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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2007

OR



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

For the transition period from  to

Commission File Number 1-5735





Provident Community Bancshares, Inc.

(Exact name of registrant as specified
in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 57-1001177                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                              |  |           
|--------------------------------------------- |  | ----------
|2700 Celanese Road, Rock Hill, South
Carolina |  | 29732     
|(Address of principal executive offices)      |  | (Zip Code)

Registrants telephone number, including area code: (803) 325-9400

Securities registered pursuant to Section 12(b) of the Exchange Act:



|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of Class                          |  | Name of each exchange on which registered
|Common stock, par value $0.01 per share |  | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Exchange Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   ̈    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark if disclosure of
delinquent filers to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrants knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K.  x

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.



|             |  |                              |  |                                          |  | 
|------------ |  | ---------------------------- |  | ---------------------------------------- |  | 
|(Check one): |  | Large accelerated filer     ̈ |  | Accelerated filer                       ̈ |  | 
|             |  | Non-accelerated filer       ̈ |  | Smaller reporting company    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 aggregate market value of the voting stock held by non-affiliates, computed by reference to the average bid and asked price on June 30, 2007, which is the last day of the registrants second fiscal quarter, was
approximately $33,158,299 (1,617,478 shares at $20.50 per share). Solely for the purposes of this calculation it is assumed that directors and executive officers are affiliates of the registrant.

As of February 15, 2008, there were 1,787,485 shares of the registrants common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of
the Proxy Statement for the 2007 Annual Meeting of Shareholders (Part III).









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INDEX



|            |  |                                                                                                              |  |     
|----------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|            |  |                                                                                                              |  | Page
|            |  | Part I                                                                                                       |  |     
|            |  |                                                                                                             
|Item 1.     |  | Business                                                                                                     |  | 1   
|            |  |                                                                                                             
|Item 1A.    |  | Risk Factors                                                                                                 |  | 20  
|            |  |                                                                                                             
|Item 1B.    |  | Unresolved Staff Comments                                                                                    |  | 23  
|            |  |                                                                                                             
|Item 2.     |  | Properties                                                                                                   |  | 23  
|            |  |                                                                                                             
|Item 3.     |  | Legal Proceedings                                                                                            |  | 24  
|            |  |                                                                                                             
|Item 4.     |  | Submission of Matters to a Vote of Security Holders                                                          |  | 24  
|            |  |                                                                                                             
|            |  | Part II                                                                                                      |  |     
|            |  |                                                                                                             
|Item 5.     |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 24  
|            |  |                                                                                                             
|Item 6.     |  | Selected Financial Data                                                                                      |  | 25  
|            |  |                                                                                                             
|Item 7.     |  | Managements Discussion and Analysis and Results of Operation                                                |  | 26  
|            |  |                                                                                                             
|Item 7A.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 33  
|            |  |                                                                                                             
|Item 8.     |  | Financial Statements and Supplementary Data                                                                  |  | 36  
|            |  |                                                                                                             
|Item 9.     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 66  
|            |  |                                                                                                             
|Item 9A(T). |  | Controls and Procedures                                                                                      |  | 66  
|            |  |                                                                                                             
|Item 9B.    |  | Other Information                                                                                            |  | 67  
|            |  |                                                                                                             
|            |  | Part III                                                                                                     |  |     
|            |  |                                                                                                             
|Item 10.    |  | Directors, Executive Officers and Corporate Governance                                                       |  | 67  
|            |  |                                                                                                             
|Item 11.    |  | Executive Compensation                                                                                       |  | 68  
|            |  |                                                                                                             
|Item 12.    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 68  
|            |  |                                                                                                             
|Item 13.    |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 69  
|            |  |                                                                                                             
|Item 14.    |  | Principal Accountant Fees and Services                                                                       |  | 69  
|            |  |                                                                                                             
|            |  | Part IV                                                                                                      |  |     
|            |  |                                                                                                             
|Item 15.    |  | Exhibits and Financial Statement Schedules                                                                   |  | 70  
|            | 
|SIGNATURES  |  | 71                                                                                                          



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PART I

Item 1. Business

General

Provident Community Bancshares, Inc. (Provident Community Bancshares) is the bank holding company for Provident Community Bank, N.A. (the Bank). Provident Community Bancshares has no material
assets or liabilities other than its investment in the Bank. Provident Community Bancshares business activity primarily consists of directing the activities of the Bank. Accordingly, the information set forth in this report, including
financial statements and related data, relates primarily to the Bank. Provident Community Bancshares and the Bank are collectively referred to as the Corporation herein.

The Banks operations are conducted through its main office in Rock Hill, South Carolina and eight full-service banking centers, all of which are
located in the upstate area of South Carolina. The Bank is regulated by the Office of the Comptroller of the Currency (the OCC), is a member of the Federal Home Loan Bank of Atlanta (the FHLB) and its deposits are insured up
to applicable limits by the Federal Deposit Insurance Corporation (the FDIC). In addition, Provident Community Bancshares is a bank holding company, subject to regulation by the Federal Reserve Board (the FRB).

On April 19, 2006, Union Financial Bancshares, Inc. changed its name to Provident Community Bancshares, Inc. On October 21, 2003, the Board of
Directors of Provident Community Bancshares changed the fiscal year end of the Corporation from September 30 to December 31, effective December 31, 2003.

The business of the Bank primarily consists of attracting deposits from the general public and originating loans to consumers and businesses. The Bank also maintains a portfolio of investment securities. The principal
sources of funds for the Banks lending activities include deposits received from the general public, interest and principal repayments on loans and, to a lesser extent, borrowings from the FHLB and other parties. The Banks primary source
of income is interest earned on loans and investments. The Banks principal expense is interest paid on deposit accounts and borrowings and expenses incurred in operating the Bank.

This annual report contains certain forward-looking statements within the meaning of the federal securities laws. These forward-looking
statements are generally identified by use of the words believe, expect, intend, anticipate, estimate, project or similar expressions. These forward-looking statements include,
but are not limited to, estimates and expectations of future performance with respect to the financial condition and results of operations of the Corporation and other factors. These forward-looking statements are not guarantees of future
performance and are subject to various factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to: changes in general economic and market conditions and the legal
and regulatory environment in which the Corporation operates; the development of an interest rate environment that adversely affects the Corporations interest rate spread or other income anticipated from the Corporations operations;
changes in consumer spending, borrowing and savings habits; adverse changes in the securities markets; changes in accounting policies and practices; and increased competitive pressures among financial services companies. These risks and
uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Corporation does not undertakeand specifically disclaims any obligationto publicly release the
results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Competition

The Bank faces competition in both the
attraction of deposit accounts and in the origination of mortgage, commercial and consumer loans. Its most direct competition for savings deposits historically has been derived from other commercial banks and thrift institutions located in and
around Union, Laurens, Fairfield, Greenville and York Counties, South Carolina. As of June 30, 2007, according to information presented on the Federal Deposit Insurance Corporations website, the Corporation held 41.7% of the deposits in
Union County, which was the largest share of



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deposits out of four financial institutions in the county. Additionally, the Corporation held 24.2% of the deposits in Fairfield County, which was the third
largest out of four financial institutions in the county, 5.7% of the deposits in Laurens County, which was the seventh largest share of deposits out of eight financial institutions in the county and 2.2% of the deposits in York County, which was
the ninth largest out of 13 financial institutions in that county. The Corporations Greenville County location was established in March 2006 and therefore, did not have a significant level of deposits. However, the Corporation competes with
super-regional banks, such as Wachovia Bank and SunTrust, and large regional banks, such as First-Citizens Bank and Trust Company of South Carolina and Carolina First Bank. These competitors have substantially greater resources and lending limits
than does the Corporation and offer services that the Corporation does not provide. The Bank faces additional significant competition for investor funds from money market instruments and mutual funds. It competes for savings by offering depositors a
variety of savings accounts, convenient office locations and other services.

The Bank competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of the services it provides borrowers, real estate brokers and home builders. The Banks competition for real estate loans comes principally from other commercial banks, thrift
institutions and mortgage banking companies.

Competition has increased and is likely to continue to increase as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry, allowed banks to expand their geographic reach by
providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among banks, securities
firms and insurance companies, also has changed and may continue to change the competitive environment in which the Bank conducts business.

Lending
Activities

General. Set forth below is selected data relating to the composition of the Banks loan portfolio
on the dates indicated (dollars in thousands).



|                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|------------------------------ |  | --------------- | ------- | - | ---------------- | ------ | - | ------ | - | ------- | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------- | - | ------ | ------ | - | ------- | - | ------- | - |  | ------ | -
|                               |  | At December 31, |         |   | At September 30, |       
|                               |  | 2007            |         |   | 2006             |        |   | 2005   |   |         | 2004    |  |        | 2003   | 
|                               |  | Amount          |         |   | Percent          |        |   | Amount |   |         | Percent |  |        | Amount |  |   | Percent |   |  | Amount |   |  | Percent |         |   | Amount |        |   | Percent |  
|Real estate loans:             |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Residential                    |  | $               | 24,989  |   |                  | 9.74   | % |        | $ | 29,482  |         |  | 12.71  | %      |  | $ | 36,560  |   |  | 18.99  | % |  | $       | 43,556  |   |        | 25.46  | % |         | $ | 55,647  |   |  | 36.39  | %
|Commercial                     |  |                 | 76,864  |   |                  | 29.97  |   |        |   | 62,450  |         |  | 26.93  |        |  |   | 45,665  |   |  | 23.71  |   |  |         | 43,351  |   |        | 25.34  |   |         |   | 40,372  |   |  | 26.40  |  
|Construction loans             |  |                 | 4,764   |   |                  | 1.86   |   |        |   | 5,787   |         |  | 2.50   |        |  |   | 4,842   |   |  | 2.51   |   |  |         | 3,823   |   |        | 2.23   |   |         |   | 2,170   |   |  | 1.42   |  
|                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total real estate loans        |  |                 | 106,617 |   |                  | 41.57  |   |        |   | 97,719  |         |  | 42.14  |        |  |   | 87,067  |   |  | 45.21  |   |  |         | 90,730  |   |        | 53.03  |   |         |   | 98,189  |   |  | 64.21  |  
|Consumer and installment loans |  |                 | 51,846  |   |                  | 20.21  |   |        |   | 46,136  |         |  | 19.90  |        |  |   | 39,876  |   |  | 20.71  |   |  |         | 30,826  |   |        | 18.02  |   |         |   | 25,445  |   |  | 16.64  |  
|Commercial loans               |  |                 | 104,261 |   |                  | 40.65  |   |        |   | 93,562  |         |  | 40.35  |        |  |   | 70,668  |   |  | 36.70  |   |  |         | 54,796  |   |        | 32.02  |   |         |   | 33,859  |   |  | 22.14  |  
|                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total loans                    |  |                 | 262,724 |   |                  | 102.43 |   |        |   | 237,417 |         |  | 102.39 |        |  |   | 197,611 |   |  | 102.62 |   |  |         | 176,352 |   |        | 103.07 |   |         |   | 157,493 |   |  | 102.99 |  
|                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Less:                          |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Undisbursed loans in process   |  |                 | (2,379  | ) |                  | (0.93  | ) |        |   | (2,238  | )       |  | (0.97  | )      |  |   | (1,980  | ) |  | (1.03  | ) |  |         | (2,363  | ) |        | (1.38  | ) |         |   | (1,392  | ) |  | (0.91  | )
|Loan discount unamortized      |  |                 | (476    | ) |                  | (0.18  | ) |        |   | (607    | )       |  | (0.26  | )      |  |   | (764    | ) |  | (0.40  | ) |  |         | (993    | ) |        | (0.58  | ) |         |   | (1,448  | ) |  | (0.95  | )
|Allowance for loan losses      |  |                 | (3,344  | ) |                  | (1.30  | ) |        |   | (2,754  | )       |  | (1.19  | )      |  |   | (2,394  | ) |  | (1.24  | ) |  |         | (2,026  | ) |        | (1.18  | ) |         |   | (1,842  | ) |  | (1.20  | )
|Deferred loan fees             |  |                 | (38     | ) |                  | (0.02  | ) |        |   | 68      |         |  | 0.03   |        |  |   | 104     |   |  | 0.05   |   |  |         | 124     |   |        | 0.07   |   |         |   | 110     |   |  | 0.07   |  
|                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Net loans receivable           |  | $               | 256,487 |   |                  | 100.00 | % |        | $ | 231,886 |         |  | 100.00 | %      |  | $ | 192,577 |   |  | 100.00 | % |  | $       | 171,094 |   |        | 100.00 | % |         | $ | 152,921 |   |  | 100.00 | %
|                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  



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The following table sets forth, at December 31, 2007, certain information regarding the dollar
amount of principal repayments for loans becoming due during the periods indicated (in thousands). Demand loans (loans having no stated schedule of repayments and no stated maturity) and overdrafts are reported as due in one year or less.



|                               |  |                   |        |                              |   |                 |  |       |        |  |   |        
|------------------------------ |  | ----------------- | ------ | ---------------------------- | - | --------------- |  | ----- | ------ |  | - | -------
|                               |  | DueWithinOne Year |        | DueAfter1
YearThrough5 Years |   | DueAfter5 Years |  | Total
|Real estate loans:             |  |                   |        |                              |   |                 |  |       |        |  |   |        
|Residential loans              |  | $                 | 215    |                              | $ | 1,162           |  | $     | 23,612 |  | $ | 24,989 
|Commercial loans               |  |                   | 22,443 |                              |   | 40,119          |  |       | 14,302 |  |   | 76,864 
|Construction loans (1)         |  |                   | 4,764  |                              |   |                |  |       |       |  |   | 4,764  
|Consumer and installment loans |  |                   | 5,215  |                              |   | 24,249          |  |       | 22,382 |  |   | 51,846 
|Commercial loans               |  |                   | 50,367 |                              |   | 40,300          |  |       | 13,594 |  |   | 104,261
|                               |  |                   |        |                              |   |                 |  |       |        |  |   |        
|Total                          |  | $                 | 83,004 |                              | $ | 105,830         |  | $     | 73,890 |  | $ | 262,724
|                               |  |                   |        |                              |   |                 |  |       |        |  |   |        



|(1) | Includes construction/permanent loans.
|--- | --------------------------------------

The actual
average life of mortgage loans is substantially less than their contractual term because of loan repayments and because of enforcement of due-on-sale clauses that give the Bank the right to declare a loan immediately due and payable if, among other
things, the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans.

The following table sets forth, at December 31, 2007, the dollar amount of loans due after December 31, 2008 which have fixed
rates of interest and which have adjustable rates of interest (in thousands).



|                               |  |       |        |            |   |        |  |   |        
|------------------------------ |  | ----- | ------ | ---------- | - | ------ |  | - | -------
|                               |  | Fixed |        | Adjustable |   | Total 
|Real estate loans:             |  |       |        |            |   |        |  |   |        
|Residential loans              |  | $     | 16,088 |            | $ | 8,686  |  | $ | 24,774 
|Commercial loans               |  |       | 35,501 |            |   | 18,920 |  |   | 54,421 
|Consumer and installment loans |  |       | 21,519 |            |   | 25,112 |  |   | 46,631 
|Commercial loans               |  |       | 23,439 |            |   | 30,455 |  |   | 53,894 
|                               |  |       |        |            |   |        |  |   |        
|Total                          |  | $     | 96,547 |            | $ | 83,173 |  | $ | 179,720
|                               |  |       |        |            |   |        |  |   |        

Real Estate Loans. The Bank originates residential mortgage loans to enable
borrowers to purchase existing single family homes or to construct new homes. At December 31, 2007, approximately $25.0 million, or 9.7% of the Corporations net loan portfolio consisted of loans secured by residential real estate
(net of undisbursed principal, excluding construction loans).

Office of the Comptroller of the Currency regulations limit the amount that
national banks may lend in relationship to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Federal banking regulations permit a maximum loan-to-value ratio of 100% for one-to
four-family dwellings and 85% for all other real estate loans. The Banks lending policies, however, limit the maximum loan-to-value ratio on one-to four-family real estate mortgage loans to 80% of the lesser of the appraised value or the
purchase price. Any single-family loan made in excess of an 80% loan-to-value ratio and any commercial real estate loan in excess of a 75% loan-to-value ratio is required to have private mortgage insurance or additional collateral. In the past, the
Bank has originated some commercial real estate loans in excess of a 75% loan-to-value ratio without private mortgage insurance or additional collateral.



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The loan-to-value ratio, maturity and other provisions of the loans made by the Bank generally have
reflected a policy of making less than the maximum loan permissible under applicable regulations, market conditions, and underwriting standards established by the Bank. Mortgage loans made by the Bank generally are long-term loans (15-30 years),
amortized on a monthly basis, with principal and interest due each month. In the Banks experience, real estate loans remain outstanding for significantly shorter periods than their contractual terms. Borrowers may refinance or prepay loans, at
their option, with no prepayment penalty.

The Bank offers a full complement of mortgage lending products with both fixed and adjustable
rates. Due to the nature of the Banks marketplace, only a small percentage of residential loans are adjustable-rate mortgage loans (ARMs). The Bank offers ARMs tied to U.S. Treasury Bills with a maximum interest rate adjustment of
2% annually and 6% over the life of the loan. At December 31, 2007, the Bank had approximately $8.7 million of ARMs, or 3.4% of the Banks total loans receivable. At December 31, 2007, 6.3% of the Banks loan portfolio consisted
of long-term, fixed-rate residential real estate loans.

Net interest income depends to a large extent on how successful the Bank is in
matching interest-earning assets and interest-bearing liabilities. The Corporation has taken steps to reduce its exposure to rising interest rates. For a discussion of these steps, see Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Commercial real estate loans constituted approximately $76.9 million, or 30.0%, of
the Banks net loan portfolio at December 31, 2007. Commercial real estate loans consist of permanent loans secured by multi-family loans, generally apartment houses, as well as commercial and industrial properties, including office
buildings, warehouses, shopping centers, hotels, motels and other special purpose properties. Commercial real estate loans are originated and purchased for inclusion in the Banks portfolio. These loans generally have 20 to 30-year amortization
schedules and are callable or have balloon payments after five years. Typically, the loan documents provide for adjustment of the interest rate every one to three years. Fixed-rate loans secured by multi-family residential and commercial properties
have terms ranging from 20 to 25 years.

Loans secured by multi-family and commercial real estate properties may involve greater risk than
single-family residential loans. Such loans generally are substantially larger than single-family residential loans. Further, the payment experience on loans secured by commercial properties typically depends on the successful operation of the
properties, and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. Our largest commercial loan relationship was a $4.8 million loan secured by commercial real estate including land
and buildings located in Rock Hill, South Carolina. This loan was performing according to its original terms at December 31, 2007.

Construction Loans. The Bank engages in construction lending that primarily is secured by single family residential real estate and, to a much lesser extent, commercial real estate. The Bank grants construction loans to
individuals with a takeout for permanent financing from one of our correspondent mortgage lenders or another financial institution, and to approved builders on both presold and unsold properties.

Construction loans to individuals are originated for a term of one year or less or are originated to convert to permanent loans at the end of the
construction period. Construction loans are originated to builders for a term not to exceed 12 months. Generally, draw inspections are handled by the appraiser who initially appraised the property; however, in some instances the draw inspections are
performed by a new appraisal firm.

Construction financing affords the Bank the opportunity to achieve higher interest rates and fees with
shorter terms to maturity than do single-family permanent mortgage loans. However, construction loans generally are considered to involve a higher degree of risk than single-family permanent mortgage lending due to: (1) the concentration of
principal among relatively few borrowers and development projects; (2) the increased difficulty at the time the loan is made of estimating the building costs and the selling price of the property to be built; (3) the increased difficulty
and costs of monitoring the loan; (4) the higher degree of sensitivity to increases in market rates of interest; and (5) the increased difficulty of working out loan problems.



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At December 31, 2007, the Bank had approximately $4.8 million outstanding in construction loans,
including approximately $2.4 million in undisbursed proceeds. Substantially all of these loans were secured by one- to four-family residences.

Consumer Loans. The Banks consumer loan portfolio primarily consists of automobile loans on new and used vehicles, mobile home loans, boat loans, second mortgage loans, loans secured by savings accounts and unsecured
loans. The Bank makes consumer loans to serve the needs of its customers and as a way to improve the interest-rate sensitivity of the Banks loan portfolio.

Consumer loans tend to bear higher rates of interest and have shorter terms to maturity than residential mortgage loans. However, nationally, consumer loans historically have tended to have a higher rate of default
than residential mortgage loans. Additionally, consumer loans entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases,
any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and thus are more likely to be
affected adversely by job loss, divorce, illness or personal bankruptcy.

Commercial Loans.Commercial business
loans are made primarily in our market area to small businesses through our branch network. Each county location of the branch network has an experienced commercial lender that is responsible for the generation of this product. In selective cases,
we will enter into a loan participation within our market area to purchase a portion of a commercial loan that meets the Banks underwriting criteria. We offer secured commercial loans with maturities of up to 20 years. The term for repayment
will normally be limited to the lesser of the expected useful life of the asset being financed or a fixed amount of time, generally less than seven years. These loans have adjustable rates of interest indexed to the prime rate as reported in
The Wall Street Journal and are payable on loans not in default, subject to annual review and renewal. When making commercial loans, we consider the financial statements of the borrower, the borrowers payment history of
both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral. A commercial loan generally is
secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and generally are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 80%
of the value of the collateral securing the loan.

Unlike residential mortgage loans, which are generally made on the basis of the
borrowers ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis
of the borrowers ability to make repayment from the cash flow of the borrowers business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself.
Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Loan
Solicitation and Processing. Loan originations come from walk-in customers, sales and solicitations from loan officers and loan participations. The Bank utilizes various officers and loan committees for the approval of real estate loans. The
Board of Directors has appointed a Board Loan Committee comprised of two members elected annually from the Board of Directors and four senior executive officers of the Bank. A quorum of three members, including at least one Board member, is required
for any action. This Committee has the authority to approve all secured and unsecured loan requests with the exception of a single loan request exceeding $3.0 million, which requires approval of the entire Board of Directors.

Loan Originations, Purchases and Sales. During fiscal 2001, we phased out broker loan purchases and originations and reduced our mortgage
lending operations to provide an increased capital allocation for consumer and commercial lending. Consequently, the Bank did not securitize any loans in either the 2007 or 2006 fiscal years. The Bank does not have any current plans to sell a large
volume of loans, other than fixed-rate mortgage loans it originates through its retail branch network. The Bank purchases participation interests in loans originated by other



5



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##### Table of Contents

institutions. The Bank had total purchases of participation interests of $27.6 million in fiscal 2007. These participation interests are primarily on
commercial properties and carry either a fixed or adjustable interest rate. The Bank performs its own underwriting analysis on each of its participation interests before purchasing such loans and therefore believes there is no greater risk of
default on these obligations. However, in a purchased participation loan, the Bank does not service the loan and thus is subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and
instituting foreclosure proceedings. The Bank is permitted to review all of the documentation relating to any loan in which the Bank participates, including any annual financial statements provided by a borrower. Additionally, the Bank receives
periodic updates on the loan from the lead lender.

The following table sets forth the Banks loan origination activity for the
periods indicated (in thousands):



|                                |  |                         |        |      |   |        |  |   |       
|------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                |  | Year Ended December 31,
|                                |  | 2007                    |        | 2006 |   | 2005  
|Loans originated:               |  |                         |        |      |   |        |  |   |       
|Real estate loans:              |  |                         |        |      |   |        |  |   |       
|Residential loans               |  | $                       | 5,338  |      | $ | 6,644  |  | $ | 5,415 
|Construction loans              |  |                         |       |      |   | 945    |  |   | 1,401 
|                                |  |                         |        |      |   |        |  |   |       
|Total mortgage loans originated |  |                         | 5,338  |      |   | 7,589  |  |   | 6,816 
|                                |  |                         |        |      |   |        |  |   |       
|Consumer and installment loans  |  |                         | 17,924 |      |   | 18,371 |  |   | 17,039
|Commercial loans                |  |                         | 59,863 |      |   | 57,353 |  |   | 56,469
|                                |  |                         |        |      |   |        |  |   |       
|Total loans originated          |  | $                       | 83,125 |      | $ | 83,313 |  | $ | 80,324
|                                |  |                         |        |      |   |        |  |   |       
|Loan participations purchased   |  | $                       | 27,636 |      | $ | 22,085 |  | $ | 7,987 
|Loan participations sold        |  | $                       | 2,000  |      | $ | 970    |  | $ | 6,000 

Problem Assets.The Bank determines a loan to be delinquent when payments
have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. See Notes 1 and 3 of Notes to Consolidated Financial Statements.

A loan is impaired when it is probable, based on current information, the Corporation will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. Management has determined that, generally, a failure to make a payment within a 90-day period constitutes a minimum delay or shortfall and generally does not constitute an impaired
loan. However, management reviews each past due loan on a loan-by-loan basis and may determine a loan to be impaired prior to the loan becoming over 90 days past due, depending upon the circumstances of that particular loan. A loan is classified as
non-accrual at the time management believes that the collection of interest is improbable, generally when a loan becomes 90 days past due. The Banks policy for charge-off of impaired loans is on a loan-by-loan basis. At the time management
believes the collection of interest and principal is remote, the loan is charged off. It is our policy to evaluate impaired loans based on the fair value of the collateral. Interest income from impaired loans is recorded using the cash method.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. When such property
is acquired it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value less selling costs. Any subsequent write-down of the property is charged to income.

Non-performing assets were $3.8 million and $1.4 million at December 31, 2007 and December 31, 2006, respectively.



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The following table sets forth information with respect to the Banks non-performing assets for the
periods indicated (dollars in thousands).



|                                                                |  |                 |       |   |                  |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|--------------------------------------------------------------- |  | --------------- | ----- | - | ---------------- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                |  | At December 31, |       |   | At September 30, |  
|                                                                |  | 2007            |       |   | 2006             |   |       | 2005 |  |   | 2004  |   |  | 2003 |      
|Real estate                                                     |  | $               | 356   |   |                  | $ | 459   |      |  | $ | 461   |   |  | $    | 217   |   |  | $ | 408   |  
|Commercial                                                      |  |                 | 2,445 |   |                  |   | 631   |      |  |   | 436   |   |  |      | 142   |   |  |   | 2,437 |  
|Consumer                                                        |  |                 | 171   |   |                  |   | 205   |      |  |   | 349   |   |  |      | 391   |   |  |   | 209   |  
|                                                                |  |                 |       |   |                  |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                           |  |                 | 2,972 |   |                  |   | 1,295 |      |  |   | 1,246 |   |  |      | 750   |   |  |   | 3,054 |  
|                                                                |  |                 |       |   |                  |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more |  |                 |      |   |                  |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Real estate owned, net                                          |  |                 | 856   |   |                  |   | 148   |      |  |   | 224   |   |  |      | 364   |   |  |   | 652   |  
|                                                                |  |                 |       |   |                  |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing assets                                     |  | $               | 3,828 |   |                  | $ | 1,443 |      |  | $ | 1,470 |   |  | $    | 1,114 |   |  | $ | 3,706 |  
|                                                                |  |                 |       |   |                  |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Percentage of non-performing assets to loans receivable net     |  |                 | 1.49  | % |                  |   | 0.62  | %    |  |   | 0.76  | % |  |      | 0.65  | % |  |   | 2.42  | %
|                                                                |  |                 |       |   |                  |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  

Interest income that would have been recorded for the year ended December 31, 2007 had
non-accruing loans been current in accordance with their original terms amounted to approximately $156,000. There was no interest included in interest income on such loans for the year ended December 31, 2007.

Allowance for Loan Losses. In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. To cover losses inherent in
the portfolio of performing loans, the Bank maintains an allowance for loan losses. Managements periodic evaluation of the adequacy of the allowance is based on a number of factors, including managements evaluation of the collectibility
of the loan portfolio, the nature and size of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans and economic conditions. The amount of the allowance is based on the estimated value of the collateral
securing the loan and other analysis pertinent to each situation.

The Bank increases its allowance for loan losses by charging provisions
for loan losses against income. The allowance for loan losses is maintained at an amount management considers adequate to absorb losses inherent in the portfolio. Although management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected significantly and adversely if circumstances substantially differ from the assumptions used in making the
determinations.

The provision 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 weights assigned to each performing group are developed from previous loan loss experience and as the loss experience changes, the category weight
is adjusted accordingly. In addition, as the amount of loans in each category increases and decreases, the provision for loan loss calculation adjusts accordingly.

While we believe that we have established the existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio,
will not request the Bank to increase significantly the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for
loan losses is adequate or that a substantial increase will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may affect adversely the
Corporations financial condition and results of operations. See Notes 1 and 3 of Notes to Consolidated Financial Statements for information concerning the Banks provision and allowance for possible loan losses.



7



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##### Table of Contents

The following table sets forth an analysis of the Banks allowance for loan losses for the periods
indicated (dollars in thousands):



|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|----------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ------------------------------------- | - | ----- | ------------------------------ |  | - | ----- | - |  | ---- | ------ | - | ---- | - | ----- | - |  | - | ----- | -
|                                                                              |  | For the Year EndedDecember 31, |       |   | For the ThreeMonths EndedDecember 30, |   |       | For the YearEndedSeptember 30, | 
|                                                                              |  | 2007                           |       |   | 2006                                  |   |       | 2005                           |  |   | 2004  |   |  | 2003 |        |   | 2003 |  
|Balance at beginning of year                                                  |  | $                              | 2,754 |   |                                       | $ | 2,394 |                                |  | $ | 2,026 |   |  | $    | 2,383  |   |      | $ | 1,842 |   |  | $ | 1,371 |  
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Loans charged off:                                                            |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Real estate                                                                   |  |                                |      |   |                                       |   | (25   | )                              |  |   | (75   | ) |  |      | (62    | ) |      |   | (47   | ) |  |   | (255  | )
|Commercial                                                                    |  |                                | (668  | ) |                                       |   | (141  | )                              |  |   | (302  | ) |  |      | (1,740 | ) |      |   | (154  | ) |  |   | (11   | )
|Consumer                                                                      |  |                                | (45   | ) |                                       |   | (74   | )                              |  |   | (195  | ) |  |      | (40    | ) |      |   | (39   | ) |  |   | (65   | )
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Total charge-offs                                                             |  |                                | (713  | ) |                                       |   | (240  | )                              |  |   | (572  | ) |  |      | (1,842 | ) |      |   | (240  | ) |  |   | (331  | )
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Recoveries:                                                                   |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Real estate                                                                   |  |                                | 13    |   |                                       |   | 44    |                                |  |   | 35    |   |  |      | 22     |   |      |   | 1     |   |  |   | 31    |  
|Commercial                                                                    |  |                                | 218   |   |                                       |   | 66    |                                |  |   | 26    |   |  |      | 192    |   |      |   | 51    |   |  |   | 6     |  
|Consumer                                                                      |  |                                | 6     |   |                                       |   | 20    |                                |  |   | 10    |   |  |      | 21     |   |      |   | 4     |   |  |   | 40    |  
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Total recoveries                                                              |  |                                | 237   |   |                                       |   | 130   |                                |  |   | 71    |   |  |      | 235    |   |      |   | 56    |   |  |   | 77    |  
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Net charge-offs                                                               |  |                                | (476  | ) |                                       |   | (110  | )                              |  |   | (501  | ) |  |      | (1,607 | ) |      |   | (184  | ) |  |   | (254  | )
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Provision for loan losses (1)                                                 |  |                                | 1,066 |   |                                       |   | 470   |                                |  |   | 869   |   |  |      | 1,250  |   |      |   | 725   |   |  |   | 725   |  
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Balance at end of year                                                        |  | $                              | 3,344 |   |                                       | $ | 2,754 |                                |  | $ | 2,394 |   |  | $    | 2,026  |   |      | $ | 2,383 |   |  | $ | 1,842 |  
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  
|Ratio of net charge-offs to average gross loans outstanding during the period |  |                                | 0.20  | % |                                       |   | 0.05  | %                              |  |   | 0.27  | % |  |      | 0.91   | % |      |   | 0.12  | % |  |   | 0.16  | %
|                                                                              |  |                                |       |   |                                       |   |       |                                |  |   |       |   |  |      |        |   |      |   |       |   |  |   |       |  



|(1) | See Managements Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the factors responsible for changes in the provision
for loan losses between the periods.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Bank experienced bad debt charge-offs, net of recoveries, of approximately $476,000
in fiscal 2007 compared to $110,000 for fiscal 2006. The loan charge-offs for the current year includes one commercial loan for $1.3 million that was foreclosed and taken into other real estate owned where the loan was written down to fair market
value of $800,000. The property was sold during the first quarter of 2008 in a transaction that resulted in a small recovery. The allowance for loan losses to total loans ratio at the end of fiscal 2007 was 1.28% compared to 1.17% at the end of
fiscal 2006.

The following table sets forth the breakdown of the allowance for loan losses by loan category and the percentage of
loans in each category to total loans for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of
further losses and does not restrict the use of the allowance to absorb losses in any category (dollars in thousands):



|                                |  |                 |       |                                         |                  |   |        |      |                                         |  |        |        |  |                                         |       |  |        |   |                                         |   |       |        |        |                                         |  |   |       |  |        |  
|------------------------------- |  | --------------- | ----- | --------------------------------------- | ---------------- | - | ------ | ---- | --------------------------------------- |  | ------ | ------ |  | --------------------------------------- | ----- |  | ------ | - | --------------------------------------- | - | ----- | ------ | ------ | --------------------------------------- |  | - | ----- |  | ------ | -
|                                |  | At December 31, |       |                                         | At September 30, |  
|                                |  | 2007            |       |                                         | 2006             |   |        | 2005 |                                         |  | 2004   |        |  | 2003                                    |      
|                                |  | Amount          |       | % of Loansin EachCategory toTotal Loans |                  |   | Amount |      | % of Loansin EachCategory toTotal Loans |  |        | Amount |  | % of Loansin EachCategory toTotal Loans |       |  | Amount |   | % of Loansin EachCategory toTotal Loans |   |       | Amount |        | % of Loansin EachCategory toTotal Loans | 
|Real estate                     |  | $               | 1,297 |                                         | 40.58            | % |        | $    | 993                                     |  | 41.16  | %      |  | $                                       | 975   |  | 44.06  | % |                                         | $ | 984   |        | 51.45  | %                                       |  | $ | 1,078 |  | 62.34  | %
|Commercial                      |  |                 | 1,268 |                                         | 39.68            |   |        |      | 956                                     |  | 39.41  |        |  |                                         | 447   |  | 20.18  |   |                                         |   | 335   |        | 17.48  |                                         |  |   | 280   |  | 16.16  |  
|Consumer                        |  |                 | 630   |                                         | 19.74            |   |        |      | 471                                     |  | 19.43  |        |  |                                         | 792   |  | 35.76  |   |                                         |   | 594   |        | 31.07  |                                         |  |   | 372   |  | 21.50  |  
|Unallocated                     |  |                 | 149   |                                         | N/A              |   |        |      | 334                                     |  | N/A    |        |  |                                         | 180   |  | N/A    |   |                                         |   | 113   |        | N/A    |                                         |  |   | 112   |  | N/A    |  
|                                |  |                 |       |                                         |                  |   |        |      |                                         |  |        |        |  |                                         |       |  |        |   |                                         |   |       |        |        |                                         |  |   |       |  |        |  
|Total allowance for loan losses |  | $               | 3,344 |                                         | 100.00           | % |        | $    | 2,754                                   |  | 100.00 | %      |  | $                                       | 2,394 |  | 100.00 | % |                                         | $ | 2,026 |        | 100.00 | %                                       |  | $ | 1,842 |  | 100.00 | %
|                                |  |                 |       |                                         |                  |   |        |      |                                         |  |        |        |  |                                         |       |  |        |   |                                         |   |       |        |        |                                         |  |   |       |  |        |  



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The Bank adjusts balances on real estate acquired in settlement of loans to the lower of cost or market
based on appraised value when the property is received in settlement. These values reflect current market conditions and sales experience. See Notes 1 and 3 of Notes to Consolidated Financial Statements.

Asset Classification. The Office of the Comptroller of the Currency requires national banks to classify problem assets. Problem
assets are classified as substandard or impaired, depending on the presence of certain characteristics. Assets that currently do not expose the insured institution to sufficient risk to warrant classification in the
above-mentioned categories but possess weaknesses are designated special mention. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the
collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as
impaired have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.

When an institution classifies problem assets as either
special mention or substandard, it is required to establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an institution classifies problem assets or a portion of assets as impaired, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset or a portion thereof so classified or to charge-off such amount. An institutions determination as to the classification of its assets and the amount of its valuation
allowances is subject to review by the Comptroller of the Currency who can order the establishment of additional general or specific loss allowances.

The following tables set forth the number and amount of classified loans at December 31, 2007 (dollars in thousands):



|            |  |          |  |             |       |                 |    |        |   |        |  |        |  |   |      
|----------- |  | -------- |  | ----------- | ----- | --------------- | -- | ------ | - | ------ |  | ------ |  | - | -----
|            |  | Impaired |  | Substandard |       | Special Mention
|            |  | Number   |  | Amount      |       | Number          |    | Amount |   | Number |  | Amount
|Real estate |  | 13       |  | $           | 2,715 |                 | 12 |        | $ | 550    |  | 5      |  | $ | 241  
|Commercial  |  |         |  |             |      |                 | 11 |        |   | 1,368  |  | 14     |  |   | 3,762
|Consumer    |  |         |  |             |      |                 | 13 |        |   | 352    |  | 2      |  |   | 2    
|            |  |          |  |             |       |                 |    |        |   |        |  |        |  |   |      
|Total       |  | 13       |  | $           | 2,715 |                 | 36 |        | $ | 2,270  |  | 21     |  | $ | 4,005
|            |  |          |  |             |       |                 |    |        |   |        |  |        |  |   |      

Investment Activities

The following table sets forth the Corporations investment and mortgage-backed securities portfolio at the dates indicated (dollars in thousands):



|                                       |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  
|-------------------------------------- |  | --------------- | ------- | ------------------- | ------ | - | ------------- | ---- | ------------------- |  | ------ | ------------- |  | ------------------- | ------- |  | ------ | -
|                                       |  | At December 31, |        
|                                       |  | 2007            |         |                     | 2006   |   |               | 2005 |                    
|                                       |  | CarryingValue   |         | Percent ofPortfolio |        |   | CarryingValue |      | Percent ofPortfolio |  |        | CarryingValue |  | Percent ofPortfolio |        
|Available for sale:                    |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  
|Investment securities:                 |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  
|U.S. Agency obligations                |  | $               | 488     |                     | 0.45   | % |               | $    | 500                 |  | 0.42   | %             |  | $                   | 507     |  | 0.35   | %
|Government Sponsored Enterprises       |  |                 | 40,665  |                     | 37.63  |   |               |      | 72,638              |  | 61.04  |               |  |                     | 82,936  |  | 57.97  |  
|Municipal securities                   |  |                 | 9,601   |                     | 8.88   |   |               |      | 10,970              |  | 9.22   |               |  |                     | 18,180  |  | 12.71  |  
|Other                                  |  |                 | 12,093  |                     | 11.20  |   |               |      | 14,644              |  | 12.31  |               |  |                     | 14,621  |  | 10.22  |  
|                                       |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  
|Total investment securities            |  |                 | 62,847  |                     | 58.16  |   |               |      | 98,752              |  | 82.99  |               |  |                     | 116,244 |  | 81.25  |  
|                                       |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  
|Mortgage-backed and related securities |  |                 | 45,214  |                     | 41.84  |   |               |      | 20,251              |  | 17.01  |               |  |                     | 26,835  |  | 18.75  |  
|                                       |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  
|Total                                  |  | $               | 108,061 |                     | 100.00 | % |               | $    | 119,003             |  | 100.00 | %             |  | $                   | 143,079 |  | 100.00 | %
|                                       |  |                 |         |                     |        |   |               |      |                     |  |        |               |  |                     |         |  |        |  



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|                     |  |                 |       |                     |        |   |               |      |                     |  |        |               |  |                     |       |  |        |  
|-------------------- |  | --------------- | ----- | ------------------- | ------ | - | ------------- | ---- | ------------------- |  | ------ | ------------- |  | ------------------- | ----- |  | ------ | -
|                     |  | At December 31, |      
|                     |  | 2007            |       |                     | 2006   |   |               | 2005 |                    
|                     |  | CarryingValue   |       | Percent ofPortfolio |        |   | CarryingValue |      | Percent ofPortfolio |  |        | CarryingValue |  | Percent ofPortfolio |      
|Held to maturity:    |  |                 |       |                     |        |   |               |      |                     |  |        |               |  |                     |       |  |        |  
|Municipal securities |  | $               | 3,126 |                     | 100.00 | % |               | $    | 3,182               |  | 100.00 | %             |  | $                   | 3,204 |  | 100.00 | %
|                     |  |                 |       |                     |        |   |               |      |                     |  |        |               |  |                     |       |  |        |  

The Corporation purchases mortgage-backed securities, both fixed-rate and adjustable-rate, from
Freddie Mac, Fannie Mae and Ginnie Mae with maturities from five to thirty years. The Corporation decreased its level of investment securities from the previous year as proceeds from the sale and maturation of investment securities were used to fund
growth in higher-yielding loans.

The Corporation also purchases mortgage derivative securities in the form of collateralized mortgage
obligations (CMOs) issued by U.S. government agencies or corporations. While these securities possess minimal credit risk due to the Federal guarantee of collection on the underlying mortgages, they possess liquidity and interest rate
risk. The amortized cost of the CMOs at December 31, 2007 was approximately $3.5 million with a fair value of $3.5 million. See Note 2 of Notes to Consolidated Financial Statements for more information regarding investment and mortgage-backed
securities.



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The following table sets forth at amortized cost (held to maturity) and market value (available for sale)
the maturities and weighted average yields* of the Corporations investment and mortgage-backed securities portfolio at December 31, 2007 (dollars in thousands):



|                                       |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|-------------------------------------- |  | ------------------------------- | ------ | -------------------- | --------------------- | - | ------------- | --------------------- | -------------------- |  | ------------- | ------------- |  | -------------------- | ------ |  | ------------- | - | -------------------- | - | ------ | ------------- | ---- | -------------------- |  | - | ------- |  | ---- | -
|                                       |  | Amount Due or Repricing within: |       
|                                       |  | One Yearor Less                 |        |                      | Over One toFive Years |   |               | Over Five toTen Years |                      |  | OverTen Years |               |  | Total                |       
|                                       |  | CarryingValue                   |        | WeightedAverageYield |                       |   | CarryingValue |                       | WeightedAverageYield |  |               | CarryingValue |  | WeightedAverageYield |        |  | CarryingValue |   | WeightedAverageYield |   |        | CarryingValue |      | WeightedAverageYield | 
|Available for Sale:                    |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|Investment securities:                 |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|U.S. Agency obligations                |  | $                               |       |                      |                      | % |               | $                     | 8                    |  | 8.07          | %             |  | $                    |       |  |              | % |                      | $ | 480    |               | 5.62 | %                    |  | $ | 488     |  | 5.66 | %
|Government Sponsored Enterprises(1)    |  |                                 | 6,977  |                      | 4.00                  |   |               |                       | 13,645               |  | 5.12          |               |  |                      | 20,043 |  | 5.99          |   |                      |   |       |               |     |                      |  |   | 40,665  |  | 5.36 |  
|Municipal securities                   |  |                                 |       |                      |                      |   |               |                       | 461                  |  | 4.82          |               |  |                      | 810    |  | 4.58          |   |                      |   | 8,330  |               | 4.88 |                      |  |   | 9,601   |  | 4.85 |  
|Corporate securities                   |  |                                 | 9,145  |                      | 7.11                  |   |               |                       | 955                  |  | 5.03          |               |  |                      |       |  |              |   |                      |   | 1,993  |               | 7.00 |                      |  |   | 12,093  |  | 6.93 |  
|                                       |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|Total investment securities            |  |                                 | 16,122 |                      | 5.76                  |   |               |                       | 15,069               |  | 5.11          |               |  |                      | 20,853 |  | 5.94          |   |                      |   | 10,803 |               | 5.30 |                      |  |   | 62,847  |  | 5.58 |  
|Mortgage-backed and related securities |  |                                 | 4,526  |                      | 5.03                  |   |               |                       | 1,486                |  | 6.10          |               |  |                      | 11,831 |  | 5.67          |   |                      |   | 27,371 |               | 5.37 |                      |  |   | 45,214  |  | 5.44 |  
|                                       |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|Total available for sale               |  |                                 | 20,648 |                      | 5.60                  |   |               |                       | 16,555               |  | 5.20          |               |  |                      | 32,684 |  | 5.84          |   |                      |   | 38,174 |               | 5.35 |                      |  |   | 108,061 |  | 5.52 |  
|                                       |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|Held to Maturity:                      |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  
|Municipal securities                   |  | $                               | 696    |                      | 3.52                  | % |               | $                     |                     |  |              | %             |  | $                    |       |  |              | % |                      | $ | 2,430  |               | 4.26 | %                    |  | $ | 3,126   |  | 4.10 | %
|                                       |  |                                 |        |                      |                       |   |               |                       |                      |  |               |               |  |                      |        |  |               |   |                      |   |        |               |      |                      |  |   |         |  |      |  



|(1) | The following GSE issuers exceed 10% of shareholders equity at 12/31/07.
|--- | -------------------------------------------------------------------------



|                              |  |            |        |              |   |       
|----------------------------- |  | ---------- | ------ | ------------ | - | ------
|Issuer                        |  | Book Value |        | Market Value
|Federal Home Loan Bank (FHLB) |  | $          | 15,475 |              | $ | 15,470
|Freddie Mac (FHLMC)           |  |            | 23,157 |              |   | 23,369
|                              |  |            |        |              |   |       
|                              |  | $          | 38,632 |              | $ | 38,839
|                              |  |            |        |              |   |       



|* | The weighted average yield is based upon the cost value and the total income received of the instrument.
|- | --------------------------------------------------------------------------------------------------------



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At December 31, 2007, approximately $16.6 million of mortgage-backed securities were
adjustable-rate securities.

Deposits and Borrowings

General deposits are the major source of our funds for lending and other investment purposes. In addition to deposits, we derive funds from principal repayments and interest payments on loans and investment and
mortgage-backed securities. Principal repayments and interest payments are a relatively stable source of funds, although principal prepayments tend to slow when interest rates increase. Deposit inflows and outflows may be influenced significantly by
general market interest rates and money market conditions. During 2007, the Bank experienced a net increase in deposits of approximately $22.0 million due to various deposit promotion programs with continued emphasis on increasing core deposits. The
Bank used the excess funds from its decrease in its level of investment securities to support the remaining growth experienced in fiscal 2007.

Deposits. Local deposits are, and traditionally have been, the primary source of the Banks funds for use in lending and for other general business purposes. We offer a number of deposit accounts including NOW
accounts, money market savings accounts, passbook and statement savings accounts, individual retirement accounts and certificate of deposit accounts. Deposit accounts vary as to terms regarding withdrawal provisions, deposit provisions and interest
rates.

We adjust the interest rates offered on our deposit accounts as necessary so as to remain competitive with other financial
institutions in Union, Laurens, York, Greenville and Fairfield Counties in South Carolina.

The following table sets forth the time
deposits of the Bank classified by rates as of the dates indicated (in thousands):



|                    |  |                 |         |      |   |         |  |   |        
|------------------- |  | --------------- | ------- | ---- | - | ------- |  | - | -------
|                    |  | At December 31,
|                    |  | 2007            |         | 2006 |   | 2005   
|Up to 2.0%          |  | $               | 228     |      | $ | 1,909   |  | $ | 24,568 
|2.01% to 4.0%       |  |                 | 31,805  |      |   | 37,139  |  |   | 86,570 
|4.01% to 6.0%       |  |                 | 129,536 |      |   | 111,029 |  |   | 26,582 
|6.01% to 8.0%       |  |                 | 26      |      |   | 25      |  |   | 23     
|                    |  |                 |         |      |   |         |  |   |        
|Total time deposits |  | $               | 161,595 |      | $ | 150,102 |  | $ | 137,743
|                    |  |                 |         |      |   |         |  |   |        

The following table sets forth the maturities of time deposits at December 31, 2007 (in
thousands):



|                                         |  |        |        
|---------------------------------------- |  | ------ | -------
|                                         |  | Amount
|Within three months                      |  | $      | 39,872 
|After three months but within six months |  |        | 40,790 
|After six months but within one year     |  |        | 54,177 
|After one year but within three years    |  |        | 25,288 
|After three years but within five years  |  |        | 1,367  
|After five years but within ten years    |  |        | 101    
|                                         |  |        |        
|Total                                    |  | $      | 161,595
|                                         |  |        |        

Certificates of deposit with maturities of less than one year increased to $134.8 million at
December 31, 2007 from $112.1 million at December 31, 2006. Historically, we have been able to retain a significant amount of deposits as they mature. In addition, we believe that we can adjust the offering rates of savings certificates to
retain deposits in changing interest rate environments.



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##### Table of Contents

The following table indicates the amount of the Banks jumbo certificates of deposit by time
remaining until maturity as of December 31, 2007 (in thousands). Jumbo certificates of deposit are certificates in amounts of $100,000 or more.



|                                      |  |        |       
|------------------------------------- |  | ------ | ------
|Maturity Period                       |  | Amount
|Three months or less                  |  | $      | 15,597
|Over three through six months         |  |        | 15,957
|Over six months through twelve months |  |        | 21,199
|Over twelve months                    |  |        | 10,470
|                                      |  |        |       
|Total jumbo certificates              |  | $      | 63,223
|                                      |  |        |       

See Note 6 of Notes to Consolidated Financial Statements for additional information about deposit
accounts.

Borrowings. The Corporation utilizes advances from the FHLB agreements and other borrowings (treasury, tax and
loan deposits, security repurchase agreements and trust preferred capital obligations) to supplement its supply of lendable funds for granting loans, making investments and meeting deposit withdrawal requirements. See Regulation and
Supervision  Federal Home Loan Bank System.

The following tables set forth certain information regarding borrowings by the
Bank at the dates and for the periods indicated (dollars in thousands):



|                                      |  |                 |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                      |  | At December 31, |       
|                                      |  | 2007            |        |   | 2006 |   |        | 2005 | 
|Balance outstanding at end of period: |  |                 |        |   |      |   |        |      |  |   |        |  
|FHLB advances                         |  | $               | 69,500 |   |      | $ | 70,000 |      |  | $ | 75,715 |  
|Other borrowings                      |  |                 | 36,503 |   |      |   | 40,905 |      |  |   | 32,862 |  
|                                      |  |                 |       
|Weighted average rate paid on:        |  |                 |        |   |      |   |        |      |  |   |        |  
|FHLB advances                         |  |                 | 4.55   | % |      |   | 4.81   | %    |  |   | 3.98   | %
|Other borrowings                      |  |                 | 4.92   | % |      |   | 5.44   | %    |  |   | 3.62   | %



|                                                           |  |                                       |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                           |  | At or For the Year Ended December 31, |       
|                                                           |  | 2007                                  |        |   | 2006 |   |        | 2005 | 
|Maximum amount of borrowings outstanding at any month end: |  |                                       |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                              |  | $                                     | 85,250 |   |      | $ | 81,500 |      |  | $ | 75,715 |  
|Other borrowings                                           |  |                                       | 51,547 |   |      |   | 47,413 |      |  |   | 41,228 |  
|                                                           |  |                                       |       
|Approximate average borrowings outstanding:                |  |                                       |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                              |  |                                       | 66,893 |   |      |   | 59,481 |      |  |   | 77,854 |  
|Other borrowings                                           |  |                                       | 40,932 |   |      |   | 43,553 |      |  |   | 35,618 |  
|                                                           |  |                                       |       
|Approximate weighted average rate paid on:                 |  |                                       |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                              |  |                                       | 4.77   | % |      |   | 5.06   | %    |  |   | 3.13   | %
|Other borrowings                                           |  |                                       | 5.35   | % |      |   | 5.72   | %    |  |   | 4.03   | %

At December 31, 2007, the Corporation had unused short-term lines of credit to purchase
federal funds from unrelated banks totaling $30.0 million. These 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. At
December 31, 2007, the Bank had unused lines of credit for longer term advances totaling $40.0 million.



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Subsidiary Activities

Under OCC regulations, the Bank generally may invest in operating subsidiaries, which may engage in activities permissible for the Bank itself. The Bank currently holds Provident Financial Services, Inc. as a
non-active subsidiary.

Provident Community Bancshares maintains two subsidiaries other than the Bank. In fiscal year 2006, Provident
Community Bancshares Capital Trust I and Capital Trust II were established as capital trusts under Delaware law for the purpose of issuing trust preferred securities. Provident Community Bancshares Capital Trust I issued trust preferred securities
on July 21, 2006 while Capital Trust II issued trust preferred securities on December 15, 2006.

Employees

The Corporation has 77 full-time employees and 7 part-time employees. None of the employees are represented by a collective bargaining unit. We believe
that relations with our employees are excellent.

REGULATION AND SUPERVISION

General

Provident Community Bancshares, which is a bank holding company, is required to file certain
reports with the Federal Reserve Board and otherwise comply with the Bank Holding Company Act of 1956, as amended (BHCA) and the rules and regulations promulgated thereunder.

The Bank, as a national bank, is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, as its
primary regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer. The Banks deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the FDIC. The Bank must file reports with the OCC
and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other institutions. The OCC and/or the FDIC conduct
periodic examinations to test the Banks safety and soundness and compliance with various regulatory requirements. Many aspects of the Banks operations are regulated by federal law including allowable activities, reserves against
deposits, branching, mergers and investments. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors.
The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OCC, the FDIC, or Congress, could have a material adverse impact on Provident Community Bancshares or the
Bank and their operations.

Certain regulatory requirements applicable to the Bank and Provident Community Bancshares are referred to below
or elsewhere herein. This description of statutory provisions and regulations applicable to national banks and their holding companies does not purport to be a complete description of such statutes and regulations and their effects on the Bank and
Provident Community Bancshares.

Holding Company Regulation

Federal Regulation.As a bank holding company, Provident Community Bancshares is subject to examination, regulation and periodic reporting under the BHCA, as administered by the FRB. Provident Community
Bancshares is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company or merge with another bank holding company. Prior FRB approval is also required for Provident
Community Bancshares to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, Provident Community Bancshares would, directly or indirectly, own or
control more than 5% of any class of voting shares of the bank or bank holding



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##### Table of Contents

company. In evaluating such transactions, the FRB considers such matters as the financial and managerial resources of and future prospects of the companies
and banks involved, competitive factors and the convenience and needs of the communities to be served. Bank holding companies have authority under the BHCA to acquire additional banks in any state, subject to certain restrictions such as deposit
concentration limits. In addition to the approval of the FRB, before any bank acquisition can be completed, prior approval may also be required from other agencies having supervisory jurisdiction over the banks to be acquired.

A bank holding company generally is prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting securities of any
company conducting non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks to be a proper incident thereto. Some of the
principal activities that the FRB has determined by regulation to be closely related to banking are: (1) making or servicing loans; (2) performing certain data processing services; (3) providing discount brokerage services;
(4) acting as fiduciary, investment or financial advisor; (5) finance leasing personal or real property; (6) making investments in corporations or projects designed primarily to promote community welfare; and (7) acquiring a
savings association, provided that the savings association only engages in activities permitted by bank holding companies.

The
Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including being well-capitalized and well managed, to opt to become a financial holding company and thereby engage
in a broader array of financial activities than previously permitted. Such activities may include insurance underwriting and investment banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in
certain of the activities permitted for financial holding companies. Financial subsidiaries are generally treated as affiliates for purposes of restrictions on a banks transactions with affiliates.

The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the OCC for the
Bank. See Capital Requirements. Provident Community Bancshares total and Tier 1 capital exceed these requirements as of December 31, 2007.

Bank holding companies generally are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an exception to this approval requirement for
well-capitalized bank holding companies that meet certain other conditions.

The FRB has issued a policy statement regarding the payment of
dividends by bank holding companies. In general, the FRBs policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Bank holding company appears consistent with
the organizations capital needs, asset quality, and overall financial condition. The FRBs policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use
available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its
subsidiary banks where necessary. Furthermore, the FRB has authority to prohibit a bank holding company from paying a capital distribution where a subsidiary bank is undercapitalized. These regulatory policies could affect the ability of Provident
Community Bancshares to pay dividends or otherwise engage in capital distributions.

The FRB has general authority to enforce the BHCA as
to Provident Community Bancshares and may require a bank holding company to cease any activity or terminate control of any subsidiary engaged in an activity that the FRB believes constitutes a serious risk to the safety, soundness or stability of
its bank subsidiaries.

Provident Community Bancshares and its subsidiaries will be affected by the monetary and fiscal policies of various
agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and money markets, it is impossible for the management of Provident Community Bancshares accurately to predict
future changes in monetary policy or the effect of such changes on the business or financial condition of Provident Community Bancshares or the Bank.



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##### Table of Contents

Acquisition of Provident Community Bancshares

Federal Regulation. Federal law requires that a notice be submitted to the FRB if any person (including a company), or group acting in
concert, seeks to acquire 10% or more of Provident Community Bancshares outstanding voting stock, unless the FRB has found that the acquisition will not result in a change in control of Provident Community Bancshares. The FRB has 60 days from
the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.

Under the BHCA, any company would be required to obtain prior approval from the FRB before it may obtain control of Provident Community
Bancshares within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class of voting securities of Provident Community Bancshares or the ability to control in any manner the
election of a majority of Provident Community Bancshares directors. An existing bank holding company would be required to obtain the FRBs prior approval under the BHCA before acquiring more than 5% of Provident Community Bancshares
voting stock. See Holding Company Regulation.

Federal Banking Regulations

Capital Requirements. The OCCs capital regulations require national banks to meet two minimum capital standards: a 4% Tier 1 capital
to total adjusted assets ratio for most banks (3% for national banks with the highest examination rating) (the leverage ratio) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital to total assets standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the financial institution examination rating system) and, together with the risk-based capital
standard itself, a 4% Tier 1 capital to risk-based assets standard. Tier 1 capital is generally defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related
surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights and credit card relationships), a percentage of certain non-financial equity investments and certain other
specified items.

The risk-based capital standard requires the maintenance of Tier 1 and total capital (which is defined as Tier 1 capital
plus Tier 2 capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet activities, are multiplied by a risk-weight factor of 0% to 100%, as
assigned by the OCC capital regulation based on the risks that the agency believes are inherent in the type of asset. The regulators have recently added a market risk adjustment to cover a banks trading account, foreign exchange and commodity
positions. Tier 2 capital may include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of Tier 2 capital included as part of total capital cannot exceed 100% of
Tier 1 capital.

The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar
to those of the OCC for the Bank. Provident Community Bancshares total and Tier 1 capital exceed these requirements.

Both the OCC
and the FRB have the discretion to establish higher capital requirements on a case-by-case basis where deemed appropriate in the circumstances of a particular bank or bank holding company.

At December 31, 2007, the Bank met each of its capital requirements.



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##### Table of Contents

Prompt Corrective Regulatory Action. Under the prompt corrective action regulations, the
OCC is required to take certain supervisory actions against undercapitalized institutions under its jurisdiction, the severity of which depends upon the institutions degree of undercapitalization. Generally, an institution that has a ratio of
total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be undercapitalized. An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be significantly
undercapitalized and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be critically undercapitalized. Subject to a narrow exception, the OCC is required to appoint a receiver or
conservator within specified time frames for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OCC within 45 days of the date an institution receives
notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Compliance with the plan must be guaranteed by any parent holding company in the amount of the lesser of 5% of the
banks total assets or the amount necessary to achieve compliance with applicable capital regulations. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

Insurance of Deposit Accounts. The Banks deposits are insured
up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The
Federal Deposit Insurance Corporation recently amended its risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (Reform Act). Under the revised system, insured
institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institutions assessment rate depends upon the category to which it is assigned. Risk category I,
which contains the least risky depository institutions, is expected to include more than 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the Federal Deposit Insurance
Corporations analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the Federal Deposit Insurance Corporation and currently range from five to seven basis points for the healthiest
institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The Federal Deposit Insurance Corporation may adjust rates uniformly from one quarter to the next, except that no single adjustment can
exceed three basis points. No institution may pay a dividend if in default of the FDIC assessment.

The Reform Act also provided for a
one-time credit for eligible institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits can be used to offset assessments until
exhausted. The Banks one-time credit approximated $180,281, of which $112,299 was used in 2007 and $67,982 is still available. The Reform Act also provided for the possibility that the Federal Deposit Insurance Corporation may pay dividends to
insured institutions once the Deposit Insurance fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to
the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during
the calendar year ending December 31, 2007 averaged 1.18 basis points of assessable deposits.

The Reform Act provided the Federal
Deposit Insurance Corporation with authority to adjust the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the Federal
Deposit Insurance Corporation as the level that the fund should achieve, was established by the agency at 1.25% for 2008, which is unchanged from 2007.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of
operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.



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Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or
the Office of Thrift Supervision. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Loans to One Borrower. National banks are subject to limits on the amount that they may lend to single borrowers. Generally, banks may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its capital and surplus (including Tier 1 capital, Tier 2 capital and the amount of the allowance for loan and lease losses not included in Tier 2 capital). An additional amount may be lent, equal to 10% of capital and
surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 2007, the Banks limit on loans to one borrower was $5.9 million and the Banks
largest aggregate outstanding balance of loans to one borrower was $4.8 million.

Limitation on Capital Distributions.
National banks may not pay dividends out of their permanent capital and may not, without OCC approval, pay dividends in excess of the total of the banks retained net income for the year combined with retained net income for the prior two years
less any transfers to surplus and capital distributions. A national bank may not pay a dividend that would cause it to fall below any applicable regulatory capital standard.

Branching.National banks are authorized to establish branches within the state in which they are headquartered to the extent state law
allows branching by state banks. Federal law also provides for interstate branching for national banks. Interstate branching by merger was authorized as of June 1, 1997 unless the state in which the bank is to branch has enacted a law opting
out of interstate branching or expedites the effective date by passing legislation. De novo interstate branching is permitted to the extent the state into which the bank is to branch has enacted a law authorizing out-of-state banks to
establish de novo branches.

Transactions with Related Parties.The authority of a depository institution to engage in
transactions with related parties or affiliates (e.g., any company that controls or is under common control with an institution, including, in this case, Provident Community Bancshares) is limited by Sections 23A and 23B of the
Federal Reserve Act (FRA). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the depository institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the depository institutions capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards,
that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.

The authority of the Bank to extend credit to executive officers, directors and 10% or greater shareholders (insiders), as well as entities such persons control, is governed by Sections 22(g) and 22(h) of
the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and are not to involve more than the normal risk of repayment. There is an
exception to this requirement for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans that institutions may make to insiders based, in part, on the institutions capital position and requires certain board approval procedures to be followed. Extensions of credit to executive
officers are subject to additional restrictions.

Enforcement.The OCC has primary enforcement responsibility over national
banks and has the authority to bring actions against such banks and all institution-affiliated parties, including directors, officers, stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership or
conservatorship. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has the authority to recommend to the OCC that it take



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enforcement action with respect to a national bank. If action is not taken by the agency, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain violations. The FRB has generally similar enforcement authority with respect to Provident Community Bancshares. Neither Provident Community Bancshares nor the Bank are under
any enforcement action.

Assessments.National banks are required to pay assessments to the OCC to fund the agencys
operations. The general assessments, paid on a semi-annual basis, are computed based upon the national banks (including consolidated subsidiaries) total balance sheet assets and financial condition. The OCC assessments paid by the Bank for the
fiscal year ended December 31, 2007 totaled $30,000.

Standards for Safety and Soundness.The federal banking agencies
have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness (Guidelines) and a final rule to implement safety and soundness standards required under federal law. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset quality and growth; earnings; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by
the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. The final rule establishes deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.

Community Reinvestment Act.The Community Reinvestment Act, (CRA), as
implemented by OCC regulations, provides that a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a bank, to assess the institutions record of meeting the credit needs of its community and to take such record into account in its
evaluation of certain corporate applications by such institution, such as mergers and branching. The Banks most recent rating was satisfactory.

USA Patriot Act.The USA Patriot Act of 2001 (the Patriot Act), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has
significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandated that financial institutions to implement additional policies and procedures with respect to, or
additional measures designed to address matters such as: money laundering, suspicious activities and currency transaction reporting.

Federal Reserve
System

The FRB regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $43.9 million or less (subject to adjustment by the FRB) the
reserve requirement is 3%; and for accounts aggregating greater than $45.8 million, a reserve requirement of 10% (subject to adjustment by the FRB between 8% and 14%) is applied against that portion of total transaction accounts in excess of $43.9
million. The first $9.3 million of otherwise reservable balances (subject to adjustments by the FRB) are exempted from the reserve requirements.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank of Atlanta. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2007 of $3.8 million.



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The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the
late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher
rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Banks net interest income would likely also be reduced.

Item 1A. Risk Factors

An investment in shares of our common stock involves various risks. Before
deciding to invest in our common stock, you should carefully consider the risks described below in conjunction with the other information in this offering memorandum, including the items included as exhibits. Our business, financial condition and
results of operations could be harmed by any of the following risks or by other risks that have not been identified or that we may believe are immaterial or unlikely. The value or market price of our common stock could decline due to any of these
risks, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Our increased emphasis on commercial lending may expose us to increased lending risks.

At December 31, 2007, 29.3% of our loan portfolio consisted of commercial real estate loans and 40.6% of our loan portfolio consisted of commercial
business loans. We have increased our emphasis on these types of loans since we converted to a national bank charter in July 2003. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family
residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related
borrowers compared to one- to four-family residential mortgage loans. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrowers ability to make repayments from the cash flow of the
borrowers business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our
allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently,
an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

The unseasoned nature of a significant portion of our commercial loan portfolio may result in errors in judging its collectibility, which may lead to additional loan
charge-offs and provisions for loan losses, which would hurt our profits.

Our commercial loan portfolio, which includes loans secured
by commercial real estate as well as business assets, has increased from $47.6 million, or 29.4% of total loans, at September 30, 2002 to $181.1 million, or 70.6% of total loans, at December 31, 2007. A large portion of our commercial loan
portfolio is unseasoned and does not provide us with a significant payment history pattern with which to judge future collectibility. These loans have also not been subjected to unfavorable economic conditions. As a result, it is difficult to
predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Further, commercial loans generally have
larger balances and involve a greater risk than one- to four-family residential mortgage loans. Accordingly, if we make any errors in judgment in the collectibility of our commercial loans, any resulting charge-offs may be larger on a per loan basis
that those incurred with our residential mortgage loan portfolio.

The building of market share through our branching strategy could cause our expenses
to increase faster than revenues.

We opened a banking center in Simpsonville in March 2006 and a second banking center in Rock Hill in
October 2006. There are considerable costs involved in opening branches and new branches generally require a



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period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any
new branch can be expected to negatively impact our earnings for some period of time until the branch reaches certain economies of scale.

Our market
area limits our growth potential.

Some of our offices are located in areas that have experienced population and economic
decline. Thus, our ability to originate loans and grow deposits in these areas may be limited. To counter this, we have attempted to expand our operations into communities that are experiencing population growth and economic expansion. This was the
impetus for the opening of our banking centers in Rock Hill in York County and Simpsonville in Greenville County and the relocation of our main office to Rock Hill. However, we can provide no assurance that we will be able to successfully enter new
markets with similar growth potential. If we are unable to do so, our ability to grow our business and our earnings will be restricted.

Strong
competition within our market area could hurt our profits and slow growth.

We face intense competition both in making loans and
attracting deposits. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying
more on our deposits, which reduces net interest income. According to the Federal Deposit Insurance Corporation, as of June 30, 2007, we held 8.6% of the deposits in Fairfield, Laurens, Union and York Counties, in South Carolina, which was the
third largest market share of deposits out of the 17 financial institutions that held deposits in these counties. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends
upon our continued ability to compete successfully in our market area.

Certain interest rate movements may hurt our earnings and asset value.

Short-term market interest rates (which we use as a guide to price our deposits) have until recently risen from historically low
levels, while longer-term market interest rates (which we use as a guide to price our longer-term loans) have not. This flattening of the market yield curve has had a negative impact on our interest rate spread and net interest margin,
which has reduced our profitability. For the years ended December 31, 2007 and 2006, respectively, our interest rate spread was 2.91% compared to 2.98%. If short-term interest rates rise, and if rates on our deposits reprice upwards faster than
the rates on our long-term loans and investments, we would experience compression of our interest rate spread and net interest margin, which would have a negative effect on our profitability. Recently, however, the U.S. Federal Reserve decreased its
target for the federal funds rate from 5.25% to 3.0%.

Changes in interest rates also affect the value of our interest-earning assets, and,
in particular, our securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available-for-sale are reported as a separate component of equity,
net of tax. Decreases in the fair value of securities available-for-sale resulting from increases in interest rates could have an adverse effect on shareholders equity.

If the value of real estate in northwestern South Carolina were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on
us.

With most of our loans concentrated in northwestern South Carolina, a decline in local economic conditions could adversely affect
the value of the real estate collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted
loans. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. Also, a decline in local economic conditions may have a greater
effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic
conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies and natural disasters.



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Our business is subject to the success of the local economy in which we operate.

Because the majority of our borrowers and depositors are individuals and businesses located and doing business in northwestern South Carolina, our
success significantly depends to a significant extent upon economic conditions in northwestern South Carolina. Adverse economic conditions in our market area could reduce our growth rate, affect the ability of our customers to repay their loans and
generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond
our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment
delinquencies, foreclosures or losses caused by adverse market or economic conditions in the State of South Carolina could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give
any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

The trading history
of our common stock is characterized by low trading volume. Our common stock may be subject to sudden decreases.

Although our common
stock trades on Nasdaq Global Market, it has not been regularly traded. We cannot predict whether a more active trading market in our common stock will occur or how liquid that market might become. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence is dependent upon the individual decisions of investors, over which
we have no control.

The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous
factors, including, but not limited to, the factors discussed in other risk factors and the following:



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



| |  |  | changes in interest rates;
| | - |  | --------------------------



| |  |  | changes in the legal or regulatory environment in which we operate;
| | - |  | -------------------------------------------------------------------



| |  |  | press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other developments affecting our competitors or us.
| | - |  | ---------------------------------------------------

These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the price you desire. In
addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of
our common stock, regardless of our trading performance.



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We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

The Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, its chartering
authority and federal regulator, and by the Federal Deposit Insurance Corporation, as insurer of its deposits. Provident Community Bancshares is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision
govern the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and for the depositors and borrowers of the Bank. The regulation and supervision by the Office of
the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation are not intended to protect the interests of investors in Provident Community Bancshares common stock. Regulatory authorities have extensive
discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Provisions of our certificate of incorporation, bylaws and Delaware law, as well as federal banking regulations, could delay or prevent a takeover of us by a third party.

Provisions in our certificate of incorporation and bylaws and the corporate law of the State of Delaware could delay, defer or prevent a third party from
acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock. These provisions include: supermajority voting requirements for certain business combinations; the election of directors to
staggered terms of three years; and advance notice requirements for nominations for election to our board of directors and for proposing matters that shareholders may act on at shareholder meetings. In addition, we are subject to Delaware laws,
including one that prohibits us from engaging in a business combination with any interested shareholder for a period of three years from the date the person became an interested shareholder unless certain conditions are met. These provisions may
discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also
discourage proxy contests and make it more difficult for you and other shareholders to elect directors other than the candidates nominated by our Board.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Corporation owns two banking offices and an operations center in Union, South
Carolina, two banking offices in Winnsboro, South Carolina, two banking offices in Rock Hill, South Carolina and a banking office in each of Laurens, Jonesville and Simpsonville, South Carolina. The net book value of the Corporations
investment in premises and equipment totaled approximately $5.1 million at December 31, 2007. See Note 4 of Notes to Consolidated Financial Statements. All property is in good condition and meets the operating needs of the Corporation.



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Item 3. Legal Proceedings

Neither Provident Community Bancshares nor the Bank is engaged in any legal
proceedings of a material nature at the present time. From time to time, the Bank is involved in routine legal proceedings occurring in the ordinary course of business wherein it enforces the Banks security interest in mortgage loans the Bank
has made.

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

No matters were submitted to a vote of
security holders during the fourth quarter of the fiscal year ended December 31, 2007.

PART II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Information

Provident Community Bancshares, Inc.s common stock is listed on the Nasdaq Global Market
under the symbol PCBS. As of February 15, 2008, there were 687 shareholders of record and 1,787,485 shares of common stock issued and outstanding.

The following table contains the range of high and low sales prices of Provident Community Bancshares common stock as reported by the Nasdaq Global Market and per share dividend as declared during each quarter
of the last two calendar years.



|                   |  |      |       |     |   |          |  |   |      
|------------------ |  | ---- | ----- | --- | - | -------- |  | - | -----
|Calendar Year 2007 |  | High |       | Low |   | Dividend
|Fourth Quarter     |  | $    | 21.24 |     | $ | 19.00    |  | $ | 0.115
|Third Quarter      |  | $    | 21.24 |     | $ | 19.00    |  | $ | 0.115
|Second Quarter     |  | $    | 21.20 |     | $ | 19.63    |  | $ | 0.115
|First Quarter      |  | $    | 21.04 |     | $ | 19.40    |  | $ | 0.110
|                   |  |      |      
|Calendar Year 2006 |  | High |       | Low |   | Dividend
|Fourth Quarter     |  | $    | 19.42 |     | $ | 18.05    |  | $ | 0.11 
|Third Quarter      |  | $    | 18.83 |     | $ | 16.86    |  | $ | 0.11 
|Second Quarter     |  | $    | 18.13 |     | $ | 16.90    |  | $ | 0.11 
|First Quarter      |  | $    | 18.34 |     | $ | 16.50    |  | $ | 0.10 

Provident Community Bancshares is subject to the requirements of Delaware law, which generally
limits dividends to an amount equal to the excess of the net assets of Provident Community Bancshares (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the
current year and the immediately preceding fiscal year. See Note 16 to the Consolidated Financial Statements for information regarding certain limitations imposed on the Banks ability to pay cash dividends to the holding company.

Purchases of Equity Securities By Issuer

The following table provides certain information with regard to shares repurchased by the
Corporation in the 4thQuarter of fiscal 2007.



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|                                           |  |                               |  |                            |       |                                                                              |       |                                                                           |       
|------------------------------------------ |  | ----------------------------- |  | -------------------------- | ----- | ---------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------- | ------
|Period                                     |  | TotalNumber ofSharesPurchased |  | AveragePrice PaidPer Share |       | Total Number ofShares Purchasedas Part of
PubliclyAnnounced Plans orPrograms |       | MaximumNumber of Sharesthat May Yet bePurchased Underthe Plans orPrograms
|October 1, 2007 through October 31, 2007   |  | 615                           |  | $                          | 21.15 |                                                                              | 615   |                                                                           | 58,740
|                                           |  |                               |  |                           
|November 1, 2007 through November 30, 2007 |  | 1,500                         |  | $                          | 19.80 |                                                                              | 1,500 |                                                                           | 57,240
|                                           |  |                               |  |                           
|December 1, 2007 through December 31, 2007 |  | 3,500                         |  | $                          | 19.55 |                                                                              | 3,500 |                                                                           | 55,740
|                                           |  |                               |  |                            |       |                                                                              |       |                                                                           |       
|Total                                      |  | 5,615                         |  | $                          | 19.79 |                                                                              | 5,615 |                                                                           |       
|                                           |  |                               |  |                            |       |                                                                              |       |                                                                           |       



|(1) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 6. Selected Financial Data



|                                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|-------------------------------------------------------------- |  | --------------------------------- | --------- | - | ---------------------------- | - | --------- | ----------------------- |  | - | --------- | - |  | ---- | --------- | - | ---- | - | --------- | - |  | - | --------- | -
|                                                               |  | SELECTED FINANCIAL AND OTHER DATA |          
|                                                               |  | Years Ended December 31,          |           |   | ThreeMonthsEndedDecember 31, |   |           | Year EndedSeptember 30, | 
|                                                               |  | 2007                              |           |   | 2006                         |   |           | 2005                    |  |   | 2004      |   |  | 2003 |           |   | 2003 |  
|Operations Data:                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Interest income                                                |  | $                                 | 26,009    |   |                              | $ | $23,491   |                         |  | $ | 19,213    |   |  | $    | 16,952    |   |      | $ | 3,787     |   |  | $ | 16,924    |  
|Interest expense                                               |  |                                   | (15,214   | ) |                              |   | (12,967   | )                       |  |   | (8,970    | ) |  |      | (7,246    | ) |      |   | (2,305    | ) |  |   | (8,702    | )
|                                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net interest income                                            |  |                                   | 10,795    |   |                              |   | 10,524    |                         |  |   | 10,243    |   |  |      | 9,706     |   |      |   | 1,482     |   |  |   | 8,222     |  
|Provision for loan losses                                      |  |                                   | (1,066    | ) |                              |   | (470      | )                       |  |   | (869      | ) |  |      | (1,250    | ) |      |   | (725      | ) |  |   | (725      | )
|                                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net interest income after provision For loan losses            |  |                                   | 9,729     |   |                              |   | 10,054    |                         |  |   | 9,374     |   |  |      | 8,456     |   |      |   | 757       |   |  |   | 7,497     |  
|Other income (expense)                                         |  |                                   | 3,162     |   |                              |   | 2,876     |                         |  |   | 2,543     |   |  |      | 2,561     |   |      |   | (283      | ) |  |   | 2,533     |  
|Other expense                                                  |  |                                   | (10,167   | ) |                              |   | (9,178    | )                       |  |   | (8,537    | ) |  |      | (8,140    | ) |      |   | (2,326    | ) |  |   | (7,600    | )
|                                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Income (loss) before income taxes                              |  |                                   | 2,724     |   |                              |   | 3,752     |                         |  |   | 3,380     |   |  |      | 2,877     |   |      |   | (1,852    | ) |  |   | 2,430     |  
|Income tax (expense) benefit                                   |  |                                   | (534      | ) |                              |   | (949      | )                       |  |   | (914      | ) |  |      | (721      | ) |      |   | 642       |   |  |   | (571      | )
|                                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net income (loss)                                              |  | $                                 | 2,190     |   |                              | $ | 2,803     |                         |  | $ | 2,466     |   |  | $    | 2,156     |   |      | $ | (1,210    | ) |  | $ | 1,859     |  
|                                                               |  |                                   |           |   |                              |   |           |                         |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net income (loss) per common share (Basic)                     |  | $                                 | 1.21      |   |                              | $ | 1.50      |                         |  | $ | 1.29      |   |  | $    | 1.10      |   |      | $ | (0.62     | ) |  | $ | 0.95      |  
|Net income (loss) per common share (Diluted)                   |  | $                                 | 1.19      |   |                              | $ | 1.48      |                         |  | $ | 1.26      |   |  | $    | 1.05      |   |      | $ | (0.62     | ) |  | $ | 0.90      |  
|Dividends paid per common stock                                |  | $                                 | 0.455     |   |                              | $ | 0.43      |                         |  | $ | 0.40      |   |  | $    | 0.40      |   |      | $ | 0.10      |   |  | $ | 0.40      |  
|Weighted average number of common shares outstanding (Basic)   |  |                                   | 1,810,916 |   |                              |   | 1,865,951 |                         |  |   | 1,914,357 |   |  |      | 1,957,760 |   |      |   | 1,967,217 |   |  |   | 1,963,775 |  
|Weighted average number of common shares outstanding (Diluted) |  |                                   | 1,846,980 |   |                              |   | 1,893,203 |                         |  |   | 1,962,920 |   |  |      | 2,044,137 |   |      |   | 1,967,217 |   |  |   | 2,056,579 |  



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|                                                                 |  |                        |         |                 |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|---------------------------------------------------------------- |  | ---------------------- | ------- | --------------- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- |  | - | -------
|                                                                 |  | At December 31,        |         | AtSeptember 30,
|                                                                 |  | 2007                   |         | 2006            |   | 2005    |  | 2004 |         | 2003 |   | 2003   
|                                                                 |  | (Dollars In Thousands)
|Financial Condition:                                             |  |                        |         |                 |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|Total amount of:                                                 |  |                        |         |                 |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|Assets                                                           |  | $                      | 407,641 |                 | $ | 387,630 |  | $    | 371,042 |      | $ | 351,598 |  | $ | 331,884 |  | $ | 341,704
|Cash and due from banks                                          |  |                        | 11,890  |                 |   | 9,124   |  |      | 8,380   |      |   | 13,197  |  |   | 28,702  |  |   | 3,290  
|Securities                                                       |  |                        | 111,187 |                 |   | 122,185 |  |      | 146,283 |      |   | 143,494 |  |   | 123,789 |  |   | 157,438
|Loans (net)                                                      |  |                        | 256,487 |                 |   | 231,886 |  |      | 192,577 |      |   | 171,094 |  |   | 154,501 |  |   | 152,921
|Deposits                                                         |  |                        | 270,399 |                 |   | 248,440 |  |      | 234,988 |      |   | 223,691 |  |   | 212,716 |  |   | 212,693
|Advances from Federal Home Loan Bank and other borrowings        |  |                        | 69,500  |                 |   | 70,000  |  |      | 75,715  |      |   | 63,500  |  |   | 68,500  |  |   | 74,000 
|Securities sold under agreement to repurchase                    |  |                        | 24,131  |                 |   | 28,533  |  |      | 24,615  |      |   | 27,898  |  |   | 15,415  |  |   | 18,539 
|Floating rate junior subordinated deferrable interest debentures |  |                        | 12,372  |                 |   | 12,372  |  |      | 8,247   |      |   | 8,247   |  |   |        |  |   |       
|Corporate obligated floating rate capital securities             |  |                        |        |                 |   |        |  |      |        |      |   |        |  |   | 8,000   |  |   | 8,000  
|Shareholders equity                                             |  |                        | 27,313  |                 |   | 25,967  |  |      | 25,333  |      |   | 26,019  |  |   | 25,507  |  |   | 26,216 



|                                                        |  |                          |   |  |                         |   |  |       |   |  |       |   |  |       |  
|------------------------------------------------------- |  | ------------------------ | - |  | ----------------------- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                                        |  | Years Ended December 31, |   |  | Year EndedSeptember 30, |  
|                                                        |  | 2007                     |   |  | 2006                    |   |  | 2005  |   |  | 2004  |   |  | 2003  |  
|Other Selected Data:                                    |  |                          |   |  |                         |   |  |       |   |  |       |   |  |       |  
|Average interest rate spread                            |  | 2.91                     | % |  | 2.98                    | % |  | 2.98  | % |  | 2.94  | % |  | 2.56  | %
|Net interest margin                                     |  | 2.91                     |   |  | 3.01                    |   |  | 3.02  |   |  | 2.96  |   |  | 2.63  |  
|Return on average assets                                |  | 0.55                     |   |  | 0.75                    |   |  | 0.68  |   |  | 0.61  |   |  | 0.55  |  
|Return on average shareholders equity                  |  | 8.25                     |   |  | 11.19                   |   |  | 9.68  |   |  | 8.40  |   |  | 6.64  |  
|Dividend payout ratio                                   |  | 37.72                    |   |  | 28.79                   |   |  | 31.26 |   |  | 36.32 |   |  | 42.29 |  
|Operating expense to average assets                     |  | 2.42                     |   |  | 2.28                    |   |  | 2.17  |   |  | 2.14  |   |  | 2.17  |  
|Ratio of average shareholders equity to average assets |  | 6.63                     | % |  | 6.68                    | % |  | 7.01  | % |  | 7.28  | % |  | 8.34  | %

Note: In 2003, the Corporation changed its year end from September 30 to December 31.

Item 7. 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. The significant accounting policies of the Corporation are described in the footnotes to the consolidated 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.



26



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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 specific classified assets.

Although the Corporation believes that it uses the best information available to establish the allowance for loan losses, future additions to the
allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process,
will periodically review the Corporations allowance for loan losses. Such agency may require the Corporation to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. See
Notes 1 and 3 of the Notes to the Consolidated Financial Statements included in this annual report for a detailed description of the Corporations estimation process and methodology related to allowance for loans losses.



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Average Balances, Interest and Average Yields/Cost

The following table sets forth certain information for the periods indicated regarding: (1) average balances of assets and liabilities; (2) the
total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities; and (3) average yields and costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented.



|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|-------------------------------------------------------------------------------- |  | ------------------------ | ------- | -------- | ---- | ------ | ----------------- | ---- | ---- | -------------- |  | -------- | ------- |  | ----------------- | ------ | - | -------------- | ---- | -------- |  | - | ----------------- |  | - | ------ | - |  | ---- | -
|                                                                                 |  | Years Ended December 31, |        
|                                                                                 |  | 2007                     |         |          | 2006 |        |                   | 2005 |     
|                                                                                 |  | AverageBalance           |         | Interest |      |        | AverageYield/Cost |      |      | AverageBalance |  | Interest |         |  | AverageYield/Cost |        |   | AverageBalance |      | Interest |  |   | AverageYield/Cost | 
|                                                                                 |  | (Dollars in thousands)   |        
|Interest-earning assets:                                                         |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Loans receivable, net (1)                                                        |  | $                        | 240,192 |          | $    | 19,048 |                   |      | 7.93 | %              |  | $        | 211,799 |  | $                 | 16,924 |   |                | 7.99 | %        |  | $ | 179,844           |  | $ | 12,666 |   |  | 7.04 | %
|Mortgage-backed securities                                                       |  |                          | 30,059  |          |      | 1,492  |                   |      | 4.96 |                |  |          | 24,249  |  |                   | 1,041  |   |                | 4.29 |          |  |   | 32,860            |  |   | 1,338  |   |  | 4.07 |  
|Investment securities:                                                           |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Taxable                                                                          |  |                          | 83,833  |          |      | 4,708  |                   |      | 5.62 |                |  |          | 96,489  |  |                   | 4,738  |   |                | 4.91 |          |  |   | 99,404            |  |   | 4,214  |   |  | 4.24 |  
|Nontaxable                                                                       |  |                          | 12,906  |          |      | 603    |                   |      | 4.67 |                |  |          | 15,860  |  |                   | 736    |   |                | 4.64 |          |  |   | 20,583            |  |   | 869    |   |  | 4.22 |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Total investment securities                                                      |  |                          | 96,739  |          |      | 5,311  |                   |      | 5.49 |                |  |          | 112,349 |  |                   | 5,474  |   |                | 4.87 |          |  |   | 119,987           |  |   | 5,083  |   |  | 4.24 |  
|Deposits and federal funds sold                                                  |  |                          | 3,413   |          |      | 158    |                   |      | 4.63 |                |  |          | 1,117   |  |                   | 52     |   |                | 4.66 |          |  |   | 6,849             |  |   | 126    |   |  | 1.84 |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Total interest-earning assets                                                    |  |                          | 370,403 |          |      | 26,009 |                   |      | 7.02 |                |  |          | 349,514 |  |                   | 23,491 |   |                | 6.72 |          |  |   | 339,540           |  |   | 19,213 |   |  | 5.66 |  
|Non-interest-earning assets                                                      |  |                          | 29,752  |          |      |        |                   |      |      |                |  |          | 24,569  |  |                   |        |   |                |      |          |  |   | 23,761            |  |   |        |   |  |      |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Total assets                                                                     |  | $                        | 400,155 |          |      |        |                   |      |      |                |  | $        | 374,083 |  |                   |        |   |                |      |          |  | $ | 363,301           |  |   |        |   |  |      |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Interest-bearing liabilities:                                                    |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Savings accounts                                                                 |  |                          | 14,486  |          |      | 111    |                   |      | 0.77 |                |  |          | 16,137  |  |                   | 106    |   |                | 0.66 |          |  |   | 17,678            |  |   | 77     |   |  | 0.43 |  
|Negotiable order of withdrawal accounts (2)                                      |  |                          | 74,326  |          |      | 2,426  |                   |      | 2.62 |                |  |          | 74,411  |  |                   | 2,339  |   |                | 2.60 |          |  |   | 63,561            |  |   | 1,352  |   |  | 1.75 |  
|Certificate accounts                                                             |  |                          | 155,490 |          |      | 7,295  |                   |      | 4.69 |                |  |          | 137,663 |  |                   | 5,291  |   |                | 3.84 |          |  |   | 138,564           |  |   | 3,819  |   |  | 2.76 |  
|FHLB advances and other borrowings                                               |  |                          | 107,823 |          |      | 5,382  |                   |      | 4.99 |                |  |          | 103,034 |  |                   | 5,231  |   |                | 5.08 |          |  |   | 102,099           |  |   | 3,722  |   |  | 3.65 |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Total interest-bearing liabilities                                               |  |                          | 352,125 |          |      | 15,214 |                   |      | 4.11 |                |  |          | 331,245 |  |                   | 12,967 |   |                | 3.74 |          |  |   | 321,902           |  |   | 8,970  |   |  | 2.67 |  
|Non-interest-bearing deposits                                                    |  |                          | 18,288  |          |      |        |                   |      |      |                |  |          | 15,397  |  |                   |        |   |                |      |          |  |   | 13,578            |  |   |        |   |  |      |  
|Non-interest-bearing liabilities                                                 |  |                          | 3,007   |          |      |        |                   |      |      |                |  |          | 2,183   |  |                   |        |   |                |      |          |  |   | 2,078             |  |   |        |   |  |      |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Total liabilities                                                                |  |                          | 373,420 |          |      |        |                   |      |      |                |  |          | 348,825 |  |                   |        |   |                |      |          |  |   | 337,558           |  |   |        |   |  |      |  
|Shareholders equity                                                             |  |                          | 26,735  |          |      |        |                   |      |      |                |  |          | 25,258  |  |                   |        |   |                |      |          |  |   | 25,743            |  |   |        |   |  |      |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Total liabilities and shareholders Equity                                       |  | $                        | 400,155 |          |      |        |                   |      |      |                |  | $        | 374,083 |  |                   |        |   |                |      |          |  | $ | 363,301           |  |   |        |   |  |      |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Net interest income                                                              |  |                          |         |          | $    | 10,795 |                   |      |      |                |  |          |         |  | $                 | 10,524 |   |                |      |          |  |   |                   |  | $ | 10,243 |   |  |      |  
|                                                                                 |  |                          |         |          |      |        |                   |      |      |                |  |          |         |  |                   |        |   |                |      |          |  |   |                   |  |   |        |   |  |      |  
|Interest rate spread (3)                                                         |  |                          |         |          |      |        |                   |      | 2.91 | %              |  |          |         |  |                   |        |   |                | 2.98 | %        |  |   |                   |  |   |        |   |  | 2.99 | %
|Net interest margin (4)                                                          |  |                          |         |          |      | 2.91   | %                 |      |      |                |  |          |         |  |                   | 3.01   | % |                |      |          |  |   |                   |  |   | 3.02   | % |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                          | 1.05x   |          |      |        |                   |      |      |                |  |          | 1.06x   |  |                   |        |   |                |      |          |  |   | 1.06x             |  |   |        |   |  |      |  



|(1) | Average loans receivable includes non-accruing loans. Interest income does not include interest on loans 90 days or more past due.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(2) | Average costs include the affects of non-interest bearing deposits.
|--- | -------------------------------------------------------------------

|(3) | Represents difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.
|--- | -------------------------------------------------------------------------------------------------------------------



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Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Corporation for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by prior rate) and (2) changes in rate (changes in rate multiplied by prior volume). The net change
attributable to the combined impact of rate and volume has been allocated to rate and volume variances consistently on a proportionate basis.



|                              |  |                                       |       |   |      |   |       |       |  |   |       |  
|----------------------------- |  | ------------------------------------- | ----- | - | ---- | - | ----- | ----- |  | - | ----- | -
|                              |  | Years Ended December 31,2007 vs. 2006 |      
|                              |  | Volume                                |       |   | Rate |   |       | Total | 
|                              |  | (Dollars in Thousands)                |      
|Change in interest income:    |  |                                       |       |   |      |   |       |       |  |   |       |  
|Loans                         |  | $                                     | 2,269 |   |      | $ | (144  | )     |  | $ | 2,125 |  
|Mortgage-backed securities    |  |                                       | 249   |   |      |   | 201   |       |  |   | 450   |  
|Investments (1)               |  |                                       | (648  | ) |      |   | 591   |       |  |   | (57   | )
|                              |  |                                       |       |   |      |   |       |       |  |   |       |  
|Total interest income         |  |                                       | 1,870 |   |      |   | 648   |       |  |   | 2,518 |  
|                              |  |                                       |       |   |      |   |       |       |  |   |       |  
|Change in interest expense:   |  |                                       |       |   |      |   |       |       |  |   |       |  
|Deposits                      |  |                                       | 603   |   |      |   | 1,493 |       |  |   | 2,096 |  
|Borrowings and other          |  |                                       | 243   |   |      |   | (92   | )     |  |   | 151   |  
|                              |  |                                       |       |   |      |   |       |       |  |   |       |  
|Total interest expense        |  |                                       | 846   |   |      |   | 1,401 |       |  |   | 2,247 |  
|                              |  |                                       |       |   |      |   |       |       |  |   |       |  
|Change in net interest income |  | $                                     | 1,024 |   |      | $ | (753  | )     |  | $ | 271   |  
|                              |  |                                       |       |   |      |   |       |       |  |   |       |  



|(1) | Includes fed funds and overnight deposits.
|--- | ------------------------------------------

Results of Operations

Comparison of Years Ended December 31, 2007 and December 31, 2006

Net income decreased $613,000, or 21.9%, from $2.8 million for the year ended December 31, 2006 to $2.2 million for the year ended December 31,
2007. Earnings per share were $1.21 per share (basic) and $1.19 per share (diluted) for the year ended December 31, 2007 compared to $1.50 per share (basic) and $1.48 per share (diluted) for the year ended December 31, 2006. Net interest
income before the loan loss provision for the year ended December 31, 2007 increased $271,000, or 2.6%, to $10.8 million compared to $10.5 million for the previous year. The increase was due primarily to higher average loan balances over the
previous year along with an increase in yield on investment securities. The increase in net interest income was partially offset by higher cost of funds as a result of rising rates and, to a lesser extent, an increase in the average balance of
deposits and borrowings.

Interest Income.Total interest income increased $2.5 million, or 10.7%, from $23.5 million for the
year ended December 31, 2006 to $26.0 million for the year ended December 31, 2007. Interest income on loans increased $2.1 million, or 12.4%, from $16.9 million for 2006 to $19.0 million for 2007 due primarily to higher average balance of
loans. The Corporations continued focus on variable and prime-based lending resulted in net growth in consumer/commercial loans of 16.3% while net residential mortgage loans declined 13.1%. Interest income on deposits, federal funds sold and
investment securities increased $394,000, or 6.0%, from $6.6 million for 2006 to $7.0 million for 2007. The increase was due primarily to higher yields, offset by lower average balances as proceeds from the maturity and sale of investment securities
were utilized to fund growth in higher-yielding loans.

Interest Expense.Interest expense increased 16.9% to $15.2 million
for 2007 from $13.0 million for 2006. Interest expense increased $2.1 million for deposits and increased $151,000 for other borrowings and floating rate junior subordinated deferrable interest debentures. Interest expense for deposits increased due
primarily to higher average balances and higher market rates from a rising interest rate environment. Interest expense on other borrowings increased due to higher average balances, offset by a decrease in the average rate paid.



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##### Table of Contents

Provision for Loan Loss.Provisions for loan losses are charges to earnings to bring the
total allowance for loan losses to a level considered by management as adequate to provide for estimated loan losses based on managements evaluation of the collectibility of the loan portfolio. The allowance for loan loss calculation includes
a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is risk rated for all loans including performing groups. The weight assigned to each performing group is developed from a three-year
historical average loan loss experience ratio 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 losses is adjusted accordingly. Consumer and
commercial loans carry higher risk weighted rates in the allowance calculation as compared to residential mortgage loans. See Item 1-Business Lending Activities-Allowance for Loan Losses for more information on the determination of the
allowance for loan losses.

The provision for loan losses increased from $470,000 for 2006 to $1,066,000 for 2007 primarily due to:
(1) an increase in non-performing assets; (2) increased growth, primarily in commercial and consumer loans, which carry a higher risk of default than one-to four-family residential mortgage loans; and (3) an increase in charge-offs.
The allowance for loan losses increased $590,000 to $3.3 million as of December 31, 2007 compared to $2.8 million as of December 31, 2006. Non-performing assets increased $2.5 million from $1.3 million at December 31, 2006 to $3.8
million at December 31, 2007. The majority of this increase relates to two loan relationships that also existed at December 31, 2006. At December 31, 2007, loans classified as impaired under FASB 114 totaled $2.7 million and carried a
specific reserve of $591,000.

The Corporation experienced loan charge-offs, net of recoveries, of approximately $476,000 for 2007 compared
to $110,000 for 2006. The loan charge-offs for 2007 included approximately $450,000 from one commercial loan foreclosure that was written down to fair market value after being transferred to other real estate owned. The property has been sold in a
transaction that realized a small recovery. The allowance for loan losses to total loans at December 31, 2007 was 1.28% compared to 1.17% at December 31, 2006. The allowance for loan losses to non-performing loans at December 31, 2007
was 88.37% compared to 212.66% at December 31, 2006.

Non-Interest Income.Non-interest income increased 9.94% to $3.2
million for the year ended December 31, 2007 from $2.9 million for the year ended December 31, 2006. Fees for financial services increased $225,000 to $3.1 million, primarily due to higher fees as a result of an increase in demand deposit
accounts that was offset partially by lower fees generated from financing receivables programs due to a reduction in product volumes.

Non-Interest Expense.Non-interest expense increased 10.8% to $10.2 million for the year ended December 31, 2007 from $9.2 million for the year ended December 31, 2006. The Corporation opened a banking center in
March 2006 in Simpsonville, South Carolina and a second Rock Hill, South Carolina banking center in October 2006. During the third quarter of 2007, the Company closed one banking center located in Winnsboro, South Carolina. The deposits and
operations contained in the banking center closed were moved into a larger Winnsboro, South Carolina location in order to improve the efficiencies for Fairfield County. The Company recorded a $135,000 write-down on the building value of the closed
location. Compensation and employee benefits increased 11.5%, or $509,000, for the year ended December 31, 2006 compared to the year ended December 31, 2007 due primarily to higher compensation and benefits costs for normal merit salary
increases and additional staffing required for the new banking centers. Occupancy and equipment expenses increased 24.0%, or $490,000, to $2.5 million for the year ended December 31, 2007 from $2.0 million for the year ended December 31,
2006 due to higher rent expense for the new banking centers along with the $135,000 write down for the closed location. Professional services expense increased 15.0%, or $60,000, from the year ended December 31, 2006 to the year ended
December 31, 2007 due primarily to higher audit fees as a result of meeting compliance requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Advertising and public relations expense decreased 16.4%, or $49,000, from the year ended
December 31, 2006 to the year ended December 31, 2007 due primarily to the previous year product and promotion expenses for the two new banking center locations. Loan operations costs increased $62,000, or 70.5%, to $150,000 for the year
ended December 31, 2007 from $88,000 for the year ended December 31, 2006, due to higher disposition costs associated with foreclosed real estate properties. Intangible



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amortization expense decreased $157,000, or 24.7%, to $480,000 for the year ended December 31, 2007 from $636,000 for 2006, due to deposit premiums
related to branch acquisitions becoming fully amortized. Items processing expense increased $29,000, or 15.1%, to $221,000 for the year ended December 31, 2007 from $192,000 for the year ended December 31, 2006 due to an increase in
transaction accounts. Other operating expense increased 3.0%, or $26,000, for the year ended December 31, 2007 compared to the year ended December 31, 2006 due primarily to higher costs associated with the opening of the two new banking
centers and higher loan expense from increased production.

Income Tax Expense. The effective income tax rate for the
Corporation was 19.60% for the year ended December 31, 2007 compared to 25.29% for the year ended December 31, 2006. The decrease was due primarily to the reversal of a valuation allowance relating to a prior year business combination.

Financial Condition, Liquidity and Capital Resources

Financial Condition

Assets.At December 31, 2007, the Corporations assets totaled $407.6
million, an increase of $20.0 million, or 5.2%, as compared to $387.6 million at December 31, 2006. Cash and due from banks increased $2.8 million to $11.9 million from $9.1 million at December 31, 2006. The increase was due primarily to
higher invested overnight funds and additional vault and teller cash required for the two new banking center openings. Investment and mortgage-backed securities decreased $11.0 million to $111.2 million from $122.2 million at December 31, 2006
as proceeds from the maturity and sale of investment securities were utilized to fund growth in higher-yielding loans.

Total loans, net,
increased $24.6 million, or 10.6%, to $256.5 million at December 31, 2007 from $231.9 million at December 31, 2006. The net change in the loan portfolio balance includes a reduction in residential mortgage loans that reflects the
Corporations movement toward higher yielding consumer and commercial loans through the use of specialized loan officers and products that are intended to provide improvements in interest rate risk exposure. Consumer and commercial loans during
this period increased $31.9 million, or 17.3%, while residential mortgage loans decreased $6.6 million or 13.2%.

Liabilities.Total liabilities increased $18.7 million, or 5.2%, to $380.3 million at December 31, 2007 from $361.7 million at December 31, 2006.

Total deposits increased $22.0 million, or 8.8%, from $248.4 million at December 31, 2006 to $270.4 million at December 31, 2007. Time deposits increased $11.5 million, or 7.7%, from $150.1 million at
December 31, 2006 to $161.6 million at December 31, 2007 while transaction deposit accounts increased $10.5 million, or 10.6%, from $98.3 million at December 31, 2006 to $108.8 million at December 31, 2007. The increase in
transaction accounts was due primarily to growth in accounts generated from the new banking center openings. The Corporation continues to target lower cost demand deposit accounts versus traditional higher cost certificates of deposits. Borrowings
from the Federal Home Loan Bank (FHLB) decreased $500,000, or 0.7%, to $69.5 million at December 31, 2007 from $70.0 million at December 31, 2006. Securities sold under agreements to repurchase were $24.1 million at
December 31, 2007 compared to $28.5 million at December 31, 2006. The increase in deposits was utilized to fund the loan growth and to pay down borrowings for the year.

Shareholders Equity.Shareholders equity increased $1.3 million, or 5.2%, to $27.3 million at December 31, 2007 from $26.0
million at December 31, 2006 due to net income of $2.2 million and a $801,000 decrease in unrealized losses on securities available for sale, offset by the payment of $826,000 in dividends and $1.1 million used to repurchase 53,119 shares of
the Corporations common stock. During fiscal year 2003, the Corporation implemented a share repurchase program under which the Corporation may repurchase up to 5% of outstanding shares. The program was expanded by an additional 5% in fiscal
2004, 2005 and 2006. During 2007, the Corporation repurchased a total of 53,119 shares at a weighted average cost of $20.65 per share for a total of $1.1 million compared to a repurchased total of 84,588 shares at a weighted average cost of $18.02
per share for a total of $1.5 million for 2006.



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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
sales and repayments, borrowings, maturities, prepayment and sales 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. During the year ended December 31, 2007, the Corporations loan originations totaled $83.1 million and $27.6 million in loan participations
purchased. At December 31, 2007, the Corporations holdings of investment and mortgage-backed securities totaled $111.2 million, $108.1 million of which was available for sale. Approximately $74.1 million and $74.4 million of investment
securities at December 31, 2007 and December 31, 2006, respectively, were pledged as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase
agreements.

During the year ended December 31, 2007, total deposits increased $22.0 million. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by the Corporation and its local competitors and other factors. 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 December 31, 2007, totaled $134.8 million. 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 competitive special products to its customers to increase retention and to attract new deposits. Based upon the Corporations experience with deposit retention and current retention strategies, management
believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them
internally, additional external sources of funds are available through FHLB advances, lines of credit and wholesale deposits. At December 31, 2007, the Corporation had outstanding $69.5 million of FHLB borrowings and $24.1 million of securities
sold under agreements to repurchase. At December 31, 2007, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $30.0 million and the ability to borrow an additional $40.0 million from
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.

See Note 14 to the Consolidated Financial Statements for further information about commitments and contingencies.

Capital Resources

At
December 31, 2007, the Bank exceeded the OCCs and the FRBs capital requirements. See Note 16 to the Consolidated Financial Statements for further discussion of these capital requirements.

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



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commitments to fund credit lines) totaled $58.9 million at December 31, 2007. Management of the Corporation anticipates that it will have sufficient
funds available to meet its current loan commitments. 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.

At December 31, 2007, the undisbursed portion of construction loans was $2.4
million and the unused portion of credit lines was $54.7 million. Funding for these commitments is expected to be provided from deposits, loan and mortgage-backed securities principal repayments, maturing investments and income generated from
operations.

For the year ended December 31, 2007, the Corporation did not engage in any off-balance sheet transactions reasonably
likely to have a material effect on its financial condition, results of operation and cash flows.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, non-interest expenses do reflect general levels of inflation.

Item 7A. 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.

At December 31, 2007, the Corporation had more interest-rate sensitive assets than liabilities that would reprice over the next twelve months. For the year ended December 31, 2007, the average balance of the loan portfolio
increased $28.4 million while the average balance of investment and mortgage-backed securities decreased $9.8 million. Proceeds from the maturation, sale and repayment of investment and mortgage-backed securities were utilized to fund loan growth
and resulted in an increase in the average yield on interest-earning assets as the loans originated carried a higher yield than the securities. However, due to increasing deposit and borrowing rates for 2007, overall funding costs increased,
resulting in a constant interest rate spread for the current and previous year. The Corporation expects that its loan portfolio will continue to increase in the future with higher consumer and commercial loan originations, resulting in a higher
yield in a rising interest rate environment. The Corporation continues to work to shorten the average life of its assets through the origination of shorter-term variable-rate consumer and commercial loans and the decline in originations of
longer-term fixed-rate real estate loans and to extend the term on its liabilities in an effort to provide a better match of repricing for interest earning assets and interest bearing liabilities.



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The Corporation has established policies and monitors results to control interest rate sensitivity. While
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, an equally important 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.

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 assets and rate-sensitive liabilities. The relationship of
rate-sensitive assets to rate-sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are those that can be repriced to
current market rates within a relatively short time period. Management monitors the rate sensitivity of interest earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the first
year. At December 31, 2007, approximately 74.8% of the Corporations interest-earning assets were scheduled to reprice or to mature within one year compared to approximately 51.9% of interest-bearing liabilities.

The following table shows the Corporations rate-sensitive position at December 31, 2007 as measured by gap analysis (the difference between
the interest-earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods). Over the next twelve months, we expect the amount of interest-earning assets to reprice will exceed the amount
of interest-bearing liabilities by approximately $86.7 million. As a result, at December 31, 2007, the ratio of rate-sensitive assets to rate-sensitive liabilities within the one-year time frame was 144%, indicating an
asset-sensitive position. Companies in an asset sensitive position would expect rising interest rates to have a positive impact on net interest income and falling interest rates to have a negative impact.



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The following table sets forth the Corporations interest sensitivity position as of
December 31, 2007.



|                                                                 |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|---------------------------------------------------------------- |  | ----------------------------- | - |  | ------------ | ------- | - | -------- | - | ------- | -------------- |  | - | ----------- | - |  | ----- | ------- | --------- |  | - | ------- |  | - | -------
|                                                                 |  | Interest Sensitivity Analysis
|                                                                 |  | AverageRate                   |   |  | Within1 Year |         |   | 1-3Years |   |         | After3-5 Years |  |   | Over5 Years |   |  | Total |         | FairValue
|                                                                 |  | (Dollars in Thousands)       
|INTEREST-EARNING ASSETS                                          |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|Loans (1)                                                        |  | 7.56                          | % |  | $            | 198,454 |   |          | $ | 38,853  |                |  | $ | 14,476      |   |  | $     | 6,779   |           |  | $ | 258,562 |  | $ | 265,107
|Mortgage-backed securities (2)                                   |  | 5.27                          |   |  |              | 13,943  |   |          |   | 10,773  |                |  |   | 6,525       |   |  |       | 9,882   |           |  |   | 41,123  |  |   | 42,203 
|Interest-earning deposits, Investments and FHLB/FRB stock        |  | 5.47                          |   |  |              | 69,988  |   |          |   | 2,686   |                |  |   | 51          |   |  |       | 5,127   |           |  |   | 77,852  |  |   | 79,942 
|                                                                 |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|Total interest-earning assets                                    |  | 6.83                          |   |  |              | 282,385 |   |          |   | 52,312  |                |  |   | 21,052      |   |  |       | 21,788  |           |  |   | 377,537 |  |   | 387,252
|                                                                 |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|                                                                 |  |                               |   |  |              |         |  
|INTEREST-BEARING LIABILITIES                                     |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|Deposits                                                         |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|Savings accounts (3)                                             |  | 0.79                          |   |  |              | 3,548   |   |          |   | 4,426   |                |  |   | 2,307       |   |  |       | 2,513   |           |  |   | 12,794  |  |   | 12,679 
|Checking accounts (3)                                            |  | 2.14                          |   |  |              | 19,347  |   |          |   | 25,880  |                |  |   | 13,493      |   |  |       | 14,696  |           |  |   | 73,416  |  |   | 75,579 
|Money market accounts (3)                                        |  | 4.44                          |   |  |              | 5,771   |   |          |   | 8,324   |                |  |   | 4,340       |   |  |       | 4,727   |           |  |   | 23,162  |  |   | 25,880 
|Certificate accounts                                             |  | 4.67                          |   |  |              | 134,839 |   |          |   | 25,288  |                |  |   | 1,367       |   |  |       | 101     |           |  |   | 161,595 |  |   | 163,355
|Borrowings (4)                                                   |  | 4.45                          |   |  |              | 24,131  |   |          |   | 17,500  |                |  |   | 28,000      |   |  |       | 24,000  |           |  |   | 93,631  |  |   | 92,959 
|Floating rate junior subordinated deferrable interest debentures |  | 6.68                          |   |  |              | 8,000   |   |          |   |        |                |  |   | 4,372       |   |  |       |        |           |  |   | 12,372  |  |   | 12,281 
|                                                                 |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|Total interest-bearing liabilities                               |  | 4.04                          |   |  | $            | 195,636 |   |          | $ | 81,418  |                |  | $ | 53,879      |   |  | $     | 46,037  |           |  | $ | 376,970 |  |   | 382,733
|                                                                 |  |                               |   |  |              |         |   |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        
|Interest sensitive gap                                           |  | 2.79                          |   |  |              | 86,749  |   |          |   | (29,106 | )              |  |   | (32,827     | ) |  |       | (24,249 | )         |  |   | 567     |  |   |        
|Cumulative interest sensitive gap                                |  |                               |   |  |              | 86,749  |   |          |   | 57,643  |                |  |   | 24,816      |   |  |       | (567    | )         |  |   |         |  |   |        
|Rate Sensitive Assets/Rate Sensitive Liabilities                 |  |                               |   |  |              | 144     | % |          |   |         |                |  |   |             |   |  |       |         |           |  |   |         |  |   |        



Assumptions:

|(1) | Fixed-rate loans are shown in the time frame corresponding to contractual principal amortization schedules. Adjustable-rate loans are shown in the time frame corresponding to the
next contractual interest rate adjustment date. The fixed and variable rate loans shown also take into account the Corporations estimates of prepayments of fixed and adjustable rate loans.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mortgage-backed securities are shown at repricing dates but also include prepayment estimates.
|--- | ----------------------------------------------------------------------------------------------

|(3) | Decay rates approximate 30% in the first year and 28% in the second year for checking accounts, 32% in the first year and 30% in the second year for savings accounts and 45% in
the first year and 43% in the second year for money market accounts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Borrowings include fixed-rate FHLB of Atlanta advances at the earlier of maturity date or expected call dates. For purposes of the table above, the Corporation has assumed under
current interest rates that certain advances with call provisions will extend.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Management is not aware of any known events or uncertainties that will have or are reasonably likely to
have a material effect on the Corporations liquidity, capital resources or results of operations. Management is not aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material
effect on the Corporations liquidity, capital resources or results of operations.

Item 8. Financial Statements and Supplementary Data

Managements Report on Internal Control
Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external
reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an
assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2007, utilizing the framework established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Companys internal control over financial reporting as of December 31, 2007 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the Companys financial statements are prevented or timely detected.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



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LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Provident Community Bancshares, Inc. and Subsidiaries

Rock Hill, South Carolina

We have audited the accompanying consolidated balance sheets of Provident Community Bancshares, Inc. and Subsidiaries (the Company) (formerly known as Union Financial Bancshares, Inc. and Subsidiaries) as
of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders equity and comprehensive income, and cash flows for the years ended December 31, 2007 and 2006. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofProvident
Community Bancshares, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006, in conformity with accounting principles generally accepted in the
United States of America.

We were not engaged to examine managements assertion about the effectiveness of Provident Community Bancshares, Inc. and
Subsidiaries internal control over financial reporting as of December 31, 2007 included in the accompanying Managements Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

LOGO

Columbia, South Carolina

March 6, 2008

www.elliottdavis.com



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PROVIDENT COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETS



|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                       |  | As of December 31, |        
|                                                                                                                                                                       |  | 2007               |         |   | 2006 |  
|                                                                                                                                                                       |  | (In Thousands)     |        
|Assets                                                                                                                                                                 |  |                    |         |   |      |   |         |  
|Cash and due from banks                                                                                                                                                |  | $                  | 11,890  |   |      | $ | 9,124   |  
|Investment and mortgage-backed securities                                                                                                                              |  |                    |         |   |      |   |         |  
|Held to maturity (market value of $3,135,000 and $3,239,000 at December 31, 2007 and 2006)                                                                             |  |                    | 3,126   |   |      |   | 3,182   |  
|Available for sale (at fair value)                                                                                                                                     |  |                    | 108,061 |   |      |   | 119,003 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total investment and mortgage-backed securities                                                                                                                        |  |                    | 111,187 |   |      |   | 122,185 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Loans, net of allowance for loan losses of $3,344,000 in 2007 and $2,754,000 in 2006                                                                                   |  |                    | 256,487 |   |      |   | 231,886 |  
|Federal Home Loan Bank stock, at cost                                                                                                                                  |  |                    | 3,826   |   |      |   | 3,983   |  
|Federal Reserve Bank stock, at cost                                                                                                                                    |  |                    | 599     |   |      |   | 539     |  
|Office properties and equipment, net                                                                                                                                   |  |                    | 5,145   |   |      |   | 5,708   |  
|Accrued interest receivable                                                                                                                                            |  |                    | 2,625   |   |      |   | 2,717   |  
|Intangible assets                                                                                                                                                      |  |                    | 3,261   |   |      |   | 3,741   |  
|Cash surrender value of life insurance                                                                                                                                 |  |                    | 9,175   |   |      |   | 5,613   |  
|Other assets                                                                                                                                                           |  |                    | 3,446   |   |      |   | 2,134   |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total assets                                                                                                                                                           |  | $                  | 407,641 |   |      | $ | 387,630 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|                                                                                                                                                                       |  |                   
|Liabilities                                                                                                                                                            |  |                    |         |   |      |   |         |  
|Deposits                                                                                                                                                               |  | $                  | 270,399 |   |      | $ | 248,440 |  
|Advances from the Federal Home Loan Bank                                                                                                                               |  |                    | 69,500  |   |      |   | 70,000  |  
|Securities sold under agreements to repurchase                                                                                                                         |  |                    | 24,131  |   |      |   | 28,533  |  
|Floating rate junior subordinated deferrable interest debentures                                                                                                       |  |                    | 12,372  |   |      |   | 12,372  |  
|Accrued interest payable                                                                                                                                               |  |                    | 742     |   |      |   | 784     |  
|Other liabilities                                                                                                                                                      |  |                    | 3,184   |   |      |   | 1,534   |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total liabilities                                                                                                                                                      |  |                    | 380,328 |   |      |   | 361,663 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Commitments and contingencies  Note 14                                                                                                                                |  |                    |         |   |      |   |         |  
|                                                                                                                                                                       |  |                   
|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  1,794,866 shares at December 31,
2007 and 1,830,528 shares at December 31, 2006 |  |                    | 20      |   |      |   | 20      |  
|Additional paid-in capital                                                                                                                                             |  |                    | 12,781  |   |      |   | 12,506  |  
|Accumulated other comprehensive gain (loss)                                                                                                                            |  |                    | 191     |   |      |   | (610    | )
|Retained earnings, substantially restricted                                                                                                                            |  |                    | 20,276  |   |      |   | 18,912  |  
|Treasury stock, at cost                                                                                                                                                |  |                    | (5,955  | ) |      |   | (4,861  | )
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                             |  |                    | 27,313  |   |      |   | 25,967  |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                             |  | $                  | 407,641 |   |      | $ | 387,630 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  

See Notes to Consolidated Financial Statements.



38



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##### Table of Contents

PROVIDENT COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
INCOME



|                                                                         |  |                                   |           |      |   |           |  
|------------------------------------------------------------------------ |  | --------------------------------- | --------- | ---- | - | --------- | -
|                                                                         |  | Years Ended December 31,          |          
|                                                                         |  | 2007                              |           | 2006 |  
|                                                                         |  | (In Thousands, Except Share Data) |          
|Interest Income:                                                         |  |                                   |           |      |   |           |  
|Loans                                                                    |  | $                                 | 19,048    |      | $ | 16,924    |  
|Deposits and federal funds sold                                          |  |                                   | 158       |      |   | 52        |  
|Securities available for sale:                                           |  |                                   |           |      |   |           |  
|State and municipal (non taxable)                                        |  |                                   | 478       |      |   | 604       |  
|Other investments (taxable)                                              |  |                                   | 5,953     |      |   | 5,547     |  
|Securities held to maturity and FHLB/FRB stock dividends                 |  |                                   | 372       |      |   | 364       |  
|                                                                         |  |                                   |           |      |   |           |  
|Total interest income                                                    |  |                                   | 26,009    |      |   | 23,491    |  
|                                                                         |  |                                   |           |      |   |           |  
|Interest Expense:                                                        |  |                                   |           |      |   |           |  
|Deposit accounts                                                         |  |                                   | 9,832     |      |   | 7,736     |  
|Floating rate junior subordinated deferrable Interest debentures         |  |                                   | 897       |      |   | 863       |  
|Advances from the FHLB and other borrowings                              |  |                                   | 4,485     |      |   | 4,368     |  
|                                                                         |  |                                   |           |      |   |           |  
|Total interest expense                                                   |  |                                   | 15,214    |      |   | 12,967    |  
|                                                                         |  |                                   |           |      |   |           |  
|Net Interest Income                                                      |  |                                   | 10,795    |      |   | 10,524    |  
|Provision for loan losses                                                |  |                                   | 1,066     |      |   | 470       |  
|                                                                         |  |                                   |           |      |   |           |  
|Net interest income after provision for loan losses                      |  |                                   | 9,729     |      |   | 10,054    |  
|                                                                         |  |                                   |           |      |   |           |  
|Non-Interest income:                                                     |  |                                   |           |      |   |           |  
|Fees for financial services                                              |  |                                   | 3,056     |      |   | 2,831     |  
|Other fees, net                                                          |  |                                   | 48        |      |   | 55        |  
|Net gain (loss) on sale of investments                                   |  |                                   | 58        |      |   | (10       | )
|                                                                         |  |                                   |           |      |   |           |  
|Total non-interest income                                                |  |                                   | 3,162     |      |   | 2,876     |  
|                                                                         |  |                                   |           |      |   |           |  
|Non-Interest Expense:                                                    |  |                                   |           |      |   |           |  
|Compensation and employee benefits                                       |  |                                   | 4,950     |      |   | 4,441     |  
|Occupancy and equipment                                                  |  |                                   | 2,528     |      |   | 2,038     |  
|Deposit insurance premiums                                               |  |                                   | 30        |      |   | 30        |  
|Professional services                                                    |  |                                   | 461       |      |   | 401       |  
|Advertising and public relations                                         |  |                                   | 250       |      |   | 299       |  
|Loan operations                                                          |  |                                   | 150       |      |   | 88        |  
|Telephone                                                                |  |                                   | 190       |      |   | 171       |  
|Items processing                                                         |  |                                   | 221       |      |   | 192       |  
|Intangible amortization                                                  |  |                                   | 480       |      |   | 636       |  
|Other                                                                    |  |                                   | 907       |      |   | 882       |  
|                                                                         |  |                                   |           |      |   |           |  
|Total non-interest expense                                               |  |                                   | 10,167    |      |   | 9,178     |  
|                                                                         |  |                                   |           |      |   |           |  
|Income before income taxes                                               |  |                                   | 2,724     |      |   | 3,752     |  
|Provision for income taxes                                               |  |                                   | 534       |      |   | 949       |  
|                                                                         |  |                                   |           |      |   |           |  
|Net income                                                               |  | $                                 | 2,190     |      | $ | 2,803     |  
|                                                                         |  |                                   |           |      |   |           |  
|Net income per common share (basic)                                      |  | $                                 | 1.21      |      | $ | 1.50      |  
|                                                                         |  |                                   |           |      |   |           |  
|Net income per common share (diluted)                                    |  | $                                 | 1.19      |      | $ | 1.48      |  
|                                                                         |  |                                   |           |      |   |           |  
|Cash dividends per common share                                          |  | $                                 | 0.455     |      | $ | 0.43      |  
|                                                                         |  |                                   |           |      |   |           |  
|Weighted average number of common shares outstanding (basic)             |  |                                   | 1,810,916 |      |   | 1,865,951 |  
|                                                                         |  |                                   |           |      |   |           |  
|Weighted average number of common shares (diluted) outstanding (Diluted) |  |                                   | 1,846,980 |      |   | 1,893,203 |  
|                                                                         |  |                                   |           |      |   |           |  

See Notes to Consolidated Financial Statements.



39



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##### Table of Contents

PROVIDENT COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME



|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------- | ------ | --------------------------------- | - | ------------------------ | - | ---------------------------------------- |  | - | ------------------------------------------- |  | - | -------------------- | - |  | ------------------------ | ---- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                         |        | Common
Stock                      |   | AdditionalPaid-InCapital |   | Retained EarningsSubstantiallyRestricted |  |   | Accumulated OtherComprehensiveIncome (Loss) |  |   | TreasuryStock AtCost |   |  | TotalShareholdersEquity |     
|                                                                                         | Shares |                                   |   | Amount                   |   |                                          |  |   |                                            
|                                                                                         |        | (In Thousands, Except Share Data) |  
|Balance at December 31, 2005                                                             |        | 1,905,897                         |   |                          | $ | 20                                       |  | $ | 12,346                                      |  | $ | 16,916               |   |  | $                        | (612 | ) |  | $ | (3,337 | ) |  | $ | 25,333 |  
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Net Income                                                                               |        |                                  |   |                          |   |                                         |  |   |                                            |  |   | 2,803                |   |  |                          |     |   |  |   |       |   |  |   | 2,803  |  
|Other comprehensive income, net of tax on unrealized holding gains arising during period |        |                                  |   |                          |   |                                         |  |   |                                            |  |   |                     |   |  |                          | 9    |   |  |   |       |   |  |   | 9      |  
|Less reclassification adjustment for losses included in net income                       |        |                                  |   |                          |   |                                         |  |   |                                            |  |   |                     |   |  |                          | (7   | ) |  |   |       |   |  |   | (7     | )
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Comprehensive income                                                                     |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   | 2,805  |  
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Stock option activity, net                                                               |        | 2,872                             |   |                          |   |                                         |  |   | 48                                          |  |   |                     |   |  |                          |     |   |  |   |       |   |  |   | 48     |  
|Dividend plan contributions                                                              |        | 6,347                             |   |                          |   |                                         |  |   | 112                                         |  |   |                     |   |  |                          |     |   |  |   |       |   |  |   | 112    |  
|                                                                                         |        |                                   |   |                          |   |                                          | 
|Share repurchase program                                                                 |        | (84,588                           | ) |                          |   |                                         |  |   |                                            |  |   |                     |   |  |                          |     |   |  |   | (1,524 | ) |  |   | (1,524 | )
|Cash dividend ($.43 per share)                                                           |        |                                  |   |                          |   |                                         |  |   |                                            |  |   | (807                 | ) |  |                          |     |   |  |   |       |   |  |   | (807   | )
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2006                                                             |        | 1,830,528                         |   |                          | $ | 20                                       |  | $ | 12,506                                      |  | $ | 18,912               |   |  | $                        | (610 | ) |  | $ | (4,861 | ) |  | $ | 25,967 |  
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Net Income                                                                               |        |                                  |   |                          |   |                                         |  |   |                                            |  |   | 2,190                |   |  |                          |     |   |  |   |       |   |  |   | 2,190  |  
|Other comprehensive income, net of tax on unrealized holding gains arising during period |        |                                  |   |                          |   |                                         |  |   |                                            |  |   |                     |   |  |                          | 816  |   |  |   |       |   |  |   | 816    |  
|Less reclassification adjustment for losses included in net income                       |        |                                  |   |                          |   |                                         |  |   |                                            |  |   |                     |   |  |                          | (15  | ) |  |   |       |   |  |   | (15    | )
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Comprehensive income                                                                     |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   | 2,991  |  
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Stock option activity, net                                                               |        | 11,561                            |   |                          |   |                                         |  |   | 157                                         |  |   |                     |   |  |                          |     |   |  |   |       |   |  |   | 157    |  
|Dividend plan contributions                                                              |        | 5,896                             |   |                          |   |                                         |  |   | 118                                         |  |   |                     |   |  |                          |     |   |  |   |       |   |  |   | 118    |  
|Share repurchase program                                                                 |        | (53,119                           | ) |                          |   |                                         |  |   |                                            |  |   |                     |   |  |                          |     |   |  |   | (1,094 | ) |  |   | (1,097 | )
|Cash dividend ($.455 per share)                                                          |        |                                  |   |                          |   |                                         |  |   |                                            |  |   | (826                 | ) |  |                          |     |   |  |   |       |   |  |   | (826   | )
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2007                                                             |        | 1,794,866                         |   |                          | $ | 20                                       |  | $ | 12,781                                      |  | $ | 20,276               |   |  | $                        | 191  |   |  | $ | (5,955 | ) |  | $ | 27,313 |  
|                                                                                         |        |                                   |   |                          |   |                                          |  |   |                                             |  |   |                      |   |  |                          |      |   |  |   |        |   |  |   |        |  

See Notes to Consolidated Financial Statements.



40



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##### Table of Contents

PROVIDENT COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
CASH FLOWS



|                                                                                  |  |                         |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Years EndedDecember 31, |        
|                                                                                  |  | 2007                    |         |   | 2006 |  
|                                                                                  |  | (In Thousands)          |        
|Operating activities:                                                             |  |                         |         |   |      |   |         |  
|Net income                                                                        |  | $                       | 2,190   |   |      | $ | 2,803   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |         |   |      |   |         |  
|Provision for loan losses                                                         |  |                         | 1,066   |   |      |   | 470     |  
|Amortization expense                                                              |  |                         | 480     |   |      |   | 636     |  
|Depreciation expense                                                              |  |                         | 652     |   |      |   | 618     |  
|Recognition of deferred income, net of costs                                      |  |                         | (545    | ) |      |   | (547    | )
|Deferral of fee income, net of costs                                              |  |                         | 653     |   |      |   | 572     |  
|Stock compensation expense                                                        |  |                         | 45      |   |      |   | 45      |  
|Loss on write-down of fixed asset                                                 |  |                         | 135     |   |      |   |        |  
|(Gain) loss on investments                                                        |  |                         | (58     | ) |      |   | 10      |  
|(Increase) decrease in accrued interest receivable                                |  |                         | 92      |   |      |   | (288    | )
|(Gain) loss on sale of assets acquired from foreclosed loans                      |  |                         | 35      |   |      |   | (24     | )
|Increase in bank owned life insurance                                             |  |                         | (3,200  | ) |      |   |        |  
|Increase in other assets                                                          |  |                         | (1,312  | ) |      |   | (495    | )
|Increase (decrease) in accrued interest payable                                   |  |                         | (42     | ) |      |   | 264     |  
|Increase in other liabilities                                                     |  |                         | 1,650   |   |      |   | 125     |  
|                                                                                  |  |                         |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                         | 1,841   |   |      |   | 4,189   |  
|                                                                                  |  |                         |         |   |      |   |         |  
|                                                                                  |  |                        
|Investing activities:                                                             |  |                         |         |   |      |   |         |  
|Purchase of investment and mortgage-backed securities:                            |  |                         |         |   |      |   |         |  
|Available for sale                                                                |  |                         | (60,701 | ) |      |   | (19,183 | )
|Proceeds from maturity of investment and mortgage-backed securities:              |  |                         |         |   |      |   |         |  
|Available for sale                                                                |  |                         | 53,966  |   |      |   | 19,325  |  
|Proceeds from sale of investment and mortgage-backed securities:                  |  |                         |         |   |      |   |         |  
|Available for sale                                                                |  |                         | 13,840  |   |      |   | 18,257  |  
|Principal repayments on mortgage-backed securities                                |  |                         |         |   |      |   |         |  
|Available for sale                                                                |  |                         | 4,752   |   |      |   | 5,691   |  
|Increase in cash surrender value of life insurance                                |  |                         | (362    | ) |      |   | (209    | )
|Net increase in loans                                                             |  |                         | (25,574 | ) |      |   | (40,102 | )
|Redemption of FHLB/FRB stock                                                      |  |                         | (97     | ) |      |   | (7      | )
|Proceeds from sales of foreclosed assets, net of costs and improvements           |  |                         | 169     |   |      |   | 352     |  
|Purchase of office properties and equipment                                       |  |                         | (480    | ) |      |   | (1,178  | )
|                                                                                  |  |                         |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                         | (14,487 | ) |      |   | (17,054 | )
|                                                                                  |  |                         |         |   |      |   |         |  
|Financing activities:                                                             |  |                         |         |   |      |   |         |  
|                                                                                  |  |                        
|Proceeds from the exercise of stock options                                       |  |                         | 157     |   |      |   | 48      |  
|Proceeds from dividend reinvestment plan                                          |  |                         | 118     |   |      |   | 112     |  
|Dividends paid in cash                                                            |  |                         | (826    | ) |      |   | (807    | )
|Repayment of term borrowings, net                                                 |  |                         | (4,902  | ) |      |   | (1,797  | )
|Share repurchase program                                                          |  |                         | (1,094  | ) |      |   | (1,524  | )
|Proceeds from the issuance of trust preferred securities                          |  |                         |        |   |      |   | 12,372  |  
|Redemption of trust preferred securities                                          |  |                         |        |   |      |   | (8,247  | )
|Increase in deposit accounts                                                      |  |                         | 21,959  |   |      |   | 13,452  |  
|                                                                                  |  |                         |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                         | 15,412  |   |      |   | 13,609  |  
|                                                                                  |  |                         |         |   |      |   |         |  
|Net increase in cash and due from banks                                           |  |                         | 2,766   |   |      |   | 744     |  
|Cash and due from banks at beginning of period                                    |  |                         | 9,124   |   |      |   | 8,380   |  
|                                                                                  |  |                         |         |   |      |   |         |  
|Cash and due from banks at end of period                                          |  | $                       | 11,890  |   |      | $ | 9,124   |  
|                                                                                  |  |                         |         |   |      |   |         |  



41



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##### Table of Contents

PROVIDENT COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization - Provident Community Bancshares, Inc. (Provident Community Bancshares) is the bank holding company for Provident Community Bank,
N.A., a national bank (the Bank). Provident Community Bancshares and the Bank are collectively referred to as the Corporation in this annual report. The Bank, founded in 1934, offers a complete array of financial services
through nine full-service banking centers in five counties in South Carolina, products include checking, savings, time deposits, individual retirement accounts (IRAs), investment services, and secured and unsecured consumer loans. The Bank
originates and services home loans and provides financing for small businesses and affordable housing. On April 19, 2006, Union Financial Bancshares, Inc. changed its name to Provident Community Bancshares, Inc.

Accounting Principles - The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United
States of America and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and disclosure of commitments and contingencies. Actual results could differ from those estimates. The following summarizes the more significant policies.

Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Provident Community Bancshares and the Bank. All inter-company amounts and balances have been eliminated in
consolidation.

Disclosure Regarding Segments - The Corporation reports as one operating segment, as the chief operating
decision-maker reviews the results of operations of the Corporation as a single enterprise.

Advertising - Advertising, promotional,
and other business development costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in
the period in which the direct mailings are sent.

Cash and Due from Banks - Cash and due from banks include cash on hand and
amounts due from depository institutions, federal funds sold and short term, interest-earning deposits. From time to time, the Corporations cash deposits with other financial institutions may exceed the FDIC insurance limits.

Investments and Mortgage-backed Securities - The Corporation accounts for investment securities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. In accordance with SFAS 115, debt securities that the Corporation has the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held to maturity or trading securities are classified as available for sale securities and
reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders equity. No securities have been classified as trading securities.

Purchases and sales of securities are accounted for on a trade date basis. Premiums and discounts on debt securities are amortized or accreted as
adjustments to income over the estimated life of the security using a method approximating the level yield method. Gains or losses on the sale of securities are based on the specific identification method. The fair value of securities is based on
quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.



42



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##### Table of Contents

1. Summary of Significant Accounting Policies (continued)



Loans - Loans are recorded at cost. Mortgage loans consist principally of conventional one-to
four-family residential loans and interim and permanent financing of non-residential loans that are secured by real estate. Commercial loans are made primarily on the strength of the borrowers general credit standing, the ability to generate
repayment from income sources and the collateral securing such loans. Consumer loans generally consist of home equity loans, automobile and other personal loans. In many lending transactions, collateral is taken to provide an additional measure of
security. Generally, the cash flows or earning power of the borrower represents the primary source of repayment, and collateral liquidation serves as a secondary source of repayment. The Corporation determines the need for collateral on a
case-by-case or product-by-product basis. Factors considered include the current and prospective credit worthiness of the customer, terms of the instrument and economic conditions.

The Corporation generally originates single-family residential loans within its primary lending area. The Corporations underwriting policies require
such loans to be 80% loan to value based upon appraised values unless private mortgage insurance is obtained. These loans are secured by the underlying properties. Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by unearned discount and fees and an allowance for loan losses. Unearned interest on loans is amortized to income over the life of the loan, using
the interest method. For all other loans, interest is accrued daily on the outstanding balances.

Loan origination and commitment fees and
certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loans yield. The Corporation is generally amortizing these amounts over the contractual life. Commitment fees and costs are
generally based upon a percentage of customers unused line of credit and are recognized over the commitment period when the likelihood of exercise is remote. If the commitment is subsequently exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of the yield.

For
impaired loans, accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors that the borrowers financial condition is such that collection of interest is doubtful. Cash
collections on impaired loans are credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected.

The Corporation determines a loan to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of
a monthly installment by the due date. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent.

All
interest accrued but not collected for loans that are placed on non accrual status or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses - The Corporation maintains an allowance for loan losses. The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans,
as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers ability to pay. The allowance for loan loss calculation includes a segmentation
of loan categories by residential mortgage, commercial and consumer loans. Each category is rated for all loans. The weights assigned to each performing group are developed from previous loan loss experience and as the loss experience changes, the
category weight is adjusted



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1. Summary of Significant Accounting Policies (continued)



accordingly. As the loan categories increase and decrease in balance, the provision for loan loss calculation will adjust accordingly. The evaluation also
includes a component for expected losses on groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Corporations allowance for loan losses, and may
require the Corporation to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either impaired, substandard or special mention. For such loans that are also
accounted for as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Recovery of the carrying value of loans is dependent to some extent on the future economic environment and operating and other conditions that may be beyond the Corporations control. Unanticipated future adverse
changes in such conditions could result in material adjustments to allowances (and future results of operation).

Accounting for
Impaired Loans - Impaired loans are accounted for in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loans effective interest rate or, as a practical matter, at the loans observable market value or fair value of the collateral if the loan is collateral dependent. If the resulting value of the
impaired loan is less than the recorded balance, the impairment must be recognized by creating a valuation allowance for the difference and recognizing a corresponding bad debt expense. The risk characteristics used to aggregate loans are collateral
type, borrowers financial condition and geographic location. SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan and requires additional disclosures about how a creditor recognizes interest income related to impaired loans.

The Corporation generally determines a loan to be impaired at the time management believes that it is probable that the principal and interest may be uncollectible. Management has determined that, generally, a failure
to make a payment within a 90-day period constitutes a minimum delay or shortfall and does not generally constitute an impaired loan. However, management reviews each past due loan and may determine a loan to be impaired prior to the loan becoming
over 90 days past due, depending upon the circumstances of that particular loan. The Corporations policy for charge-off of impaired loans is on a loan-by-loan basis. The Corporations policy is to evaluate impaired loans based on the fair
value of the collateral. Interest income from impaired loans is recorded using the cash method. At December 31, 2007, impaired loans totaled $2.7 million and the Corporation had recognized no interest income from impaired loans. The average
balance in impaired loans was $544,000for 2007.

Office Properties and Equipment - Office properties and equipment are
presented at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets. Estimated useful lives are twenty to thirty nine years for buildings and improvements and generally
five to ten years for furniture, fixtures and equipment.

The cost of maintenance and repairs is charged to expense as incurred, and
improvements and other expenditures, which materially increase property lives, are capitalized. The costs and accumulated depreciation applicable to office properties and equipment retired or otherwise disposed of are eliminated from the related
accounts, and any resulting gains or losses are credited or charged to income.



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1. Summary of Significant Accounting Policies (continued)



Securities Sold Under Agreements to Repurchase - The Corporation enters into sales of
securities under agreements to repurchase. Fixed-coupon reverse repurchase agreements are treated as financings, with the obligations to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining
as an asset. The securities are delivered by appropriate entry by the Corporations safekeeping agent to the counterparties accounts. The dealers may have sold, loaned or otherwise disposed of such securities to other parties in the
normal course of their operations, and have agreed to resell to the Corporation substantially identical securities at the maturities of the agreements.

Federal Home Loan Bank Stock - The Bank, as a member institution of Federal Home Loan Bank of Atlanta (FHLB), is required to own capital stock in the FHLB based generally upon the Banks
balances of residential mortgage loans and FHLB advances. No ready market exists for this stock and it has no quoted market value. However, redemption of this stock historically has been at par value. The Bank carries this investment at its original
cost.

Federal Reserve Bank Stock - The Bank, as a member institution of Federal Reserve Bank of Richmond (FRB), is
required to own capital stock in the FRB based upon the Banks capital and surplus. No ready market exists for this stock and it has no quoted market value. However, redemption of this stock historically has been at par value. The Bank carries
this investment at its original cost.

Real Estate Acquired Through Foreclosure - Real estate acquired through foreclosure is stated
at the lower of cost or estimated fair value less estimated costs to sell. Any accrued interest on the related loan at the date of acquisition is charged to operations. Costs relating to the development and improvement of property are capitalized to
the extent that such costs do not exceed the estimated fair value less selling costs of the property, whereas those relating to holding the property are charged to expense. Real estate acquired through foreclosure is included in other assets on the
balance sheet.

Intangible Assets - Intangible assets consist of core deposit premiums resulting from Provident Community
Banks branch acquisitions in 1997 and 1999 and the excess of cost over the fair value of net assets resulting from the acquisition of South Carolina Community Bancshares, Inc. in 1999.

Goodwill and identified intangible assets with indefinite lives related to acquisitions are not subject to amortization. Core deposit intangible assets
are amortized over their estimated useful lives using methods that reflect the pattern in which the economic benefits are utilized.

The
Corporations unamortized goodwill and other intangible assets are reviewed annually to determine whether there have been any events or circumstances to indicate that the recorded amount is not recoverable from projected undiscounted net
operating cash flows. If the projected undiscounted net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value, and when appropriate, the amortization period is also reduced.

Interest Income - Interest on loans is accrued and credited to income monthly based on the principal balance outstanding and the
contractual rate on the loan. The Corporation places loans on non-accrual status when they become greater than 90 days delinquent or when in the opinion of management, full collection of principal or interest is unlikely. All interest that was
accrued prior to the loan being placed on non-accrual status is automatically reversed after the 90 delinquency period. The loans are returned to accrual status when full collection of principal and interest appears likely.

Income Taxes - The Corporation accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS
No. 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is
established for deferred tax assets that may not be realized. Also, SFAS No. 109 eliminates, on a prospective basis, the exception from the requirement to record deferred taxes on tax



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1. Summary of Significant Accounting Policies (continued)



basis bad debt reserves in excess of the base year amounts. The tax basis bad debt reserve that arose prior to the fiscal year 1988 (the base year amount) is
frozen, and the book reserves at that date and all subsequent changes in book and tax basis reserves are included in the determination of deferred taxes. In 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes  an Interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a corporations tax return. FIN 48 is effective for fiscal years beginning
after December 15, 2006. Accordingly, the Corporation adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Corporations consolidated financial position.

Per-Share Data - SFAS No. 128, Earnings Per Share, requires the dual presentation of basic and diluted earnings per share on the
face of the income statement. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Diluted earnings per share is similar to the computation of basic earnings per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of options outstanding under Provident Community
Bancsharess stock option plan is reflected in diluted earnings per share by the application of the treasury stock method. Common stock equivalents included in the diluted earnings per share calculation at December 31, 2007 were 36,064
compared to 27,252 at December 31, 2006.

Fair Values of Financial Instruments - The following methods and assumptions were
used by the Corporation in estimating fair values of financial instruments as disclosed herein:

Cash and short-term instruments -
The carrying amounts of cash and short-term instruments approximate their fair value.

Available for sale and held to maturity
securities - Fair values for securities are based on quoted market prices. The carrying values of restricted equity securities approximate fair values.

Loans - For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to
four-family residential), credit-card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for
commercial real estate and commercial loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Cash surrender value of life insurance
-The carrying amounts of cash surrender values of life insurance approximate their fair value.

Deposit liabilities - The fair
values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money-market accounts and certificates of
deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.

Advances from the FHLB and other borrowings - The fair values of the
Corporations borrowings are estimated using discounted cash flow analysis based on the Corporations current incremental borrowing rates for similar types of borrowing arrangements.

Securities sold under agreements to repurchase - The fair values of the Corporations repurchase agreements are estimated using discounted
cash flow analysis based on the Corporations current incremental borrowing rates for similar types of borrowing arrangements.



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1. Summary of Significant Accounting Policies (continued)



Accrued interest - The carrying amounts of accrued interest approximate their fair values.

Floating rate junior subordinated deferrable interest debentures - The fair values of the Corporations floating rate
debentures are estimated using discounted cash flow analysis based on the Corporations current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance-sheet instruments - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counter parties credit standings.

Risks and
Uncertainties - In the normal course of its business, the Corporation encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The
Corporation is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets.

Credit risk is the risk of default on the Corporations loan portfolio that results from the borrowers inability or unwillingness to make
contractually required payments. Credit risk also applies to investment securities and mortgage-backed securities should the issuer of the security be unable to make principal and interest payments. Market risk reflects changes in the value of
collateral underlying loans receivable, the valuation of real estate held by the Corporation and the valuation of investment securities.

The Corporation is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Corporation also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators judgments based on information available to them at the time of their examination.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods covered. Actual results could differ from those estimates and assumptions.

Reclassifications - Certain amounts in prior years financial statements have been reclassified to conform with current year
classifications. These reclassifications had no effect on previously reported net income or shareholders equity.

Stock-Based
Compensation - On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) 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.

There were no stock options granted in 2007 or 2006.



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2. Investment and Mortgage-backed Securities

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



|                     |               |                         |                  |        |   |           |  |   |     |   |  |   |      
|-------------------- | ------------- | ----------------------- | ---------------- | ------ | - | --------- |  | - | --- | - |  | - | -----
|                     |               | As of December 31, 2007
|                     | AmortizedCost |                         | Gross Unrealized |        |   | FairValue
|                     |               | Gains                   |                  | Losses |   |          
|Municipal Securities |               | $                       | 3,126            |        | $ | 22        |  | $ | (13 | ) |  | $ | 3,135
|                     |               |                         |                  |        |   |           |  |   |     |   |  |   |      

Available for Sale - Securities classified as available for sale consisted of the following
(in thousands):



|                                    |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|----------------------------------- | ------------- | ----------------------- | ---------------- | ------ | - | --------- |  | - | ---- | - |  | - | -------
|                                    |               | As of December 31, 2007
|                                    | AmortizedCost |                         | Gross Unrealized |        |   | FairValue
|                                    |               | Gains                   |                  | Losses |   |          
|Investment Securities:              |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|U.S. Agency Obligations             |               | $                       | 507              |        | $ |          |  | $ | (19  | ) |  | $ | 488    
|Government Sponsored Enterprises    |               |                         | 40,457           |        |   | 238       |  |   | (30  | ) |  |   | 40,665 
|Municipal Securities                |               |                         | 9,296            |        |   | 305       |  |   |     |   |  |   | 9,601  
|Other                               |               |                         | 12,458           |        |   |          |  |   | (365 | ) |  |   | 12,093 
|                                    |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|Total Investment Securities         |               |                         | 62,718           |        |   | 543       |  |   | (414 | ) |  |   | 62,847 
|                                    |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|Mortgage-backed Securities:         |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|Fannie Mae                          |               |                         | 27,511           |        |   | 204       |  |   | (236 | ) |  |   | 27,479 
|Ginnie Mae                          |               |                         | 1,187            |        |   | 13        |  |   |     |   |  |   | 1,200  
|Freddie Mac                         |               |                         | 12,860           |        |   | 226       |  |   | (6   | ) |  |   | 13,080 
|Collateralized Mortgage Obligations |               |                         | 3,492            |        |   |          |  |   | (37  | ) |  |   | 3,455  
|                                    |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|Total Mortgage-backed Securities    |               |                         | 45,050           |        |   | 443       |  |   | (279 | ) |  |   | 45,214 
|                                    |               |                         |                  |        |   |           |  |   |      |   |  |   |        
|Total available for sale            |               | $                       | 107,768          |        | $ | 986       |  | $ | (693 | ) |  | $ | 108,061
|                                    |               |                         |                  |        |   |           |  |   |      |   |  |   |        

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



|                     |               |                         |                  |        |   |           |  |   |    |   |  |   |      
|-------------------- | ------------- | ----------------------- | ---------------- | ------ | - | --------- |  | - | -- | - |  | - | -----
|                     |               | As of December 31, 2006
|                     | AmortizedCost |                         | Gross Unrealized |        |   | FairValue
|                     |               | Gains                   |                  | Losses |   |          
|Municipal Securities |               | $                       | 3,182            |        | $ | 60        |  | $ | (3 | ) |  | $ | 3,239
|                     |               |                         |                  |        |   |           |  |   |    |   |  |   |      

Available for Sale - Securities classified as available for sale consisted of the following
(in thousands):



|                                    |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|----------------------------------- | ------------- | ----------------------- | ---------------- | ------ | - | --------- |  | - | ------ | - |  | - | -------
|                                    |               | As of December 31, 2006
|                                    | AmortizedCost |                         | Gross Unrealized |        |   | FairValue
|                                    |               | Gains                   |                  | Losses |   |          
|Investment Securities:              |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|U.S. Agency Obligations             |               | $                       | 515              |        | $ |          |  | $ | (15    | ) |  | $ | 500    
|Government Sponsored Enterprises    |               |                         | 73,511           |        |   | 2         |  |   | (875   | ) |  |   | 72,638 
|Municipal Securities                |               |                         | 10,594           |        |   | 376       |  |   |       |   |  |   | 10,970 
|Other                               |               |                         | 14,533           |        |   | 178       |  |   | (67    | ) |  |   | 14,644 
|                                    |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|Total Investment Securities         |               |                         | 99,153           |        |   | 556       |  |   | (957   | ) |  |   | 98,752 
|                                    |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|Mortgage-backed Securities:         |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|Fannie Mae                          |               |                         | 13,243           |        |   | 2         |  |   | (432   | ) |  |   | 12,813 
|Ginnie Mae                          |               |                         | 55               |        |   | 2         |  |   |       |   |  |   | 57     
|Freddie Mac                         |               |                         | 3,111            |        |   | 15        |  |   | (17    | ) |  |   | 3,109  
|Collateralized Mortgage Obligations |               |                         | 4,380            |        |   |          |  |   | (108   | ) |  |   | 4,272  
|                                    |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|Total Mortgage-backed Securities    |               |                         | 20,789           |        |   | 19        |  |   | (557   | ) |  |   | 20,251 
|                                    |               |                         |                  |        |   |           |  |   |        |   |  |   |        
|Total available for sale            |               | $                       | 119,942          |        | $ | 575       |  | $ | (1,514 | ) |  | $ | 119,003
|                                    |               |                         |                  |        |   |           |  |   |        |   |  |   |        



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2. Investment and Mortgage-backed Securities (continued)



The following table shows gross unrealized losses and fair value, aggregated by investment category,
and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 (in thousands).



|                                 |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|-------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                 |  | Less than 12 Months |        | 12 Months or More |   | Total    
|                                 |  | FairValue           |        | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|Securities Available for Sale    |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|                                 |  |                     |        |                   |   |          
|U.S. Agency Obligations          |  | $                   |       |                   | $ |          |  | $                | 481    |           | $ | 19               |  | $ | 481    |  | $ | 19 
|Government Sponsored Enterprises |  |                     |       |                   |   |          |  |                  | 13,445 |           |   | 30               |  |   | 13,445 |  |   | 30 
|Municipal Securities             |  |                     |       |                   |   |          |  |                  |       |           |   |                 |  |   |       |  |   |   
|Other                            |  |                     | 5,743  |                   |   | 207       |  |                  | 6,350  |           |   | 158              |  |   | 12,093 |  |   | 365
|Mortgage-backed Securities       |  |                     | 5,189  |                   |   | 37        |  |                  | 14,642 |           |   | 242              |  |   | 19,831 |  |   | 279
|                                 |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total                            |  | $                   | 10,932 |                   | $ | 244       |  | $                | 34,918 |           | $ | 449              |  | $ | 45,850 |  | $ | 693
|                                 |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    

The following table shows gross unrealized losses and fair value, aggregated by investment
category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2006 (in thousands).



|                                 |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|-------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                 |  | Less than 12 Months |        | 12 Months or More |   | Total    
|                                 |  | FairValue           |        | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|Securities Available for Sale    |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|                                 |  |                     |        |                   |   |          
|U.S. Agency Obligations          |  | $                   |       |                   | $ |          |  | $                | 500    |           | $ | 15               |  | $ | 500    |  | $ | 15   
|Government Sponsored Enterprises |  |                     | 12,973 |                   |   | 28        |  |                  | 57,664 |           |   | 847              |  |   | 70,637 |  |   | 875  
|Municipal Securities             |  |                     |       |                   |   |          |  |                  | 601    |           |   |                 |  |   | 601    |  |   |     
|Other                            |  |                     | 3,988  |                   |   | 23        |  |                  | 4,155  |           |   | 44               |  |   | 8,144  |  |   | 67   
|Mortgage-backed Securities       |  |                     | 1,211  |                   |   | 18        |  |                  | 16,352 |           |   | 539              |  |   | 17,563 |  |   | 557  
|                                 |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|Total                            |  | $                   | 18,172 |                   | $ | 69        |  | $                | 79,272 |           | $ | 1,445            |  | $ | 97,444 |  | $ | 1,514
|                                 |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      

Management reviews securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Proceeds, gross gains and gross losses realized from the sales of available for sale securities were as follows for the periods ended (in thousands):



|                                           |  |                          |        |   |      |   |        |  
|------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                           |  | Years Ended December 31, |       
|                                           |  | 2007                     |        |   | 2006 |  
|Proceeds                                   |  | $                        | 13,840 |   |      | $ | 18,257 |  
|Gross gains                                |  |                          | 108    |   |      |   | 191    |  
|Gross losses                               |  |                          | (50    | ) |      |   | (201   | )
|                                           |  |                          |        |   |      |   |        |  
|Net gain (loss) on investment transactions |  | $                        | 58     |   |      | $ | (10    | )



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2. Investment and Mortgage-backed Securities (continued)



The maturities of securities at December 31, 2007 are as follows (in thousands):



|                                                                  |  |                  |       |                    |   |               |  |           |         |  |   |        
|----------------------------------------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------- |  | --------- | ------- |  | - | -------
|                                                                  |  | Held to Maturity |       | Available for Sale
|                                                                  |  | AmortizedCost    |       | FairValue          |   | AmortizedCost |  | FairValue
|Due in one year or less                                           |  | $                | 696   |                    | $ | 696           |  | $         | 58      |  | $ | 59     
|Due after one year through five years                             |  |                  |      |                    |   |              |  |           | 14,419  |  |   | 14,444 
|Due after five years through ten years                            |  |                  |      |                    |   |              |  |           | 28,431  |  |   | 28,642 
|Due after ten years                                               |  |                  | 2,430 |                    |   | 2,439         |  |           | 64,860  |  |   | 64,916 
|                                                                  |  |                  |       |                    |   |               |  |           |         |  |   |        
|Total investment and mortgage-backed securities backed securities |  | $                | 3,126 |                    | $ | 3,135         |  | $         | 107,768 |  | $ | 108,061
|                                                                  |  |                  |       |                    |   |               |  |           |         |  |   |        

The mortgage-backed securities held at December 31, 2007 mature between one and thirty years.
The actual lives of those securities may be significantly shorter as a result of principal payments and prepayments.

At December 31,
2007 and 2006, $74,087,525 and $74,387,000, respectively, of securities recorded at book value were pledged as collateral for certain deposits and borrowings.

At December 31, 2007, approximately $16,645,910 of mortgage-backed securities was adjustable rate securities. The adjustment periods range from monthly to annually and rates are adjusted based on the movement of
a variety of indices.

Investments in collateralized mortgage obligations (CMOs) represent securities issued by agencies of the
federal government.

3. Loans, Net

Loans receivable
consisted of the following (in thousands):



|                                                  |  |                    |         |   |      |   |         |  
|------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                                  |  | As of December 31, |        
|                                                  |  | 2007               |         |   | 2006 |  
|Mortgage loans:                                   |  |                    |         |   |      |   |         |  
|Fixed-rate residential                            |  | $                  | 16,214  |   |      | $ | 19,187  |  
|Adjustable-rate residential                       |  |                    | 8,775   |   |      |   | 10,295  |  
|Commercial real estate                            |  |                    | 76,864  |   |      |   | 62,450  |  
|Construction                                      |  |                    | 4,764   |   |      |   | 5,787   |  
|                                                  |  |                    |         |   |      |   |         |  
|Total mortgage loans                              |  |                    | 106,617 |   |      |   | 97,719  |  
|                                                  |  |                    |         |   |      |   |         |  
|Commercial loans:                                 |  |                    |         |   |      |   |         |  
|Commercial non-real estate                        |  |                    | 32,091  |   |      |   | 42,093  |  
|Commercial lines of credit                        |  |                    | 72,170  |   |      |   | 51,469  |  
|                                                  |  |                    |         |   |      |   |         |  
|Total commercial loans                            |  |                    | 104,261 |   |      |   | 93,562  |  
|                                                  |  |                    |         |   |      |   |         |  
|Consumer loans:                                   |  |                    |         |   |      |   |         |  
|Home equity                                       |  |                    | 15,185  |   |      |   | 15,936  |  
|Consumer and installment                          |  |                    | 36,315  |   |      |   | 29,827  |  
|Consumer lines of credit                          |  |                    | 346     |   |      |   | 373     |  
|                                                  |  |                    |         |   |      |   |         |  
|Total consumer loans                              |  |                    | 51,846  |   |      |   | 46,136  |  
|                                                  |  |                    |         |   |      |   |         |  
|Total loans                                       |  |                    | 262,724 |   |      |   | 237,417 |  
|                                                  |  |                    |         |   |      |   |         |  
|Less:                                             |  |                    |         |   |      |   |         |  
|Undisbursed portion of interim construction loans |  |                    | (2,379  | ) |      |   | (2,238  | )
|Unamortized loan discount                         |  |                    | (476    | ) |      |   | (607    | )
|Allowance for loan losses                         |  |                    | (3,344  | ) |      |   | (2,754  | )
|Net deferred loan origination costs               |  |                    | (38     | ) |      |   | 68      |  
|                                                  |  |                    |         |   |      |   |         |  
|Total, net                                        |  | $                  | 256,487 |   |      | $ | 231,886 |  
|                                                  |  |                    |         |   |      |   |         |  
|Weighted-average interest rate of loans           |  |                    | 7.56    | % |      |   | 8.14    | %



50



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3. Loans, net (continued)



Under OCC regulations, the Bank may not make loans to one borrower in excess of 15% of unimpaired
capital. This limitation does not apply to loans made before August 9, 1989. At December 31, 2007, the Bank had loans outstanding to one borrower ranging up to $4.8 million.

Adjustable-rate residential real estate loans (approximately $8.8 million and $10.3 million at December 31, 2007 and 2006, respectively) are subject
to rate adjustments annually and generally are adjusted based on movement of the Federal Home Loan Bank National Monthly Median Cost of Funds rate or the Constant Maturity Treasury index. The maximum loan rates can be adjusted is 200 basis points in
any one year with a lifetime cap of 600 basis points.

Non-refundable deferred origination fees and cost and discount points collected at
loan closing, net of commitment fees paid, are deferred and recognized at the time of sale of the mortgage loans. Gain or loss on sales of mortgage loans is recognized based upon the difference between the selling price and the carrying amount of
the mortgage loans sold. Other fees earned during the loan origination process are also included in net gain or loss on sales of mortgage loans.

Until 2002, the Bank originated both fixed rate and adjustable rate mortgage loans with terms generally ranging from fifteen to thirty years and generally sold the loans while retaining servicing on loans originated. The Bank discontinued
the origination of loans held for sale in 2002. The underlying value of loans serviced for others were $15.6 million and $17.9 million at December 31, 2007 and 2006, respectively.

At December 31, 2007 and 2006, loans which are accounted for on a non-accrual basis or contractually past due ninety days or more totaled
approximately $3.0 million and $1.3 million, respectively. The amount the Corporation will ultimately realize from these loans could differ materially from their carrying value because of future developments affecting the underlying collateral or
the borrowers ability to repay the loans. During the years ended December 31, 2007,2006, and 2005, the Corporation recognized no interest income on loans past due 90 days or more, whereas, under the original terms of these loans, the
Corporation would have recognized additional interest income of approximately $156,000, $117,000, $92,000, respectively.

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



|                               |  |                          |       |   |      |   |       |  
|------------------------------ |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                               |  | Years Ended December 31, |      
|                               |  | 2007                     |       |   | 2006 |  
|Balance at beginning of Period |  | $                        | 2,754 |   |      | $ | 2,394 |  
|Provision for loan losses      |  |                          | 1,066 |   |      |   | 470   |  
|Net charge-offs                |  |                          | (476  | ) |      |   | (110  | )
|                               |  |                          |       |   |      |   |       |  
|Balance at end of period       |  | $                        | 3,344 |   |      | $ | 2,754 |  
|                               |  |                          |       |   |      |   |       |  

Directors and officers of the Corporation are customers of the Corporation in the ordinary course
of business. Loans to directors and officers have terms consistent with those offered to other customers. Loans to officers and directors of the Corporation are summarized as follows (in thousands):



|                                   |  |                          |     |   |      |   |     |  
|---------------------------------- |  | ------------------------ | --- | - | ---- | - | --- | -
|                                   |  | Years Ended December 31, |    
|                                   |  | 2007                     |     |   | 2006 |  
|Balance at beginning of period     |  | $                        | 326 |   |      | $ | 373 |  
|Loans originated during the period |  |                          | 71  |   |      |   |    |  
|Loan repayments during the period  |  |                          | (48 | ) |      |   | (47 | )
|                                   |  |                          |     |   |      |   |     |  
|Balance at the end of period       |  | $                        | 349 |   |      | $ | 326 |  
|                                   |  |                          |     |   |      |   |     |  



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4. Office Properties and Equipment

Office properties and equipment consisted of the following (in thousands):



|                                         |  |                    |        |   |      |   |        |  
|---------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                         |  | As of December 31, |       
|                                         |  | 2007               |        |   | 2006 |  
|Land                                     |  | $                  | 719    |   |      | $ | 766    |  
|Building and improvements                |  |                    | 5,065  |   |      |   | 5,326  |  
|Office furniture, fixtures and equipment |  |                    | 3,263  |   |      |   | 5,336  |  
|                                         |  |                    |        |   |      |   |        |  
|Total                                    |  |                    | 9,047  |   |      |   | 11,428 |  
|Less accumulated depreciation            |  |                    | (3,902 | ) |      |   | (5,720 | )
|                                         |  |                    |        |   |      |   |        |  
|Office properties and equipment, net     |  | $                  | 5,145  |   |      | $ | 5,708  |  
|                                         |  |                    |        |   |      |   |        |  

Depreciation expense was $652,000 and $618,000 for the years ended December 31, 2007 and
2006, respectively.

5. Intangible Assets

Intangible assets consisted of the following (in thousands):



|                             |  |                          |       |   |      |   |       |  
|---------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                             |  | Years Ended December 31, |      
|                             |  | 2007                     |       |   | 2006 |  
|Core Deposit Premium         |  |                          |       |   |      |   |       |  
|Balance at beginning of year |  | $                        | 1,412 |   |      | $ | 2,048 |  
|Amortization                 |  |                          | (480  | ) |      |   | (636  | )
|                             |  |                          |       |   |      |   |       |  
|Balance at end of year       |  |                          | 932   |   |      |   | 1,412 |  
|Goodwill                     |  |                          | 2,329 |   |      |   | 2,329 |  
|                             |  |                          |       |   |      |   |       |  
|Total                        |  | $                        | 3,261 |   |      | $ | 3,741 |  
|                             |  |                          |       |   |      |   |       |  

Amortization expense is estimated to be approximately $416,000, $320,000, and $200,000 for 2008,
2009, and 2010 respectively. Fiscal 2006 includes a reclassification related to deferred tax liabilities recorded in a business combination and a corresponding adjustment to goodwill in the amount of $801,000.

6. Deposit Accounts

Deposit accounts at
December 31 were as follows (in thousands):



|                                |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|------------------------------- |  | ---- | - |  | ------- | ------- | - | ------ | - | ---- | ---- | - | ------- | - | ------- |  | ------ | -
|                                |  | 2007 |   |  | 2006    |        
|                                |  | Rate |   |  | Balance |         | % |        |   | Rate |      |   | Balance |   | %       | 
|Account Type                    |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|NOW accounts:                   |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|Commercial non-interest-bearing |  |     | % |  | $       | 16,568  |   | 6.13   | % |      |     | % |         | $ | 16,718  |  | 6.73   | %
|Non-commercial                  |  | 2.14 |   |  |         | 56,282  |   | 20.81  |   |      | 2.82 |   |         |   | 52,512  |  | 21.14  |  
|Money market                    |  | 4.44 |   |  |         | 23,160  |   | 8.57   |   |      | 4.22 |   |         |   | 14,178  |  | 5.71   |  
|Savings                         |  | 0.79 |   |  |         | 12,794  |   | 4.73   |   |      | 0.76 |   |         |   | 14,930  |  | 6.00   |  
|                                |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|Total demand and time deposits  |  | 2.47 |   |  |         | 108,804 |   | 40.24  |   |      | 2.20 |   |         |   | 98,338  |  | 39.58  |  
|                                |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|Time deposits:                  |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|Up to 3.00%                     |  |      |   |  |         | 5,768   |   | 2.13   |   |      |      |   |         |   | 15,557  |  | 6.26   |  
|3.01% - 4.00%                   |  |      |   |  |         | 26,265  |   | 9.71   |   |      |      |   |         |   | 23,491  |  | 9.46   |  
|4.01% - 5.00%                   |  |      |   |  |         | 34,988  |   | 12.94  |   |      |      |   |         |   | 31,086  |  | 12.51  |  
|5.01% - 6.00%                   |  |      |   |  |         | 94,548  |   | 34.97  |   |      |      |   |         |   | 79,943  |  | 32.18  |  
|6.01% - 7.00%                   |  |      |   |  |         | 26      |   | 0.01   |   |      |      |   |         |   | 25      |  | 0.01   |  
|                                |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|Total time deposits             |  | 4.67 |   |  |         | 161,595 |   | 59.76  |   |      | 4.47 |   |         |   | 150,102 |  | 60.42  |  
|                                |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  
|Total deposit accounts          |  | 3.78 | % |  | $       | 270,399 |   | 100.00 | % |      | 3.56 | % |         | $ | 248,440 |  | 100.00 | %
|                                |  |      |   |  |         |         |   |        |   |      |      |   |         |   |         |  |        |  

As of December 31, 2007 and 2006, total deposit accounts include approximately $2.1 million
and $2.0 million, respectively, of deposits from the Corporations officers, directors, employees or parties related to them.



52



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6. Deposit Accounts (continued)



At December 31, 2007 and 2006, deposit accounts with balances of $100,000 and over totaled
approximately $63.2 million and $52.5 million, respectively.

Time deposits by maturity were as follows (in thousands):



|                           |  |                    |         |      |   |        
|-------------------------- |  | ------------------ | ------- | ---- | - | -------
|                           |  | As of December 31,
|                           |  | 2007               |         | 2006
|Maturity Date              |  |                    |         |      |   |        
|Within 1 year              |  | $                  | 134,839 |      | $ | 112,147
|After 1 but within 2 years |  |                    | 23,287  |      |   | 33,226 
|After 2 but within 3 years |  |                    | 2,001   |      |   | 1,948  
|After 3 but within 4 years |  |                    | 1,367   |      |   | 1,354  
|Thereafter                 |  |                    | 101     |      |   | 1,427  
|                           |  |                    |         |      |   |        
|Total time deposits        |  | $                  | 161,595 |      | $ | 150,102
|                           |  |                    |         |      |   |        

Interest expense on deposits consisted of the following (in thousands):



|                                               |  |                          |       |   |      |   |       |  
|---------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                                               |  | Years Ended December 31, |      
|                                               |  | 2007                     |       |   | 2006 |  
|Account Type                                   |  |                          |       |   |      |   |       |  
|NOW accounts and money market deposit accounts |  | $                        | 2,426 |   |      | $ | 2,338 |  
|Passbook and statement savings Accounts        |  |                          | 111   |   |      |   | 106   |  
|Certificate accounts                           |  |                          | 7,332 |   |      |   | 5,311 |  
|Early withdrawal penalties                     |  |                          | (37   | ) |      |   | (19   | )
|                                               |  |                          |       |   |      |   |       |  
|Total                                          |  | $                        | 9,832 |   |      | $ | 7,736 |  
|                                               |  |                          |       |   |      |   |       |  

7. Advances from The Federal Home Loan Bank

At December 31, 2007 and 2006, the Bank had $69.5 million and $70.0 million, respectively, of advances outstanding from the FHLB. The maturity of the
advances from the FHLB is as follows (in thousands):



|                                                    |  |                    |        |                      |      |   |      |   |                      |  |      |  
|--------------------------------------------------- |  | ------------------ | ------ | -------------------- | ---- | - | ---- | - | -------------------- |  | ---- | -
|                                                    |  | As of December 31, |       
|                                                    |  | 2007               |        | WeightedAverage Rate |      |   | 2006 |   | WeightedAverage Rate | 
|Contractual Maturity:                               |  |                    |        |                      |      |   |      |   |                      |  |      |  
|Within one year  fixed rate                        |  | $                  |       |                      |     | % |      | $ | 21,500               |  | 5.18 | %
|Within one year  adjustable rate                   |  |                    | 5,000  |                      | 4.88 |   |      |   | 15,000               |  | 5.36 |  
|After one but within three years  fixed rate       |  |                    | 5,000  |                      | 4.93 |   |      |   |                     |  |     |  
|After one but within three years  adjustable rate  |  |                    | 7,500  |                      | 5.30 |   |      |   | 12,500               |  | 5.33 |  
|After three but within five years  adjustable rate |  |                    | 28,000 |                      | 4.61 |   |      |   |                     |  |     |  
|Greater than five years  adjustable rate           |  |                    | 24,000 |                      | 4.10 |   |      |   | 21,000               |  | 4.33 |  
|                                                    |  |                    |        |                      |      |   |      |   |                      |  |      |  
|Total advances                                      |  | $                  | 69,500 |                      | 4.55 | % |      | $ | 70,000               |  | 5.00 | %
|                                                    |  |                    |        |                      |      |   |      |   |                      |  |      |  

The Bank pledges as collateral to the advances their FHLB stock, investment securities and has
entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying loans (as defined) with unpaid principal balances equal to, when discounted at 50% to 80% of the unpaid principal balances,
100% of total advances. The amount of qualifying loans was $38.5 million and $41.5 million, respectively, at December 31, 2007 and 2006.

8.
Securities Sold Under Agreements to Repurchase

The Company had $24,131,000 and $28,533,000 borrowed under agreements to repurchase at
December 31, 2007 and 2006, respectively. The amortized cost of the securities underlying the agreements to repurchase at December 31, 2007 was $32,390,000 and $33,174,000 at December 31, 2006. The maximum amount outstanding at any
month end during 2007 was $39,175,000 and $35,506,000 for 2006. The average amount of outstanding agreements for 2007 was $28,124,000 and $33,386,000 for 2006 and the approximate weighted average interest rate was 5.30% in 2007 and 4.52% in 2006.



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9. Floating Rate Junior Subordinated Deferrable Interest Debentures

On July 18, 2006, the Corporation sponsored the creation of Provident Community Bancshares Capital Trust I (Capital Trust I). The
Corporation is the owner of all of the common securities of Capital Trust I. On July 21, 2006, Capital Trust I issued $4,000,000 in the form of floating/fixed rate capital securities through a pooled trust preferred securities offering. The
proceeds from this issuance, along with the Corporations $124,000 capital contribution for Capital Trust Is common securities, were used to acquire $4,124,000 aggregate principal amount of the Corporations floating rate junior
subordinated deferrable interest debentures due October 1, 2036 (the Debentures), which constitute the sole asset of Capital Trust I. The interest rate on the Debentures and the capital securities will be equal to 7.393% for the
first five years. Thereafter, the interest rate is variable and adjustable quarterly at 1.74% over the three-month LIBOR. The Corporation has, through the Trust Agreement establishing Capital Trust I, the Guarantee Agreement, the notes and the
related Debenture, taken together, fully irrevocably and unconditionally guaranteed all of the Capital Trust I obligations under the capital securities. The stated maturity of the Debentures is October 1, 2036. In addition, the Debentures are
subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after October 1, 2011. The Debentures are also subject to redemption prior to October 1,
2011 at up to 103.7% of par after the occurrence of certain events that would either have a negative tax effect on Capital Trust I or the Corporation or would result in Capital Trust I being treated as an investment company that is required to be
registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, Capital Trust I will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust
preferred securities and trust common securities. The Corporation has the right, at one or more times, to defer interest payments on the Debentures for up to twenty consecutive quarterly periods. All deferrals will end on an interest payment date
and will not extend beyond October 1, 2036, the stated maturity date of the Debentures. If the Corporation defers interest payments on the Debentures, Capital Trust I will also defer distributions on the capital securities. During any deferral
period, each installment of interest that would otherwise have been due and payable will bear additional interest at the applicable distribution rate, compounded quarterly. The Corporation paid $305,000 in interest for the year ended
December 31, 2007 for the Capital Trust I debentures.

On November 28, 2006, the Corporation sponsored the creation of Provident
Community Bancshares Capital Trust (Capital Trust II). The Corporation is the owner of all of the common securities of the Trust. On December 15, 2006, the Trust issued $8,000,000 in the form of floating rate capital securities
through a pooled trust preferred securities offering. The proceeds of Capital Trust II were utilized for the redemption of Union Financial Bancshares Statutory Trust (the Trust) issued on December 18, 2001. The proceeds from this
issuance, along with the Corporations $247,000 capital contribution for the Trusts common securities, were used to acquire $8,247,000 aggregate principal amount of the Corporations floating rate junior subordinated deferrable
interest debentures due March 1, 2037 (the Debentures), which constitute the sole asset of the Trust. The interest rate on the Debentures and the capital securities is variable and adjustable quarterly at 1.74% over the three-month
LIBOR, with an initial rate of 7.11%. The Corporation has, through the Trust agreement establishing the Trust, the Guarantee Agreement, the notes and the related Debenture, taken together, fully irrevocably and unconditionally guaranteed all of the
Trusts obligations under the capital securities. The stated maturity of the Debentures is March 1, 2037. In addition, the Debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval,
in whole or in part on any interest payment date after March 1, 2012. The Debentures are also subject to redemption prior to March 1, 2012 at 103.5% of par after the occurrence of certain events that would either have a negative tax effect
on the Trust or the Corporation or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following
their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities. The Corporation has the right, at one or more times, to defer interest payments
on the Debentures for up to twenty consecutive quarterly periods. All deferrals will end on an interest payment date and will not extend beyond March 1, 2037, the stated maturity date of the Debentures. If the Corporation defers interest
payments on the Debentures, the Trust will also defer distributions on the capital securities. During any deferral period, each installment of interest that would otherwise have been due and payable will bear additional interest at the applicable
distribution rate, compounded quarterly. The Corporation paid $592,000 in interest the Capital Trust II in 2007.



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9. Floating Rate Junior Subordinated Deferrable Interest Debentures (continued)



On December 18, 2001, a trust created by the Corporation issued $8,000,000 in the form of
floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporations $247,000 capital contribution for the Trusts common securities, were used to acquire
$8,247,000 aggregate principal amount of the Corporations floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the Debentures), which constituted the sole asset of the Trust. The interest rate on the
Debentures and the capital securities was variable and adjustable quarterly at 3.60% over the three-month LIBOR. The Corporation paid $703,000 in interest on the Trust in 2006. On December 18, 2006, the Trust was redeemed with the proceeds from
Capital Trust II.

10. Income Taxes

Income tax expense is summarized as follows (in thousands):



|                         |  |                          |       |   |      |   |    
|------------------------ |  | ------------------------ | ----- | - | ---- | - | ---
|                         |  | Years Ended December 31,
|                         |  | 2007                     |       |   | 2006
|Current                  |  | $                        | 1,151 |   |      | $ | 734
|Deferred                 |  |                          | (617  | ) |      |   | 215
|                         |  |                          |       |   |      |   |    
|Total income tax expense |  | $                        | 534   |   |      | $ | 949
|                         |  |                          |       |   |      |   |    

The provision for income taxes differed from amounts computed by applying the statutory federal
rate of 34% to income before income taxes as follows (in thousands):



|                                           |  |                          |      |   |      |   |       |  
|------------------------------------------ |  | ------------------------ | ---- | - | ---- | - | ----- | -
|                                           |  | Years Ended December 31, |     
|                                           |  | 2007                     |      |   | 2006 |  
|Tax and federal income tax rate            |  | $                        | 926  |   |      | $ | 1,276 |  
|Increase (decrease) resulting from:        |  |                          |      |   |      |   |       |  
|State income taxes, net of federal benefit |  |                          | 95   |   |      |   | 114   |  
|Interest on municipal bonds                |  |                          | (205 | ) |      |   | (250  | )
|Non-taxable life insurance income          |  |                          | (123 | ) |      |   | (71   | )
|Other, net                                 |  |                          | (159 | ) |      |   | (120  | )
|                                           |  |                          |      |   |      |   |       |  
|Total                                      |  | $                        | 534  |   |      | $ | 949   |  
|                                           |  |                          |      |   |      |   |       |  

The Corporation had analyzed the tax positions taken or expected to be taken in its tax returns
and concluded it has no liability related to uncertain tax positions in accordance with FIN 48.



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##### Table of Contents

10. Income Taxes (continued)



The tax effects of significant items comprising the Corporations deferred taxes as of
December 31, 2007 and 2006 are as follows (in thousands):



|                                                             |  |              |       |      |   |      
|------------------------------------------------------------ |  | ------------ | ----- | ---- | - | -----
|                                                             |  | December 31,
|                                                             |  | 2007         |       | 2006
|Deferred tax assets:                                         |  |              |       |      |   |      
|Book reserves in excess of tax basis bad debt reserves       |  | $            | 1,137 |      | $ | 936  
|Deferred compensation                                        |  |              | 385   |      |   | 291  
|SFAS No. 115 mark-to-market adjustment                       |  |              |      |      |   | 319  
|Deferred loan fees                                           |  |              | 10    |      |   |     
|Other real estate owned                                      |  |              | 154   |      |   |     
|Core deposit intangible                                      |  |              | 65    |      |   |     
|Other                                                        |  |              | 50    |      |   | 41   
|                                                             |  |              |       |      |   |      
|Total deferred tax asset                                     |  |              | 1,801 |      |   | 1,587
|                                                             |  |              |       |      |   |      
|Deferred tax liabilities:                                    |  |              |       |      |   |      
|Difference between book and tax property basis               |  |              | 84    |      |   | 132  
|Difference between book and tax Federal Home Loan Bank stock |  |              | 85    |      |   | 85   
|Deferred loan fees                                           |  |              |      |      |   | 26   
|Core deposit intangible                                      |  |              |      |      |   | 23   
|SFAS No. 115 mark-to-market adjustment                       |  |              | 100   |      |   |     
|Prepaid expenses                                             |  |              | 81    |      |   | 68   
|                                                             |  |              |       |      |   |      
|Total deferred tax liability                                 |  |              | 350   |      |   | 334  
|                                                             |  |              |       |      |   |      
|Net deferred tax asset                                       |  | $            | 1,451 |      | $ | 1,253
|                                                             |  |              |       |      |   |      

The deferred tax assets of $1,451,000 and $1,253,000 at December 31, 2007 and 2006 are
included in other assets in the balance sheet.

Retained earnings at December 31, 2007 includes approximately $1,636,000 representing
pre-1988 tax bad debt base year reserve amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse until indefinite future periods and may never reverse. Circumstances that would require an
accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, dividend payments in excess of current year or accumulated tax earnings and profits, or other distributions in
dissolutions, liquidations or redemption of the Banks stock.

11. Employee Benefits

The Corporation has a contributory profit-sharing plan which is available to all eligible employees. Annual employer contributions to the plan consist of
an amount which matches participant contributions up to a maximum of 5% of a participants compensation and a discretionary amount determined annually by the Corporations Board of Directors. The annual contributions to the plan will be 5%
of a participants compensation. Employer expensed contributions to the plans were $287,000 and $240,000 for the years ended December 31, 2007 and 2006.

12. Financial Instruments

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments are commitments to extend credit. They involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvements the Corporation has in particular classes of financial instruments.

The Corporation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 Corporation uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.



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12. Financial Instruments (continued)



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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Corporation upon
extension of credit, is based on managements credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial properties.

The Corporation had loan commitments as follows (in thousands):



|                                                                                                 |  |                    |        |      |   |       
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---- | - | ------
|                                                                                                 |  | As of December 31,
|                                                                                                 |  | 2007               |        | 2006
|Fixed/variable interest rate commitments to fund residential credit                              |  | $                  | 1,906  |      | $ | 2,013 
|Commitments to fund commercial and construction loans                                            |  |                    | 2,379  |      |   | 2,238 
|Unused portion of credit lines (principally variable-rate consumer lines secured by real estate) |  |                    | 54,650 |      |   | 41,852
|                                                                                                 |  |                    |        |      |   |       
|Total                                                                                            |  | $                  | 58,935 |      | $ | 46,103
|                                                                                                 |  |                    |        |      |   |       

The Corporation has no additional financial instruments with off-balance sheet risk.

The Corporation did not incur any losses on its commitments in the years ended December 31, 2007 and 2006.

The estimated fair values of the Corporations financial instruments were as follows at December 31, 2007 (in thousands):



|                                                                 |  |                   |         |   |           |   |         |  
|---------------------------------------------------------------- |  | ----------------- | ------- | - | --------- | - | ------- | -
|                                                                 |  | December 31, 2007 |        
|                                                                 |  | CarryingAmount    |         |   | FairValue |  
|Financial assets                                                 |  |                   |         |   |           |   |         |  
|Cash and due from banks                                          |  | $                 | 11,890  |   |           | $ | 11,890  |  
|Securities available for sale                                    |  |                   | 108,061 |   |           |   | 108,061 |  
|Securities held to maturity                                      |  |                   | 3,126   |   |           |   | 3,135   |  
|Federal Home Loan Bank stock, at cost                            |  |                   | 3,826   |   |           |   | 3,826   |  
|Federal Reserve Bank stock, at cost                              |  |                   | 599     |   |           |   | 599     |  
|Loans, net                                                       |  |                   | 256,487 |   |           |   | 261,763 |  
|Accrued interest receivable                                      |  |                   | 2,625   |   |           |   | 2,625   |  
|Cash surrender value of life insurance                           |  |                   | 9,175   |   |           |   | 9,175   |  
|                                                                 |  |                  
|Financial liabilities                                            |  |                   |         |   |           |   |         |  
|Deposits                                                         |  | $                 | 270,399 |   |           | $ | 276,947 |  
|Advances from FHLB and other borrowings                          |  |                   | 69,500  |   |           |   | 68,649  |  
|Securities sold under agreement to repurchase                    |  |                   | 24,131  |   |           |   | 24,402  |  
|Floating rate junior subordinated deferrable interest debentures |  |                   | 12,372  |   |           |   | 12,281  |  
|Accrued interest payable                                         |  |                   | 742     |   |           |   | 742     |  
|                                                                 |  |                  
|Off-balance-sheet assets (liabilities)                           |  |                   |         |   |           |   |         |  
|Commitments to extend credit                                     |  | $                 | (58,935 | ) |           | $ | (58,935 | )



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12. Financial Instruments (continued)



The estimated fair values of the Corporations financial instruments were as follows at
December 31, 2006 (in thousands):



|                                                                 |  |                   |         |   |           |   |         |  
|---------------------------------------------------------------- |  | ----------------- | ------- | - | --------- | - | ------- | -
|                                                                 |  | December 31, 2006 |        
|                                                                 |  | CarryingAmount    |         |   | FairValue |  
|Financial assets                                                 |  |                   |         |   |           |   |         |  
|Cash and due from banks                                          |  | $                 | 9,124   |   |           | $ | 9,124   |  
|Securities available for sale                                    |  |                   | 119,003 |   |           |   | 119,003 |  
|Securities held to maturity                                      |  |                   | 3,182   |   |           |   | 3,239   |  
|Federal Home Loan Bank stock, at cost                            |  |                   | 3,983   |   |           |   | 3,983   |  
|Federal Reserve Bank stock, at cost                              |  |                   | 539     |   |           |   | 539     |  
|Loans, net                                                       |  |                   | 231,886 |   |           |   | 232,949 |  
|Accrued interest receivable                                      |  |                   | 2,717   |   |           |   | 2,717   |  
|Cash surrender value of life insurance                           |  |                   | 5,613   |   |           |   | 5,613   |  
|                                                                 |  |                  
|Financial liabilities                                            |  |                   |         |   |           |   |         |  
|Deposits                                                         |  | $                 | 248,440 |   |           | $ | 247,091 |  
|Advances from FHLB and other borrowings                          |  |                   | 70,000  |   |           |   | 70,514  |  
|Securities sold under agreement to repurchase                    |  |                   | 28,533  |   |           |   | 28,025  |  
|Floating rate junior subordinated deferrable interest debentures |  |                   | 12,372  |   |           |   | 12,641  |  
|Accrued interest payable                                         |  |                   | 784     |   |           |   | 784     |  
|                                                                 |  |                  
|Off-balance-sheet assets (liabilities)                           |  |                   |         |   |           |   |         |  
|Commitments to extend credit                                     |  | $                 | (46,103 | ) |           | $ | (46,103 | )

13. Supplemental Cash Flow Disclosures



|                                                        |  |                          |        |      |   |        |  
|------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                                                        |  | Years Ended December 31, |       
|                                                        |  | 2007                     |        | 2006 |  
|Cash paid for:                                          |  |                          |        |      |   |        |  
|Income taxes                                            |  | $                        | 1,407  |      | $ | 1,076  |  
|Interest                                                |  |                          | 15,172 |      |   | 12,703 |  
|Non-cash transactions:                                  |  |                          |        |      |   |        |  
|Loans foreclosed                                        |  |                          | 856    |      |   | 283    |  
|Unrealized gain (loss) on securities available for sale |  | $                        | 293    |      | $ | (939   | )

14. Commitments and Contingencies

Lease commitments - The Corporation leases certain Bank facilities under rental agreements that have expiration dates between 2018 and 2025. Future
minimum rental payments due under these leases are as follows:



|            |  |   |          
|----------- |  | - | ---------
|Years Ended |  |  
|2008        |  | $ | 446,112  
|2009        |  |   | 446,112  
|2010        |  |   | 446,112  
|2011        |  |   | 446,112  
|Thereafter  |  | $ | 3,615,120

Total rent expense for the years ended December 31, 2007 and 2006 was $448,000 and $334,000,
respectively.

Lines of credit - At December 31, 2007, the Corporation had unused short-term lines of credit to purchase
federal funds from unrelated banks totaling $30.0 million and the ability to borrow an additional $40.0 million from 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.

Concentrations of Credit Risk - Financial
instruments, which potentially subject the Corporation to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amount due from banks.



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14. Commitments and Contingencies (continued)



The Corporation makes loans to individuals and small businesses for various personal and commercial
purposes primarily in the Piedmont region of South Carolina and North Carolina. The Corporations loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not
aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions. Management has identified a concentration of a type of lending that it is monitoring. This concentration of
commercial non-mortgage loans totaled $104.2 million at December 31, 2007 representing 385% of total equity and 41% of loans receivable. At December 31, 2006 this concentration totaled $93.6 million representing 361% of total equity and
40% of net loans receivable. Commercial loans are of higher risk and typically are made on the basis of the borrowers ability to make repayment from the cash flow of the borrowers business and are generally secured by a variety of
collateral types, primarily accounts receivable, inventory and equipment.

In addition to monitoring potential concentrations of loans to
particular borrowers or groups of borrowers, industries, geographic regions and loan types, management monitors exposure to credit risk from other lending practices such as loans that subject borrowers to substantial payment increases (e.g.
principal deferral periods, loans with initial interest-only periods, etc.) and loans with high loan-to-value ratios. Management has determined that the Corporation has a concentration of loans that exceed one of the regulatory guidelines for
loan-to-value ratios. This particular guideline states that the total amount by which commercial, agricultural, and multifamily and other non-residential properties exceed the regulatory maximum loan-to-value ratio limits should not exceed 30% of a
banks total risk-based capital. The excess over regulatory guidelines for these types of loans totaled $16.1 million at December 31, 2007 representing 41.2% of the Banks total risk-based capital. These amounts exceeded regulatory
guidelines by $4.4 million and 11.2%, respectively.

Additionally, there are industry practices that could subject the Corporation to
increased credit risk should economic conditions change over the course of a loans life. For example, the Corporation makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e.
balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Corporation to unusual credit risk.

The Corporations investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general
obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio.

The
Corporation places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Litigation - The Corporation is involved in legal actions in the normal course of business. In the opinion of management, based on the advice of
its general counsel, the resolution of these matters will not have a material adverse impact on future results of operations or the financial position of the Corporation.

Potential Impact of Changes in Interest Rates - The Corporations profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and
investments and interest expense on deposits and borrowings. Like most financial institutions, the Corporations interest income and interest expense are significantly affected by changes in market interest rates and other economic factors
beyond its control. Management seeks to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations.



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15. Stock Option Plans

At December 31, 2007, the Corporation had the following stock options outstanding.



|                     |  |               |  |                               |       |                          |   |                 |  |                          |  |               
|-------------------- |  | ------------- |  | ----------------------------- | ----- | ------------------------ | - | --------------- |  | ------------------------ |  | --------------
|Grant Date           |  | SharesGranted |  | AverageExercisePrice PerShare |       | AverageIntrinsicValue(1) |   | Expiration Date |  | Earliest DateExercisable
|May, 1998            |  | 11,918        |  | $                             | 15.83 |                          | $ | 61,616          |  | May, 2008                |  | May, 1998     
|October, 2000        |  | 1,700         |  |                               | 8.75  |                          |   | 20,825          |  | October, 2010            |  | October, 2000 
|January, 2001        |  | 16,090        |  |                               | 9.06  |                          |   | 192,115         |  | January, 2011            |  | January, 2001 
|January, 2002        |  | 14,985        |  |                               | 10.36 |                          |   | 159,440         |  | January 2012             |  | January, 2002 
|April, 2002          |  | 750           |  |                               | 13.00 |                          |   | 6,000           |  | April, 2012              |  | April, 2002   
|November, 2002       |  | 1,000         |  |                               | 13.25 |                          |   | 7,750           |  | November, 2012           |  | November, 2002
|December, 2003       |  | 40,000        |  |                               | 16.75 |                          |   | 170,000         |  | December, 2013           |  | December, 2003
|January, 2005        |  | 1,000         |  |                               | 16.60 |                          |   | 4,400           |  | January, 2015            |  | January, 2005 
|March, 2005          |  | 23,250        |  |                               | 17.26 |                          |   | 86,955          |  | March, 2015              |  | March, 2005   
|                     |  |               |  |                               |       |                          |   |                 |  |                          |  |               
|Total shares granted |  | 110,693       |  |                               |       |                          | $ | 709,101         |  |                          |  |               
|                     |  |               |  |                               |       |                          |   |                 |  |                          |  |               



|(1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. This amount changes based on changes in the market value of the
Corporations stock.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At December 31, 2007, the Corporation had the following options exercisable:



|            |  |                        |             |                                           |           |                           |         |                      |   |      
|----------- |  | ---------------------- | ----------- | ----------------------------------------- | --------- | ------------------------- | ------- | -------------------- | - | -----
|Fiscal Year |  | Range ofexercise price |             | Weighted AverageRemainingContractual Life |           | Number OptionsExercisable |         | AverageExercisePrice
|1998        |  | $                      | 15.83       |                                           | 2.3 years |                           | 11,918  |                      | $ | 15.83
|2000        |  |                        | 8.75        |                                           | 2.8 years |                           | 1,700   |                      |   | 8.75 
|2001        |  |                        | 9.06        |                                           | 4 years   |                           | 16,090  |                      |   | 9.06 
|2002        |  |                        | 10.36-13.25 |                                           | 4.6 years |                           | 16,735  |                      |   | 10.96
|2003        |  |                        | 16.75       |                                           | 6 years   |                           | 40,000  |                      |   | 16.75
|2005        |  |                        | 16.60       |                                           | 7 years   |                           | 1,000   |                      |   | 16.60
|2005        |  |                        | 17.26       |                                           | 6.9 years |                           | 23,250  |                      |   | 17.26
|            |  |                        |             |                                           |           |                           |         |                      |   |      
|            |  | $                      | 8.75-$17.26 |                                           | 4.8 years |                           | 110,693 |                      | $ | 14.59
|            |  |                        |             |                                           |           |                           |         |                      |   |      

Options for the two previous fiscal years were forfeited and exercised as follows:



|                                 |  |              |   |  |                         |      
|-------------------------------- |  | ------------ | - |  | ----------------------- | -----
|                                 |  | Stockoptions |   |  | Weightedaverageexercise
|Outstanding at December 31, 2005 |  | 138,263      |   |  | $                       | 14.40
|                                 |  |              |   |  |                         |      
|Granted                          |  |             |   |  |                         |     
|Forfeited                        |  | (750         | ) |  |                         | 14.62
|Exercised                        |  | (5,833       | ) |  |                         | 9.75 
|                                 |  |              |   |  |                         |      
|Outstanding at December 31, 2006 |  | 131,680      |   |  | $                       | 14.60
|                                 |  |              |   |  |                         |      
|Granted                          |  |             |   |  |                         |     
|Forfeited                        |  | (2,500       | ) |  |                         | 16.95
|Exercised                        |  | (18,487      | ) |  |                         | 14.36
|                                 |  |              |   |  |                         |      
|Outstanding at December 31, 2007 |  | 110,693      |   |  | $                       | 14.59
|                                 |  |              |   |  |                         |      

The intrinsic value of options exercised for the years ended December 31, 2007 and 2006 was $122,872 and
$49,473.



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16. Liquidation Account, Dividend Restrictions and Regulatory Matters

On August 7, 1987, the Bank completed its conversion from a federally chartered mutual savings and loan association to a federally chartered stock
savings and loan association. A special liquidation account was established by the Bank for the pre-conversion retained earnings of approximately $3,718,000. The liquidation account is maintained for the benefit of depositors who held a savings or
demand account as of the March 31, 1986 eligibility or the June 30, 1987 supplemental eligibility record dates who continue to maintain their deposits at the Bank after the conversion. In the event of a future liquidation (and only in such
an event), each eligible and supplemental eligible account holder who continues to maintain his or her deposit account will be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account will be
decreased in an amount proportionately corresponding to decreases in the deposit account balances of eligible and supplemental eligible account holders on each subsequent annual determination date. Except for payment of dividends by the Bank to
Provident Community Bancshares and repurchase of the Banks stock, the existence of the liquidation account will not restrict the use or application of such net worth.

The Bank is prohibited from declaring cash dividends on its common stock or repurchasing its common stock if the effect thereof would cause its net worth
to be reduced below either the amount required for the liquidation account or the minimum regulatory capital requirement. In addition, the Bank is also prohibited from declaring cash dividends and repurchasing its own stock without prior regulatory
approval if the total amount of all dividends and stock repurchases (including any proposed dividends and stock repurchases) for the applicable calendar year exceeds its current years net income plus its retained net income for the preceding
two years. Under current OCC regulations the Bank is limited in the amount it may loan to affiliates, including the Corporation. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of bank
capital and surplus.

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 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 classification are also
subject to qualitative judgments by the regulators about components, risk weightings 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 December 31, 2006, that the Bank and the Corporation meet the capital adequacy requirements to which they are subject.

As of December 31, 2007 and 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. There are no conditions or events since December 31, 2007 that management believes have
changed the banks classification.

Under present regulations of the OCC, 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.



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16. Liquidation Account, Dividend Restrictions and Regulatory Matters (continued)



The following tables present the total risk-based, Tier 1 risk-based and Tier 1 leverage requirements for the
Corporation and the Bank (in thousands).



|                               |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|------------------------------ |  | ----------------- | ------ | ----- | ------------------ | - | ------ | ------------------ | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                               |  | December 31, 2007 |       
|                               |  | Actual            |        |       | Regulatory Minimum |   |        | Well Capitalized |       
|                               |  | Amount            |        | Ratio |                    |   | Amount |                    | Ratio  |  |      | Amount |  | Ratio |       
|Leverage ratio                 |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|Corporation                    |  | $                 | 32,867 |       | 8.27               | % |        | $                  | 15,892 |  | 4.00 | %      |  | $     | n/a    |  | n/a   | %
|Bank                           |  |                   | 35,831 |       | 8.78               |   |        |                    | 16,333 |  | 4.00 |        |  |       | 20,416 |  | 5.00  |  
|Tier 1 capital ratio           |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|Corporation                    |  |                   | 32,867 |       | 10.97              |   |        |                    | 11,986 |  | 4.00 |        |  |       | n/a    |  | n/a   |  
|Bank                           |  |                   | 35,831 |       | 11.97              |   |        |                    | 11,972 |  | 4.00 |        |  |       | 17,958 |  | 6.00  |  
|Total risk-based capital ratio |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|Corporation                    |  |                   | 39,204 |       | 13.08              |   |        |                    | 23,973 |  | 8.00 |        |  |       | n/a    |  | n/a   |  
|Bank                           |  |                   | 39,175 |       | 13.09              |   |        |                    | 23,944 |  | 8.00 |        |  |       | 29,930 |  | 10.00 |  



|                               |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|------------------------------ |  | ----------------- | ------ | ----- | ------------------ | - | ------ | ------------------ | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                               |  | December 31, 2006 |       
|                               |  | Actual            |        |       | Regulatory Minimum |   |        | Well Capitalized |       
|                               |  | Amount            |        | Ratio |                    |   | Amount |                    | Ratio  |  |      | Amount |  | Ratio |       
|Leverage ratio                 |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|Corporation                    |  | $                 | 31,805 |       | 8.59               | % |        | $                  | 14,814 |  | 4.00 | %      |  | $     | n/a    |  | n/a   | %
|Bank                           |  |                   | 34,143 |       | 9.06               |   |        |                    | 15,068 |  | 4.00 |        |  |       | 18,835 |  | 5.00  |  
|Tier 1 capital ratio           |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|Corporation                    |  |                   | 31,805 |       | 11.96              |   |        |                    | 10,448 |  | 4.00 |        |  |       | n/a    |  | n/a   |  
|Bank                           |  |                   | 34,143 |       | 12.85              |   |        |                    | 10,627 |  | 4.00 |        |  |       | 15,941 |  | 6.00  |  
|Total risk-based capital ratio |  |                   |        |       |                    |   |        |                    |        |  |      |        |  |       |        |  |       |  
|Corporation                    |  |                   | 37,590 |       | 14.13              |   |        |                    | 20,895 |  | 8.00 |        |  |       | n/a    |  | n/a   |  
|Bank                           |  |                   | 36,897 |       | 13.89              |   |        |                    | 21,254 |  | 8.00 |        |  |       | 26,568 |  | 10.00 |  

Under current Federal Reserve guidelines, the Corporation includes trust preferred securities in
Tier 1 capital.

The Bank is required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against its
deposit liabilities. The amounts of such reserves totaled $1,360,000 at December 31, 2007 and $1,700,000 at December 31, 2006.

17. Recently
Issued Accounting Standards

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

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard eliminates
inconsistencies found in various prior pronouncements but does not require any new fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and will not impact the Companys accounting measurements but it is
expected to result in additional disclosures.

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). Entities purchase
life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common types of life insurance arrangements are endorsement split dollar life and collateral assignment split
dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below) covers the latter. EITF 06-4 states that entities with endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to



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17. Recently Issued Accounting Standards (continued)



postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967 (if the arrangement is, in
substance, an individual deferred compensation contract). 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. EITF 06-4 is effective for the
Company on January 1, 2008. The Company does not believe the adoption of EITF 06-4 will have a material impact on its financial position, results of operations or cash flows.

In September 2006, the FASB ratified the consensus reached on EITF 06-5, Accounting for Purchases of Life InsuranceDetermining the Amount
That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-5). EITF 06-5 states that a policyholder should consider any additional amounts included in
the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be
realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for the Company on January 1, 2008. The Company
does not believe the adoption of EITF 06-5 will have a material impact on its financial position, results of operations or cash flows.

In
March 2007, the FASB ratified the consensus reached on EITF 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements (EITF 06-10). The postretirement aspect of this EITF is substantially similar to
EITF 06-4 discussed above and requires that an employer recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either FASB Statement No. 106 or APB
Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employees retirement or provide the employee with a death benefit based on the substantive agreement with the employee. In addition,
a consensus was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. EITF 06-10 is effective for the Company on January 1, 2008.
The Company does not believe the adoption of EITF 06-10 will have a material impact on its financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115 (SFAS 159). This statement
permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current
earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is
demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the
fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading
securities. SFAS 159 is effective for the Company on January 1, 2008. The Company is currently analyzing the fair value option that is permitted, but not required, under SFAS 159.

In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, Written Loan Commitments
Recorded at Fair Value Through Earnings (SAB 109). SAB 109 expresses the current view of the SEC staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of
all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply this guidance on a prospective basis to derivative loan commitments issued or modified in the first quarter of 2008 and
thereafter. The Company is currently analyzing the impact of this guidance, which relates to the Companys mortgage loans held for sale.



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17. Recently Issued Accounting Standards (continued)



In December 2007, the FASB issued SFAS No. 141(R), Business Combinations,
(SFAS 141(R)) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is
required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB
No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for
reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financials statements and separate from the parents equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on
January 1, 2009. Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on
the Companys financial position, results of operations or cash flows.



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18. Provident Community Bancshares, Inc. Financial Information

(Parent Corporation Only)

Condensed
financial information for Provident Community Bancshares is presented as follows (in thousands):



|                                                                 |  |                    |        |      |   |       
|---------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------
|                                                                 |  | As of December 31,
|                                                                 |  | 2007               |        | 2006
|Condensed Balance Sheets                                         |  |                    |        |      |   |       
|Assets:                                                          |  |                    |        |      |   |       
|Cash and due from banks                                          |  | $                  | 136    |      | $ | 792   
|Investment in subsidiary                                         |  |                    | 39,283 |      |   | 37,273
|Other                                                            |  |                    | 384    |      |   | 379   
|                                                                 |  |                    |        |      |   |       
|Total assets                                                     |  | $                  | 39,803 |      | $ | 38,444
|                                                                 |  |                    |        |      |   |       
|Liabilities and Shareholders Equity:                            |  |                    |        |      |   |       
|Accrued interest payable                                         |  | $                  | 118    |      | $ | 105   
|Floating rate junior subordinated deferrable interest debentures |  |                    | 12,372 |      |   | 12,372
|Shareholders equity                                             |  |                    | 27,313 |      |   | 25,967
|                                                                 |  |                    |        |      |   |       
|Total liabilities and shareholders equity                       |  | $                  | 39,803 |      | $ | 38,444
|                                                                 |  |                    |        |      |   |       



|                                                                              |  |                          |        |   |      |   |        |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                              |  | Years Ended December 31, |       
|                                                                              |  | 2007                     |        |   | 2006 |  
|Condensed Statements of Income                                                |  |                          |        |   |      |   |        |  
|Equity in undistributed earnings of subsidiary                                |  | $                        | 3,209  |   |      | $ | 3,843  |  
|Interest expense                                                              |  |                          | (897   | ) |      |   | (863   | )
|Other expense, net                                                            |  |                          | (122   | ) |      |   | (177   | )
|                                                                              |  |                          |        |   |      |   |        |  
|Net income                                                                    |  | $                        | 2,190  |   |      | $ | 2,803  |  
|                                                                              |  |                          |        |   |      |   |        |  
|Condensed Statements of Cash Flows                                            |  |                          |        |   |      |   |        |  
|Operating Activities:                                                         |  |                          |        |   |      |   |        |  
|Net income                                                                    |  | $                        | 2,190  |   |      | $ | 2,803  |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                          |        |   |      |   |        |  
|Equity in undistributed earnings of subsidiary                                |  |                          | (3,209 | ) |      |   | (3,843 | )
|Increase in other assets and liabilities, net                                 |  |                          | 8      |   |      |   | 4      |  
|                                                                              |  |                          |        |   |      |   |        |  
|Net cash used in operating activities                                         |  |                          | (1,011 | ) |      |   | (1,036 | )
|                                                                              |  |                          |        |   |      |   |        |  
|Financing Activities:                                                         |  |                          |        |   |      |   |        |  
|Dividends received from subsidiary                                            |  |                          | 2,000  |   |      |   | 1,000  |  
|Capital contribution to subsidiary                                            |  |                          |       |   |      |   | (2,000 | )
|Dividend reinvestment plan contributions                                      |  |                          | 118    |   |      |   | 112    |  
|Dividends paid                                                                |  |                          | (826   | ) |      |   | (807   | )
|Share repurchase program                                                      |  |                          | (1,094 | ) |      |   | (1,524 | )
|Proceeds from the issuance of trust preferred securities                      |  |                          |       |   |      |   | 12,372 |  
|Redemption of trust preferred securities                                      |  |                          |       |   |      |   | (8,247 | )
|Proceeds from the exercise of stock options                                   |  |                          | 157    |   |      |   | 48     |  
|                                                                              |  |                          |        |   |      |   |        |  
|Net cash provided by financing activities                                     |  |                          | 355    |   |      |   | 954    |  
|                                                                              |  |                          |        |   |      |   |        |  
|Net increase (decrease) in cash and due from banks                            |  |                          | (656   | ) |      |   | (82    | )
|Cash and due from banks at beginning of period                                |  |                          | 792    |   |      |   | 874    |  
|                                                                              |  |                          |        |   |      |   |        |  
|Cash and due from banks at end of period                                      |  | $                        | 136    |   |      | $ | 792    |  
|                                                                              |  |                          |        |   |      |   |        |  



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19. Quarterly Financial Data (unaudited)

The tables set forth below summarize selected financial data regarding results of operations for the periods indicated (in thousands, except common share
data).



|                                    |  |                                      |       |               |   |              |  |               |       |  |       |       |   |  |   |       
|----------------------------------- |  | ------------------------------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- |  | ----- | ----- | - |  | - | ------
|                                    |  | For the year ended December 31, 2007
|                                    |  | Firstquarter                         |       | Secondquarter |   | Thirdquarter |  | Fourthquarter |       |  | Total
|Interest income                     |  | $                                    | 6,419 |               | $ | 6,460        |  | $             | 6,575 |  | $     | 6,555 |   |  | $ | 26,009
|Interest expense                    |  |                                      | 3,685 |               |   | 3,712        |  |               | 3,861 |  |       | 3,956 |   |  |   | 15,214
|                                    |  |                                      |       |               |   |              |  |               |       |  |       |       |   |  |   |       
|Net interest income                 |  |                                      | 2,734 |               |   | 2,748        |  |               | 2,714 |  |       | 2,599 |   |  |   | 10,795
|Provision for loan losses           |  |                                      | 160   |               |   | 85           |  |               | 20    |  |       | 801   |   |  |   | 1,066 
|Non-interest income                 |  |                                      | 723   |               |   | 812          |  |               | 782   |  |       | 845   |   |  |   | 3,162 
|Non-interest expense                |  |                                      | 2,439 |               |   | 2,713        |  |               | 2,506 |  |       | 2,509 |   |  |   | 10,167
|Provision for income taxes          |  |                                      | 209   |               |   | 161          |  |               | 243   |  |       | (79   | ) |  |   | 534   
|                                    |  |                                      |       |               |   |              |  |               |       |  |       |       |   |  |   |       
|Net income                          |  |                                      | 649   |               |   | 601          |  |               | 727   |  |       | 213   |   |  |   | 2,190 
|                                    |  |                                      |       |               |   |              |  |               |       |  |       |       |   |  |   |       
|Net income per common shareBasic   |  |                                      | 0.36  |               |   | 0.33         |  |               | 0.40  |  |       | 0.12  |   |  |   | 1.21  
|                                    |  |                                      |       |               |   |              |  |               |       |  |       |       |   |  |   |       
|Net income per common shareDiluted |  |                                      | 0.35  |               |   | 0.32         |  |               | 0.40  |  |       | 0.12  |   |  |   | 1.19  
|                                    |  |                                      |       |               |   |              |  |               |       |  |       |       |   |  |   |       



|                                    |  |                                      |       |               |   |              |  |               |       |       |   |       |  |   |       
|----------------------------------- |  | ------------------------------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- | ----- | - | ----- |  | - | ------
|                                    |  | For the year ended December 31, 2006
|                                    |  | Firstquarter                         |       | Secondquarter |   | Thirdquarter |  | Fourthquarter |       | Total
|Interest income                     |  | $                                    | 5,427 |               | $ | 5,769        |  | $             | 6,018 |       | $ | 6,277 |  | $ | 23,491
|Interest expense                    |  |                                      | 2,773 |               |   | 3,088        |  |               | 3,467 |       |   | 3,639 |  |   | 12,967
|                                    |  |                                      |       |               |   |              |  |               |       |       |   |       |  |   |       
|Net interest income                 |  |                                      | 2,654 |               |   | 2,681        |  |               | 2,551 |       |   | 2,638 |  |   | 10,524
|Provision for loan losses           |  |                                      | 175   |               |   | 135          |  |               | 45    |       |   | 115   |  |   | 470   
|Non-interest income                 |  |                                      | 686   |               |   | 727          |  |               | 720   |       |   | 743   |  |   | 2,876 
|Non-interest expense                |  |                                      | 2,187 |               |   | 2,373        |  |               | 2,294 |       |   | 2,324 |  |   | 9,178 
|Provision for income taxes          |  |                                      | 279   |               |   | 261          |  |               | 281   |       |   | 128   |  |   | 949   
|                                    |  |                                      |       |               |   |              |  |               |       |       |   |       |  |   |       
|Net income                          |  |                                      | 699   |               |   | 639          |  |               | 651   |       |   | 814   |  |   | 2,803 
|                                    |  |                                      |       |               |   |              |  |               |       |       |   |       |  |   |       
|Net income per common shareBasic   |  |                                      | 0.37  |               |   | 0.34         |  |               | 0.35  |       |   | 0.44  |  |   | 1.50  
|                                    |  |                                      |       |               |   |              |  |               |       |       |   |       |  |   |       
|Net income per common shareDiluted |  |                                      | 0.36  |               |   | 0.33         |  |               | 0.35  |       |   | 0.44  |  |   | 1.48  
|                                    |  |                                      |       |               |   |              |  |               |       |       |   |       |  |   |       

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

No
changes in or disagreements with the Corporations independent accountants on accounting and financial disclosure has occurred during the two most recent fiscal years.

Item 9A(T). Controls and Procedures



|(a) | Disclosure Controls and Procedures
|--- | ----------------------------------

The Companys
management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Company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 Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company 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 Companys
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.



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|(b) | Internal Controls Over Financial Reporting
|--- | ------------------------------------------

Managements annual report on internal control over financial reporting is incorporated herein by reference to the Companys audited Consolidated Financial Statements in this Annual Report on Form 10-K.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.



|(c) | Changes to Internal Control Over Financial Reporting
|--- | ----------------------------------------------------

Except as indicated herein, there were no changes in the Companys internal control over financial reporting during the three months ended December 31, 2007 that have materially affected, or are reasonable likely to materially
affect, the Companys internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

For information concerning the Board
of Directors of Provident Community Bancshares, the information contained under the section captioned Proposal I  Election of Directors and Corporate Governance Director Compensation in the Proxy Statement is
incorporated herein by reference. Reference is made to the cover page of this Form 10-K and to the section captioned Compliance with Section 16(a) of the Exchange Act for information regarding compliance with section 16(a) of the
Exchange Act.

For information concerning the Corporations code of ethics, the information contained under the section captioned
Corporate Governance  Code of Ethics and Business Conduct in the Proxy Statement is incorporated herein by reference. A copy of the code of ethics is available, in the Investor Relations Section of our website at
www.providentonline.com.



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Executive Officers of the Registrant

Certain executive officers of the Bank also serve as executive officers of Provident Community Bancshares. The day-to-day management duties of the
executive officers of Provident Community Bancshares and the Bank relate primarily to their duties as to the Bank. The executive officers of Provident Community Bancshares currently are as follows:



|                 |  |        |  |                                                   
|---------------- |  | ------ |  | --------------------------------------------------
|Name             |  | Age(1) |  | Position as of December 31, 2007                  
|Dwight V. Neese  |  | 57     |  | President, Chief Executive Officer and Director   
|Richard H. Flake |  | 59     |  | Executive Vice President - Chief Financial Officer
|Lud W. Vaughn    |  | 57     |  | Executive Vice President - Chief Operating Officer



|(1) | At December 31, 2007.
|--- | ---------------------

Dwight V. Neese was
appointed as President and Chief Executive Officer of the Bank effective September 5, 1995. As President and Chief Executive Officer of the Bank and Provident Community Bancshares, Mr. Neese is responsible for daily operations of the Bank
and implementation of the policies and procedures approved by the board of Directors.

Richard H. Flake joined the Company in
September 1995.

Lud W. Vaughnjoined the Company in April 2003. Prior to joining the Company, Mr. Vaughn was Senior Vice
President for Bank of America in Rock Hill, South Carolina.

Information concerning the audit committee and the audit committee financial
expert and other corporate governance matters is incorporated herein by reference to the section titled Corporate Governance in the Proxy Statement.

Item 11. Executive Compensation

The information contained under the sections captioned
Executive Compensation and Corporate Governance-Director Compensation in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a) Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the
section captioned Stock Ownership in the Proxy Statement.

(b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned Stock Ownership in the Proxy Statement.

(c) Management of Provident Community Bancshares knows of no arrangements, including any pledge by any person of securities of
Provident Community Bancshares, the operation of which may at a subsequent date result in a change in control of the registrant.



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(d) Equity Compensation Plan Information

The following table sets forth information about the Company common stock that may be issued upon the exercise of stock options, warrants and rights under
all of the Companys equity compensation plans as of December 31, 2007.



|                                                           |  |                                                                                                 |  |                                                                                 |  |                                                                                                                                                
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Plan category                                              |  | (a) Number of securities to be issued upon exercise of outstanding options, warrants and
rights |  | (b) Weighted-average exercise price of outstanding options, warrants and
rights |  | (c) Number of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a))
|Equity compensation plans approved by security holders     |  | 110,693                                                                                         |  | $14.59                                                                          |  | 160,623                                                                                                                                        
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                |  |                                                                                                                                               
|Total                                                      |  | 110,693                                                                                         |  | $14.59                                                                          |  | 160,623                                                                                                                                        

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information
required by this item is incorporated herein by reference to the sections captioned Proposal IElection of Directors and Other Information Relating to Director and Executive Officers-Transactions with Related Persons in
the Proxy Statement.

Information concerning director independence is incorporated herein by reference to the section titled Proposal
1Election of Directors in the Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information required by this Item is
incorporated herein by reference to the section captioned Proposal 2Ratification of Appointment of Auditors in the Proxy Statement.



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PART IV

Item 15. Exhibits



|         |  |                                                                                                                                                        
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                        
|3(a)     |  | Amended and Restated Certificate of Incorporation(1)                                                                                                   
|         | 
|3(b)     |  | Bylaws(2)                                                                                                                                              
|         | 
|10(a)    |  | Employment Agreement with Dwight V. Neese(3)                                                                                                           
|         | 
|10(b)    |  | Employment Agreement with Richard H. Flake(3)                                                                                                          
|         | 
|10(c)    |  | Provident Community Bancshares, Inc. 1995 Stock Option Plan(4)                                                                                         
|         | 
|10(d)    |  | Provident Community Bancshares, Inc. 2001 Stock Option Plan(5)                                                                                         
|         | 
|10(e)    |  | Provident Community Bancshares, Inc. 2006 Stock Option Plan(6)                                                                                         
|         | 
|10(f)    |  | Amended and Restated Change in Control Agreement by and among Lud W. Vaughn, Provident Community Bank, N.A. and Provident Community Bancshares, Inc.(7)
|         | 
|10(g)    |  | Supplemental Executive Retirement Plan, by and between Dwight V. Neese and Provident Community Bank(8)                                                 
|         | 
|10(h)    |  | Supplemental Executive Retirement Plan #2, by and between Dwight V. Neese and Provident Community Bank(8)                                              
|         | 
|10(i)    |  | Supplemental Executive Retirement Plan, by and between Richard H. Flake and Provident Community Bank(8)                                                
|         | 
|10(j)    |  | Supplemental Executive Retirement Plan #2, by and between Richard H. Flake and Provident Community Bank(8)                                             
|         | 
|10(k)    |  | Supplemental Executive Retirement Plan, by and between Lud W. Vaughn and Provident Community Bank(7)                                                   
|         | 
|21       |  | Subsidiaries of the Registrant                                                                                                                         
|         | 
|23       |  | Consent of Independent Auditor                                                                                                                         
|         | 
|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       |  | Section 1350 Certifications                                                                                                                            



|(1) | Incorporated herein by reference to Provident Community Bancshares Form 10-Q for the quarter ended June 30, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated herein by reference to Provident Community Bancshares Form 8-K as filed on October 17, 2007.
|--- | ----------------------------------------------------------------------------------------------------------

|(3) | Incorporated herein by reference to Provident Community Bancshares Form 10-KSB for the year ended September 30, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated herein by reference to Exhibit A to Provident Community Bancshares Proxy Statement for its 1996 Annual Meeting of Stockholders.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated herein by reference to Appendix A to Provident Community Bancshares Proxy Statement for its 2000 Annual Meeting of Stockholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated herein by reference to Appendix A to Provident Community Bancshares Proxy Statement for its 2005 Annual Meeting of Stockholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated herein by reference to Provident Community Bancshares Form 10-Q for the quarter ended June 30, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated herein by reference to Provident Community Bancshares Form 10-Q for the quarter ended March 31, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------



70



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##### Table of Contents

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |                                      |  |                                      
|-------------------- |  | ------------------------------------ |  | -------------------------------------
|                     |  | PROVIDENT COMMUNITY BANCSHARES, INC.
|                     |  |                                     
|Date: March 18, 2008 |  | By:                                  |  | /s/ Dwight V. Neese                  
|                     |  |                                      |  | Dwight V. Neese                      
|                     |  |                                      |  | President and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.



|      |  |                                              |  |  |  |                      |  |                       
|----- |  | -------------------------------------------- |  |  |  | -------------------- |  | ----------------------
|By:   |  | /s/ Dwight V. Neese                          |  |  |  | By:                  |  | /s/ Russell H. Smart  
|      |  | Dwight V. Neese                              |  |  |  |                      |  | Russell H. Smart      
|      |  | (Principal Executive Officer)                |  |  |  |                      |  | Director              
|      |  |                                              | 
|Date: |  | March 18, 2008                               |  |  |  | Date: March 18, 2008
|      |  |                                              |  | 
|By:   |  | /s/ Richard H. Flake                         |  |  |  | By:                  |  | /s/ Phillip C. Wilkins
|      |  | Richard H. Flake                             |  |  |  |                      |  | Phillip C. Wilkins    
|      |  | (Principal Financial and Accounting Officer) |  |  |  |                      |  | Director              
|      |  |                                              |  |  |  |                      |  |                       
|      |  |                                              | 
|Date: |  | March 18, 2008                               |  |  |  | Date: March 18, 2008
|      |  |                                              |  | 
|By:   |  | /s/ Robert H. Breakfield                     |  |  |  |                      |  |                       
|      |  | Robert H. Breakfield                         |  |  |  |                      |  |                       
|      |  | Director                                     |  |  |  |                      |  |                       
|      |  |                                              |  | 
|Date: |  | March 18, 2008                               |  |  |  |                      |  |                       
|      |  |                                              |  | 
|By:   |  | /s/ James W. Edwards                         |  |  |  |                      |  |                       
|      |  | James W. Edwards                             |  |  |  |                      |  |                       
|      |  | Director                                     |  |  |  |                      |  |                       
|      |  |                                              |  | 
|Date: |  | March 18, 2008                               |  |  |  |                      |  |                       
|      |  |                                              |  | 
|By:   |  | /s/ William M. Graham                        |  |  |  |                      |  |                       
|      |  | William M. Graham                            |  |  |  |                      |  |                       
|      |  | Director                                     |  |  |  |                      |  |                       
|      |  |                                              |  | 
|Date: |  | March 18, 2008                               |  |  |  |                      |  |                       
|      |  |                                              |  | 
|By:   |  | /s/ Carl L. Mason                            |  |  |  |                      |  |                       
|      |  | Carl L. Mason                                |  |  |  |                      |  |                       
|      |  | Director                                     |  |  |  |                      |  |                       
|      |  |                                              |  | 
|Date: |  | March 18, 2008                               |  |  |  |                      |  |                       



71