,867    9.94%                  55,105   23.00%
 3.01 %- 4.00%                                          27,904   11.63%                  56,033   23.38%
 4.01 %- 5.00%                                          43,985   18.33%                  23,862    9.96%
 5.01 %- 6.00%                                          39,994   16.66%                   2,720    1.13%
 6.01 %- 7.00%                                              23    0.01%                      23    0.02%
                                                       -------- --------                -------- --------
Total savings certificates                    3.66%    135,773   56.57%         2.75%   137,743   57.49%
                                                       -------- --------                -------- --------
Sweep accounts                                5.00%      5,735    2.39%         3.43%     4,615    1.93%
                                                       -------- --------                -------- --------
Total deposit accounts                        3.07%   $240,007  100.00%         2.57%  $239,603  100.00%
                                                       ======== ========                ======== ========
</TABLE>

At  September  30, 2006 and  December 31,  2005,  the Bank had  $66,900,000  and
$75,715,000,  respectively,  of advances outstanding from the FHLB. The maturity
of the advances from the FHLB is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                       September 30, 2006     December 31, 2005
                                                                         Wtd Avg Rate           Wtd Avg Rate
                                                                       ------------------     -----------------
<S>                                                                       <C>       <C>          <C>      <C>
Contractual Maturity:
Within one year - fixed rate                                           $13,000      4.97%     $10,000     2.35%
Within one year - adjustable rate                                       30,400      5.45%      23,215     4.08%
After one but within three years - fixed rate                                -         -%       3,000     3.35%

After one but within three years - adjustable rate                      12,500      5.30%       5,000     3.79%
After three but within five years - adjustable rate                          -         -%       7,500     5.30%
Greater than five years - adjustable rate                               11,000      4.16%      27,000     4.24%
                                                                        ------                 ------

Total advances                                                         $66,900      5.12%     $75,715     3.98%
                                                                        ======                 ======
</TABLE>

The Bank pledges as  collateral  for the advances its FHLB stock and  investment
securities  and has entered into a blanket  collateral  agreement  with the FHLB
whereby the Bank maintains,  free of other  encumbrances,  qualifying  loans (as
defined) with unpaid principal  balances equal to, when discounted at 50% to 75%
of the unpaid principal  balances,  100% of total advances.  Borrowings from the
Federal  Home  Loan  Bank (the  "FHLB")  decreased  $8,815,000,  or  11.64%,  to
$66,900,000  at  September  30,  2006 from  $75,715,000  at December  31,  2005.
Securities   sold  under  agreement  to  repurchase   increased   $5,000,000  to
$25,000,000 at September 30, 2006 from $20,000,000 at December 31, 2005.  During
this period, securities sold under agreement to repurchase provided a lower cost


                                       16
<PAGE>

funding alternative to Federal Home Loan Bank advances.  Borrowings were reduced
with  deposit  growth  and the  proceeds  from  reductions  in  investments  and
mortgage-backed  securities.  In  addition,  on July 21, 2006,  the  Corporation
completed  a private  placement  of $4  million  in trust  preferred  securities
thereby  increasing  outstanding  balances to $12 million at September  30, 2006
compared to $8 million at September 30, 2005.

Shareholders' Equity
--------------------

Shareholders'  equity increased  $76,000,  or 0.30%, to $25,409,000 at September
30, 2006 from  $25,333,000  at December 31, 2005 due to net income of $1,989,000
and $122,000 in  additional  paid-in  capital due to stock option  exercises and
shares issued under the dividend  reinvestment plan, offset by the repurchase of
74,058 shares at a cost of $1,326,000, dividend payments of $0.32 per share at a
cost of $604,000  and a $105,000  increase in  unrealized  losses on  securities
available for sale.

Liquidity
---------

Liquidity  is the  ability  to  meet  demand  for  loan  disbursements,  deposit
withdrawals,  repayment  of debt,  payment of  interest  on  deposits  and other
operating  expenses.  The  primary  sources  of  liquidity  are  deposits,  loan
repayments, borrowings, maturity and sale of securities and interest payments.

While  maturities  and  scheduled  amortization  of  loans  and  securities  are
predictable  sources of funds,  deposit  outflows and mortgage  prepayments  are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.  The  primary  investing  activities  of the  Corporation  are  the
origination of commercial and consumer loans, and the purchase of investment and
mortgage-backed  securities.  These activities are funded primarily by principal
and  interest  payments  on loans and  investment  securities,  deposit  growth,
securities  sold under  agreements to  repurchase  and the  utilization  of FHLB
advances.

At September 30, 2006,  the  Corporation's  investment in marketable  securities
totaled $120,278,000,  nearly all of which is available for sale.  Approximately
$65,858,000  and  $83,170,000  of debt  securities  at  September  30,  2006 and
December  31, 2005,  respectively,  were  pledged by the Bank as  collateral  to
secure  deposits  of the State of South  Carolina,  and Union,  Laurens and York
counties along with additional borrowings and repurchase agreements.

Additionally, outstanding loan commitments (including commitments to fund credit
lines) totaled $110,052,000 at September 30, 2006. Management of the Corporation
anticipates  that it will have  sufficient  funds  available to meet its current
loan commitments.

The  Corporation  closely  monitors  its  liquidity  position on a daily  basis.
Certificates of deposit,  which are scheduled to mature in one year or less from
September 30, 2006,  totaled  $104,004,000.  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


                                       17
<PAGE>

possible to predict  future terms and  conditions  upon  renewal,  a significant
portion of such deposits will remain with the  Corporation.  If the  Corporation
requires  funds  beyond its  ability to  generate  them  internally,  additional
sources of funds are  available  through FHLB  advances,  securities  sold under
agreements  to  repurchase  and lines of credit.  At  September  30,  2006,  the
Corporation  had  outstanding  $66,900,000 of FHLB borrowings and $25,000,000 of
securities  sold under  agreements to  repurchase.  At September  30, 2006,  the
Corporation had unused short-term lines of credit to purchase federal funds from
unrelated  banks  totaling  $19,000,000  and the ability to borrow an additional
$10,000,000 from FHLB and secured borrowing lines. Lines of credit are available
on a one-to-ten day basis for general  purposes of the  Corporation.  All of the
lenders have reserved the right to withdraw these lines at their option.

Capital Management
------------------

The  Bank  and  the  Corporation  are  subject  to  various  regulatory  capital
requirements administered by banking regulators. Failure to meet minimum capital
requirements   can  initiate  certain   mandatory  -  and  possibly   additional
discretionary - actions by regulators  that, if undertaken,  could have a direct
material effect on the Corporation's  consolidated  financial statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities,  and certain off-balance-sheet items
as calculated under regulatory accounting practices.  The Bank's capital amounts
and classifications are also subject to qualitative  judgments by the regulators
about components, risk weights and other factors.

Quantitative  measures  established by  regulations  to ensure capital  adequacy
require the Bank and the  Corporation to maintain  minimum amounts and ratios of
total and Tier 1  capital  to  risk-weighted  assets,  and of Tier 1 capital  to
average  assets (as  defined in the  regulations).  Management  believes,  as of
September 30, 2006, that the Bank and the Corporation  meet the capital adequacy
requirements to which they are subject.

As of September 30, 2006, the Bank was "well  capitalized"  under the regulatory
framework for prompt corrective action based on its capital ratio  calculations.
In  order  to be  "well  capitalized",  the Bank  must  maintain  minimum  total
risk-based,  Tier 1 risk-based,  and Tier 1 leverage  ratios as set forth in the
following table.

Under present regulations of the Office of the Comptroller of the Currency,  the
Bank must have core capital (leverage  requirement)  equal to 4.0% of assets, of
which 1.5% must be tangible capital,  excluding intangible assets. The Bank must
also maintain risk-based regulatory capital as a percent of risk weighted assets
at least equal to 8.0%. In measuring compliance with capital standards,  certain
adjustments must be made to capital and total assets.



                                       18
<PAGE>

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).
<TABLE>
<CAPTION>
                                                September 30, 2006
                                                ------------------
                                          Actual          Regulatory Minimum     "Well Capitalized"
                                     ----------------     ------------------      ----------------
                                     Amount     Ratio     Amount       Ratio      Amount     Ratio
                                       $          %          $           %           $         %
                                     ------     -----     ------       -----      ------     -----
<S>                                   <C>       <C>        <C>          <C>         <C>       <C>
Leverage ratio
 Corporation                         31,734     8.61%     14,736        4.00%       n/a        n/a
 Bank                                33,669     9.19%     14,654        4.00%     18,317      5.00%

Tier 1 capital ratio
 Corporation                         31,734     12.40%    10,221        4.00%       n/a        n/a
 Bank                                33,669     13.18%    10,222        4.00%     15,332      6.00%

Total risk-based capital ratio
 Corporation                         37,641     14.71%    20,443        8.00%       n/a        n/a
 Bank                                36,284     14.20%    20,443        8.00%     25,553     10.00%
</TABLE>




                                       19
<PAGE>

During fiscal 2003, the Corporation implemented a share repurchase program under
which the Board of Directors of the Corporation  authorized the repurchase of up
to 5% of the outstanding shares or 98,000 shares. The program was expanded by an
additional 5%, or 98,000 shares,  in fiscal 2004, by an additional 5%, or 95,000
shares in fiscal 2005 and by an additional  5%, or 92,000 shares in fiscal 2006.
The shares  are to be  repurchased  either  through  open  market  purchases  or
privately  negotiated  transactions,  depending on market  conditions  and other
factors.  Repurchased  shares will be held in treasury and will be available for
the  Corporation's  benefit  plans.  During the nine months ended  September 30,
2006, the Corporation  repurchased  74,058 shares. As of September 30, 2006, the
Corporation had repurchased a total of 265,611 shares under these authorizations
and had 117,389 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 $110,052,000 at September 30, 2006. Each customer's credit worthiness is
evaluated on a case-by-case basis. The amount of collateral obtained,  if deemed
necessary by the  Corporation  upon extension of credit,  is based on the credit
evaluation  of  the  borrower.   Collateral  varies  but  may  include  accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.  The credit risk on these commitments is managed by subjecting each
customer to normal underwriting and risk management processes.

For the period ended  September 30, 2006, the  Corporation did not engage in any
off-balance  sheet  transactions  reasonably likely to have a material effect on
its financial condition, results of operation and cash flows.

Results of operations for the three months ended September 30, 2006 and 2005
----------------------------------------------------------------------------

General
-------

Net income increased  $13,000,  or 2.04%, to $651,000 for the three months ended
September  30, 2006 as  compared  to $638,000  for the same period in 2005 as an
increase in non-interest income and a reduction in the provision for loan losses
were partially offset by an increase in non-interest  expense and a reduction in
net interest income.





                                       20
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands)

                                                                    Three Months Ended September 30,
                                                                    --------------------------------
                                                            2006                                   2005
                                                            ----                                   ----
                                                  Average               Average        Average                 Average
                                                  Balance  Interest    Yield/Cost      Balance   Interest     Yield/Cost
                                                  -------  --------    ----------      -------   --------     ----------
<S>                                                <C>        <C>          <C>            <C>       <C>           <C>
Interest-earning assets:
Loans (1)                                       $212,063    $4,387        8.27%       $182,194     $3,243         7.12%
Mortgage-backed securities                        22,163       248        4.48%         31,065        305         3.93%
Investment securities                            103,582     1,318        5.09%        116,058      1,276         4.40%
Other interest-earning assets                      4,687        65        5.55%         10,663         80         3.00%
                                                 -------   --------    ----------      -------   --------     ----------
Total interest-earning assets                    342,495     6,018        7.03%        339,980      4,904         5.77%
                                                           --------    ==========                --------     ==========
Non-interest-earning assets                       28,890                                25,572
                                                 -------                               -------
Total assets                                    $371,385                              $365,552
                                                 =======                               -------
Interest-bearing liabilities:
Deposits                                         239,522     2,037        3.40%        233,504      1,349         2.31%
Floating rate junior subordinated
 deferrable interest debentures                   11,475       249        8.68%          8,247        150         7.28%
FHLB advances and other borrowings                93,407     1,181        5.06%         95,242        827         3.47%
                                                 -------   --------    ----------      -------   --------     ----------
Total interest-bearing liabilities               344,404     3,467        4.03%        336,993      2,326         2.76%
                                                           --------    ==========                --------     ==========
Non-interest-bearing liabilities                   2,626                                 2,168
                                                 -------                               -------
Total liabilities                                347,030                               339,161
Shareholders' equity                              24,355                                26,391
                                                 -------                               -------
Total liabilities and shareholders'
 equity                                         $371,385                              $365,552
                                                 =======                               =======
Net interest income/spread                                  $2,551        3.00%                    $2,578         3.01%
                                                           ========                              ========
Net yield on earning assets                                               2.98%                                   3.03%
(1) Average balances of loans include non-accrual loans.
</TABLE>



                                       21
<PAGE>

Interest Income
---------------

Interest income  increased  $1,114,000,  or 22.72%,  to $6,018,000 for the three
months ended September 30, 2006 as compared to the same period in 2005. Interest
income on loans increased by 35.28%, or $1,144,000,  to $4,387,000 for the three
months  ended  September  30, 2006 from  $3,243,000  for the three  months ended
September  30, 2005,  due  primarily to higher  average  rates due to increasing
market  interest  rates  along  with a higher  average  balance of loans and our
increased  emphasis on commercial  and consumer loan  originations.  Interest on
deposits  and federal  funds sold,  combined  with  interest  and  dividends  on
investment and mortgage-backed  securities  decreased $30,000, or 1.81%, for the
three months ended September 30, 2006 to $1,631,000  from $1,661,000  during the
same period in 2005 due to lower average  balances  offset by higher yields from
higher market interest rates.

Interest Expense
----------------

Interest expense  increased  $1,141,000,  or 49.05%, to $3,467,000 for the three
months ended  September 30, 2006 as compared to the three months ended September
30, 2005. Interest expense on deposit accounts increased $688,000,  or 51.0%, to
$2,037,000 for the three months ended September 30, 2006 from $1,349,000  during
the same period in 2005 due to higher average balances and cost of deposits as a
result of higher market rates.  The  Corporation  continues to target lower cost
demand deposit accounts versus  traditional higher cost certificates of deposits
in order to  reduce  overall  funding  costs.  Interest  expense  on  borrowings
increased $354,000,  or 42.81%, for the three months ended September 30, 2006 as
compared to the same period in the previous year due to higher  market  interest
rates. Interest expense on floating rate junior subordinated deferrable interest
debentures  increased $99,000,  or 66.0%, to $249,000 for the three months ended
September  30, 2006 from  $150,000  during the same period in 2005 due to higher
market interest rates. In addition,  on July 21, 2006, the Corporation completed
a  private  placement  of $4  million  in  trust  preferred  securities  thereby
increasing outstanding balances to $12 million at September 30, 2006 compared to
$8 million at September 30, 2005.

Provision for Loan Losses
-------------------------

During the three months ended  September 30, 2006, the provision for loan losses
was $45,000 as compared to  $220,000  for the same period in the  previous  year
with a decrease in classified  loans and net  charge-offs,  partially  offset by
loan growth and an increase in  nonperforming  loans.  Average  classified loans
decreased  $1,985,000  from  $4,599,000  at September  30, 2005 to $2,614,000 at
September  30, 2006.  The decrease  from the previous  year was due to the prior
year  payoff  for one  commercial  loan.  Loans  30-89  days  past due and still
accruing  was  $3,899,000  at  September  30,  2006  compared to  $3,442,000  at
September 30, 2005.  During the three months ended  September 30, 2006, bad debt
charge-offs,  net of recoveries,  was $4,000 as compared to $89,000 for the same
period in the previous year.




                                       22
<PAGE>


Non-Interest Income
-------------------

Total non-interest income increased $28,000, or 4.05%, to $720,000 for the three
months  ended  September  30,  2006  from  $692,000  for the same  period in the
previous  year.  Fees from financial  services  increased  $26,000,  or 3.9%, to
$693,000  for the three months ended  September  30, 2006 from  $667,000 for the
same  period  in the  previous  year.  The  increase  was  from an  increase  in
transaction  accounts  along with  higher  loan fees from an increase in average
outstanding loan balances.

Non-Interest Expense
--------------------

For the three  months  ended  September  30, 2006,  total  non-interest  expense
increased $124,000,  or 5.71%, to $2,294,000 from $2,170,000 for the same period
in 2005.  Compensation and employee  benefits  increased  $83,000,  or 8.20%, to
$1,095,000 for the three months ended September 30, 2006 from $1,012,000 for the
same period in 2005 due primarily to higher  compensation and benefits costs for
normal merit salary  increases and additional  staff due to the opening of a new
banking center location in Simpsonville, South Carolina in March 2006. Occupancy
and equipment  expense  decreased  $27,000,  or 5.49%, to $465,000 for the three
months ended  September 30, 2006 from $492,000 for the same period in 2005,  due
primarily to lower depreciation expense. Professional services expense increased
$21,000,  or 24.42%,  to $107,000 for the three months ended  September 30, 2006
from  $86,000 for the same period in 2005,  due to higher  legal and audit fees.
Advertising/public  relations expense increased $72,000, or 156.52%, to $118,000
for the three months ended  September  30, 2006 from $46,000 for the same period
in 2005 due  primarily  to product and  promotion  expenses  for the new banking
center location and product promotion  expenses for business checking  accounts.
Loan operations  expense decreased  $71,000,  or 70.3%, to $30,000 for the three
months ended  September 30, 2006 from $101,000 for the same period in 2005,  due
to lower costs associated with loan  foreclosures.  Telephone  expense decreased
$12,000, or 24.0%, to $38,000 for the three months ended September 30, 2006 from
$50,000 for the same period in 2005 due to new  telephone  contracts  and vendor
credits.  Other expense increased $61,000,  or 36.53%, to $228,000 for the three
months ended September 30, 2006 from $167,000 for the same period in 2005 due to
higher general operating expense from two new banking center openings.

Results of operations for the nine months ended September 30, 2006 and 2005
---------------------------------------------------------------------------

General
-------

Net income  increased  $263,000,  or 15.24%,  to $1,989,000  for the nine months
ended  September 30, 2006 as compared to $1,726,000  for the same period in 2005
as increases in net interest income and  non-interest  income and a reduction in
the  provision  for  loan  losses  were  partially  offset  by  an  increase  in
non-interest expense.




                                       23
<PAGE>

Average Yields and Rates
------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                     Nine Months Ended September 30,
                                                                    --------------------------------
                                                            2006                                   2005
                                                            ----                                   ----
                                                  Average               Average        Average                 Average
                                                  Balance  Interest    Yield/Cost      Balance   Interest     Yield/Cost
                                                  -------  --------    ----------      -------   --------     ----------
<S>                                                <C>        <C>          <C>            <C>       <C>           <C>
Interest-earning assets:
Loans (1)                                       $205,247   $12,306          7.99%     $176,034     $9,108         6.90%
Mortgage-backed securities                        24,879       808          4.33%       34,390      1,050         4.07%
Investment securities                            109,554     3,927          4.78%      113,294      3,756         4.42%
Other interest-earning assets                      5,107       173          4.52%        7,576        109         1.92%
                                                 -------   --------    ----------      -------   --------     ----------
Total interest-earning assets                    344,787    17,214          6.66%      331,294     14,023         5.64%
                                                           --------    ==========                --------     ==========
Non-interest-earning assets                       26,734                                23,885
                                                 -------                               -------
Total assets                                    $371,521                              $355,179
                                                 =======                               =======
Interest-bearing liabilities:
Deposits                                         245,057     5,647          3.07%      228,972      3,770         2.20%
Floating rate junior subordinated
 deferrable interest debentures                    9,335       596          8.51%        8,247        417         6.74%
FHLB advances and other borrowings                89,741     3,084          4.58%       89,480      2,308         3.44%
                                                 -------   --------    ----------      -------   --------     ----------
Total interest-bearing liabilities               344,133     9,327          3.61%      326,699      6,495         2.65%
                                                           --------    ==========                --------     ==========
Non-interest-bearing liabilities                   2,319                                 3,012
                                                 -------                               -------
Total liabilities                                346,452                               329,711
Shareholders' equity                              25,069                                25,468
                                                 -------                               -------
Total liabilities and shareholders'
 equity                                         $371,521                              $355,179
                                                 =======                               =======
Net interest income/spread                                  $7,887          3.05%                  $7,528         2.99%
                                                           ========                              ========
Net yield on earning assets                                                 3.05%                                 3.03%

(1) Average balances of loans include non-accrual loans.
</TABLE>

Interest Income
---------------

Interest income  increased  $3,191,000,  or 22.76%,  to $17,214,000 for the nine
months ended September 30, 2006 as compared to the same period in 2005. Interest
income on loans increased by 35.11%, or $3,198,000,  to $12,306,000 for the nine
months  ended  September  30, 2006 from  $9,108,000  for the nine  months  ended
September  30, 2005,  due  primarily to a higher  average rate due to increasing
market  interest  rates  along with our  increased  emphasis on  commercial  and
consumer loan  originations  and a higher average balance of loans.  Interest on
deposits  and federal  funds sold,  combined  with  interest  and  dividends  on
investment and mortgage-backed  securities decreased $7,000, for the nine months
ended September 30, 2006 to $4,908,000 from $4,915,000 during the same period in
2005 due to higher yields,  from higher market interest  rates,  offset by lower
average balances.



                                       24
<PAGE>

Interest Expense
----------------

Interest expense  increased  $2,832,000,  or 43.60%,  to $9,327,000 for the nine
months ended  September 30, 2006 as compared to the nine months ended  September
30, 2005. Interest expense on deposit accounts increased $1,877,000,  or 49.79%,
to  $5,647,000  for the nine months  ended  September  30, 2006 from  $3,770,000
during  the same  period in 2005 due to  higher  averages  balances  and cost of
deposits as a result of higher market rates. The Corporation continues to target
lower cost demand deposit accounts versus  traditional  higher cost certificates
of deposits.  Interest expense on borrowings increased $776,000,  or 33.62%, for
the nine months ended  September  30, 2006 as compared to the same period in the
previous year due to higher market interest rates.  Interest expense on floating
rate junior subordinated  deferrable interest debentures increased $179,000,  or
42.93%,  to $596,000 for the nine months ended  September 30, 2006 from $417,000
during the same period in 2005 due to higher market interest rates. In addition,
on July 21, 2006, the Corporation completed a private placement of $4 million in
trust  preferred  securities  thereby  increasing  outstanding  balances  to $12
million at September 30, 2006 compared to $8 million at September 30, 2005.

Provision for Loan Losses
-------------------------

During the nine months ended  September 30, 2006,  the provision for loan losses
was $355,000 as compared to $768,000  for the same period in the  previous  year
due to a decrease in classified loans and charge-offs,  partially offset by loan
growth and an increase in  nonperforming  loans. 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.  Real estate acquired in
foreclosure and loans classified as substandard and doubtful  decreased $303,000
from $3,164,000 at December 31, 2005 to $2,861,000 at September 30, 2006. During
the  nine  months  ended  September  30,  2006,  bad  debt  charge-offs,  net of
recoveries,  was  $134,000 as  compared  to $198,000  for the same period in the
previous year. The  Corporation's  loan loss allowance at September 30, 2006 was
approximately 1.20% of the Corporation's  outstanding loan portfolio and 137.70%
of non-performing loans compared to 1.23% of the Corporation's  outstanding loan
portfolio and 162.86% of non-performing loans at December 31, 2005.

The changes in the  allowance  for loan losses  consisted of the  following  (in
thousands):

        Balance at beginning of period                      $2,394
        Provision for loan losses                              355
        Charge-offs, net                                      (134)
                                                            ======
        Balance at end of period                            $2,615



                                       25
<PAGE>

The  following  table  sets  forth   information  with  respect  to  the  Bank's
non-performing assets at the dates indicated (dollars in thousands):

                                       September 30, 2006      December 31, 2005
                                       ------------------      -----------------
Non-accruing loans which are
 contractually past due 90 days
 or more:

Real estate                                   $  367                  $   461
Commercial                                     1,029                      436
Consumer                                         331                      349
                                              ------                   ------
Total                                         $1,727                   $1,246
                                              ======                   ======
Percentage of loans receivable                  0.77%                    0.64%
                                              ------                   ------

Percentage of allowance for loan losses
 to total loans outstanding                     1.20%                    1.23%
                                              ------                   ------
Allowance for loan losses                     $2,615                   $2,394
                                              ======                   ======
Real estate acquired through
 foreclosure and repossessed assets           $  172                   $  224
                                              ------                   ------

Non-performing  loans for the nine months  ended  September  30, 2006  increased
$481,000 from December 31, 2005 due primarily to an increase in 3  delinquencies
for  commercial  loans.  Since the quarter  end,  approximately  $300,000 of the
commercial  loans  have  been  brought  current.  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  $191,000,  or 9.84%, to $2,133,000 for the
nine months ended  September 30, 2006 from $1,942,000 for the same period in the
previous year. Fees from financial  services increased  $199,000,  or 10.72%, to
$2,055,000 for the nine months ended  September 30, 2006 from $1,856,000 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.

Non-Interest Expense
--------------------

For the nine  months  ended  September  30,  2006,  total  non-interest  expense
increased $491,000,  or 7.72%, to $6,854,000 from $6,363,000 for the same period
in 2005.  Compensation and employee benefits increased  $317,000,  or 10.53%, to
$3,327,000 for the nine months ended  September 30, 2006 from $3,010,000 for the
same period in 2005 due primarily to higher  compensation and benefits costs for


                                       26
<PAGE>

normal merit salary  increases and additional  staff due to the opening of a new
banking center location in Simpsonville, South Carolina in March 2006. Occupancy
and equipment  expense decreased  $46,000,  or 3.02%, to $1,477,000 for the nine
months ended  September 30, 2006 from $1,523,000 for the same period in 2005 due
to  primarily  to lower  depreciation  expense.  Professional  services  expense
increased  $54,000,  or 19.57%,  to $330,000 for the nine months ended September
30, 2006 from $276,000 for the same period in 2005 due to higher legal  expenses
primarily due to the changing the name of the holding  company  during the first
quarter of 2006.  Advertising/public  relations expense increased  $108,000,  or
101.89%,  to $214,000 for the nine months ended September 30, 2006 from $106,000
for the same period in 2005 due primarily to product and promotion  expenses for
the new banking  center  location  and product  promotion  expenses for business
checking  accounts.  Loan operations expense decreased  $119,000,  or 66.48%, to
$60,000 for the nine months ended  September 30, 2006 from $179,000 for the same
period  in  2005,  due  to  lower  costs  associated  with  foreclosures.  Items
processing expense increased $35,000, or 31.82%, to $145,000 for the nine months
ended  September  30, 2006 from  $135,000  for the same period in 2005 due to an
increase in transaction  accounts.  Other expense increased $150,000, or 28.68%,
to $673,000 for the nine months ended  September  30, 2006 from $523,000 for the
same period in 2005 due to higher loan expense  from  increased  production  and
higher forms and supplies expense from two new banking center openings.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
        ----------------------------------------------------------

The  Corporation  is  committed  to  following a program of asset and  liability
management  in an  effort to  manage  the  fluctuations  in  earnings  caused by
movements in interest rates. A significant  portion of the Corporation's  income
results  from the spread  between  the yield  realized  on its  interest-earning
assets  and the rate of  interest  paid on its  deposits  and other  borrowings.
Differences  in the timing and volume of repricing  assets versus the timing and
volume of repricing  liabilities  expose the  Corporation to interest rate risk.
Management's  policies  are  directed  at  minimizing  the impact on earnings of
movements in interest rates.

The  Corporation's   Asset/Liability   Committee  makes  pricing  and  marketing
decisions  on  deposit  and loan  products  in  conjunction  with  managing  the
Corporation's  interest rate risk. In addition,  the  Asset/Liability  Committee
reviews  the  Corporation's  securities  portfolio,   FHLB  advances  and  other
borrowings as well as the Corporation's asset and liability policies.

The primary  objective of  Asset/Liability  management at the  Corporation is to
manage  interest  rate risk and achieve  reasonable  stability  in net  interest
income throughout  interest rate cycles in order to maintain adequate liquidity.
This is achieved by  maintaining  the proper balance of  rate-sensitive  earning
assets   and   rate-sensitive   costing   liabilities.   The   relationship   of
rate-sensitive  earning  assets to  rate-sensitive  costing  liabilities  is the
principal factor in projecting the effect that  fluctuating  interest rates will
have on future net interest income.  Rate-sensitive  assets and interest-bearing
liabilities  are those that can be repriced  to current  market  rates  within a
relatively  short time  period.  Management  monitors  the rate  sensitivity  of
earning assets and  interest-bearing  liabilities  over the entire life of these
instruments.



                                       27
<PAGE>

The  Corporation  has  established  policies  and  monitors  results  to control
interest rate  sensitivity.  Although the Corporation  utilizes measures such as
static  gap,  which  is  simply  the  measurement  of  the  difference   between
interest-sensitive  assets and  interest-sensitive  liabilities  repricing for a
particular  time period,  just as important a process is the  evaluation  of how
particular  assets and  liabilities are impacted by changes in interest rates or
selected  indices  as they  reprice.  Asset/liability  modeling  techniques  are
utilized by the  Corporation to assess  varying  interest rate and balance sheet
mix assumptions.

Net  Interest  Income  Simulation   Analysis.   We  analyze  our  interest  rate
sensitivity  position to manage the risk associated with interest rate movements
through  the use of  interest  income  simulation.  The  matching  of assets and
liabilities  may be  analyzed by  examining  the extent to which such assets and
liabilities  are  "interest  sensitive."  An  asset or  liability  is said to be
interest  rate  sensitive  within a specific  time  period if it will  mature or
reprice within that time period.

Our goal is to manage asset and  liability  positions to moderate the effects of
interest rate fluctuations on net interest income.  Interest income  simulations
utilizing  interest  rate shocks are  completed  quarterly  and presented to the
Asset/Liability  Committee. The simulations provide an estimate of the impact of
changes in interest rates on net interest  income under a range of  assumptions.
The interest  rate shocks are compared to board  approved  policy limits and are
reviewed by the  Asset/Liability  Committee on a quarterly basis. The simulation
incorporates  assumptions  regarding  the  potential  timing in the repricing of
certain  assets and  liabilities  when  market  rates  change and the changes in
spreads between  different  market rates. The simulation  analysis  incorporates
management's  current  assessment  of the risk that pricing  margins will change
adversely over time due to competition or other factors.

Simulation  analysis is only an estimate of our interest rate risk exposure at a
particular point in time. We continually  review the potential effect changes in
interest rates could have on the repayment of rate sensitive  assets and funding
requirements of rate sensitive liabilities.

The table below sets forth an  approximation  of our exposure as a percentage of
estimated  net interest  income for the next twelve month period using  interest
income  simulation.  The  simulation  uses  projected  repricing  of assets  and
liabilities on the basis of contractual  maturities,  anticipated repayments and
scheduled rate  adjustments.  Prepayment rates can have a significant  impact on
interest income simulation.  When interest rates rise, prepayments tend to slow.
When interest rates fall, prepayments tend to rise.




                                       28
<PAGE>

The following table reflects  changes in estimated net interest income from rate
shocks of (+) or (-) 100 and 200 basis  points in a rising and falling  interest
rate environment for the Corporation.

                                                      At                 At
                                                  September 30,     December 31,
Change in Rates (Basis Points)                       2006               2005
------------------------------                       ----               ----

     +200
                                                   +6.95%               +5.88%
     +100
                                                   +3.63%               +3.24%
     -100
                                                   -3.91%               -4.97%
     -200
                                                   -7.27%               -7.72%


The Corporation  improved  slightly in rising interest rate environments for the
period ending  September 30, 2006 as compared to the period ending  December 31,
2005 due primarily to significant growth in prime based loan products.

The 200 and 100 basis  point  change in rates in the above  table is  assumed to
occur evenly over the following twelve months.  Based on the scenario above, net
interest  income would be  positively  affected in the  twelve-month  periods if
rates rose by 100 and 200 basis points, but would be adversely affected if rates
declined by 100 and 200 basis points.

Item 4. Controls and Procedures
        -----------------------

The Corporation's  management,  including the Corporation's  principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Corporation's  "disclosure  controls and procedures," as such term is defined in
Rule  13a-15(e)  promulgated  under  the  Securities  Exchange  Act of 1934,  as
amended,  (the  "Exchange  Act").  Based upon their  evaluation,  the  principal
executive officer and principal  financial officer concluded that, as of the end
of the period covered by this report, the Corporation's  disclosure controls and
procedures  were  effective  for the  purpose of ensuring  that the  information
required to be disclosed in the reports  that the  Corporation  files or submits
under the Exchange Act with the Securities and Exchange  Commission  (the "SEC")
(1) is recorded,  processed,  summarized  and  reported  within the time periods
specified in the SEC's rules and forms,  and (2) is accumulated and communicated
to the Corporation's management, including its principal executive and principal
financial officers,  as appropriate to allow timely decisions regarding required
disclosure.

There has been no change in the  Corporation's  internal  control over financial
reporting  identified  in  connection  with  the  evaluation  required  by  Rule
13(a)-15(e) that occurred during the Corporation's  last fiscal quarter that has
materially   affected  or  is  reasonably  likely  to  materially   affect,  the
Corporation's internal control over financial reporting.


                                       29
<PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
        -----------------

The Corporation is not involved in any legal  proceedings.  The Bank is involved
in various  claims and legal  actions  arising in the normal course of business.
Management  believes that these  proceedings are immaterial to the Corporation's
financial condition and results of operations.

Item 1A. Risk Factors
         ------------

In  addition  to the other  information  set forth in this  report,  you  should
carefully  consider the factors  discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks that we face.
Additional  risks  and  uncertainties  not  currently  known  to us or  that  we
currently  deem to be  immaterial  also  may  materially  adversely  affect  our
business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
        -----------------------------------------------------------

The  following  table  provides  certain   information  with  regard  to  shares
repurchased by the Corporation during the third quarter of 2006.
<TABLE>
<CAPTION>
                                                                            (c)
                                   (a)                                 Total Number of                 (d)
                                                     (b)             Shares Purchased            Maximum Number of
                             Total Number           Average         as part of Publicly         Shares that may
                              of Shares            Price Paid           Announced                be purchased under
   Period                     Purchased            per share             Programs                   Program
------------------          ---------------       -----------       -------------------         --------------------
<S>                              <C>                   <C>                   <C>                         <C>
July 1, 2006 through            10,243               $17.64               10,243                       44,631
July 31, 2006

August 1, 2006 through          18,963               $18.41               18,963                      117,668
August 31, 2006

September 1, 2006                  279               $18.10                  279                      117,389
through September 30, 2006

  Total                         29,485               $18.14               29,485                         N/A
</TABLE>


In May 2005, the Corporation  implemented a share repurchase program under which
the  Corporation  may  repurchase up to 5% of the  outstanding  shares or 98,000
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.



                                       30
<PAGE>

Item 3. Defaults upon Senior Securities
        -------------------------------

          Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders
        ---------------------------------------------------

          None

Item 5. Other Information
        -----------------

          None

Item 6. Exhibits
        --------

        31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

        31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

        32(a) Chief Executive Officer Certification Pursuant to Section 906 of
              the Sarbanes-Oxley Act of 2002

        32(b) Chief Financial Officer Certification Pursuant to Section 906 of
              the Sarbanes-Oxley Act of 2002



                                       31
<PAGE>

                                   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: 11/07/2006                        By: /s/ Dwight V. Neese
      ----------                            -------------------
                                            Dwight V. Neese, CEO


Date: 11/07/2006                        By: /s/ Richard H. Flake
      ----------                            --------------------
                                            Richard H. Flake, CFO






                                       32