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, 2008





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
                  
                  (I.R.S.
      Employeror
      organization)
                  
                  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
      registeredCommon
      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 xNo    ̈





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
                      o
                      Accelerated
      filer
                      oNon-accelerated
      filer
                      o
                      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, 2008, which is the
last day of the registrant’s second fiscal quarter, was approximately
$15,562,306 (1,596,134 shares at $9.75 per share).  Solely for this
calculation it is assumed that directors and executive officers are affiliates
of the registrant.





As of
March 4, 2009, there were 1,788,310 shares of the registrant’s common stock
issued and outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





1.
            Portions
      of the Proxy Statement for the 2009 Annual Meeting of Shareholders
      (Part III).










INDEX


PagePart
      IItem
      1.
                        Business
                        1Item
      1A.
                        Risk
      Factors
                        20Item
      1B.
                        Unresolved
      Staff Comments
                        25Item
      2.
                        Properties
                        25Item
      3.
                        Legal
      Proceedings
                        25Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        26Part
      IIItem
      5.
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                        26Item
      6.
                        Selected
      Financial Data
                        27Item
      7.
                        Management’s
      Discussion and Analysis and Results of Operation
                        28Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        35Item
      8.
                        Financial
      Statements and Supplementary Data
                        35Item
      9.
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        68Item
      9A(T).
                        Controls
      and Procedures
                        69Item
      9B.
                        Other
      Information
                        69Part
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance
                        69Item
      11.
                        Executive
      Compensation
                        70Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        70Item
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        71Item
      14.
                        Principal
      Accountant Fees and Services
                        71Part
      IVItem
      15.
                        Exhibits
      and Financial Statement Schedules
                        72SIGNATURES





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”).  Provident Community Bancshares is
a bank holding company, subject to regulation by the Federal Reserve Board (the
“FRB”).





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, 2008, according to
information presented on the Federal Deposit Insurance Corporation’s website,
the Corporation held 40.45% of the deposits in Union County, which was the
second largest share of deposits out of four financial institutions in the
county.  Additionally, the Corporation held 25.19% of the deposits in
Fairfield County, which was the third largest out of four financial institutions
in the county, 5.96% of the deposits in Laurens County, which was the sixth
largest share of deposits out of eight financial institutions in the county and
2.29% of the deposits in York County, which was the tenth largest out of 15
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 BB&T 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.


1


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 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                PercentReal
      estate loans:Residential
                
                $
                20,235
                
                
                
                7.26
                %
                
                $
                24,989
                
                
                
                9.74
                %
                
                $
                29,482
                
                
                
                12.71
                %
                
                $
                36,560
                
                
                
                18.99
                %
                
                $
                43,556
                
                
                
                25.46
                %Commercial
                
                
                110,589
                
                
                
                39.68
                
                
                
                76,864
                
                
                
                29.97
                
                
                
                62,450
                
                
                
                26.93
                
                
                
                45,665
                
                
                
                23.71
                
                
                
                43,351
                
                
                
                25.34Construction
      loans
                
                
                5,867
                
                
                
                2.11
                
                
                
                4,764
                
                
                
                1.86
                
                
                
                5,787
                
                
                
                2.50
                
                
                
                4,842
                
                
                
                2.51
                
                
                
                3,823
                
                
                
                2.23Total
      real estate loans
                
                
                136,691
                
                
                
                49.05
                
                
                
                106,617
                
                
                
                41.57
                
                
                
                97,719
                
                
                
                42.14
                
                
                
                87,067
                
                
                
                45.21
                
                
                
                90,730
                
                
                
                53.03Consumer
      and installment loans
                
                
                57,002
                
                
                
                20.45
                
                
                
                51,846
                
                
                
                20.21
                
                
                
                46,136
                
                
                
                19.90
                
                
                
                39,876
                
                
                
                20.71
                
                
                
                30,826
                
                
                
                18.02Commercial
      loans
                
                
                94,012
                
                
                
                33.74
                
                
                
                104,261
                
                
                
                40.65
                
                
                
                93,562
                
                
                
                40.35
                
                
                
                70,668
                
                
                
                36.70
                
                
                
                54,796
                
                
                
                32.02Total
      loans
                
                
                287,705
                
                
                
                103.24
                
                
                
                262,724
                
                
                
                102.43
                
                
                
                237,417
                
                
                
                102.39
                
                
                
                197,611
                
                
                
                102.62
                
                
                
                176,352
                
                
                
                103.07Less:Undisbursed
      loans in process
                
                
                (1,926
                )
                
                
                (0.69
                )
                
                
                (2,379
                )
                
                
                (0.93
                )
                
                
                (2,238
                )
                
                
                (0.97
                )
                
                
                (1,980
                )
                
                
                (1.03
                )
                
                
                (2,363
                )
                
                
                (1.38
                )Loan
      discount unamortized
                
                
                (383
                )
                
                
                (0.14
                )
                
                
                (476
                )
                
                
                (0.18
                )
                
                
                (607
                )
                
                
                (0.26
                )
                
                
                (764
                )
                
                
                (0.40
                )
                
                
                (993
                )
                
                
                (0.58
                )Allowance
      for loan losses
                
                
                (6,778
                )
                
                
                (2.43
                )
                
                
                (3,344
                )
                
                
                (1.30
                )
                
                
                (2,754
                )
                
                
                (1.19
                )
                
                
                (2,394
                )
                
                
                (1.24
                )
                
                
                (2,026
                )
                
                
                (1.18
                )Deferred
      loan fees
                
                
                47
                
                
                
                0.02
                
                
                
                (38
                )
                
                
                (0.02
                )
                
                
                68
                
                
                
                0.03
                
                
                
                104
                
                
                
                0.05
                
                
                
                124
                
                
                
                0.07Net
      loans receivable
                
                $
                278,665
                
                
                
                100.00
                %
                
                $
                256,487
                
                
                
                100.00
                %
                
                $
                231,886
                
                
                
                100.00
                %
                
                $
                192,577
                
                
                
                100.00
                %
                
                $
                171,094
                
                
                
                100.00
                %


2


The
following table sets forth, at December 31, 2008, 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.




Due
                  Within
                  One Year
                
                
                Due
                  After
                  1 Year
                  Through
                  5 Years
                
                
                Due After
                  5 Years
                
                
                TotalReal
      estate loans:Residential
      loans
                
                $
                42
                
                
                $
                1,531
                
                
                $
                18,662
                
                
                $
                20,235Commercial
      loans
                
                
                27,699
                
                
                
                57,233
                
                
                
                25,657
                
                
                
                110,589Construction
      loans (1)
                
                
                5,867
                
                
                
                —
                
                
                
                —
                
                
                
                5,867Consumer
      and installment loans
                
                
                5,110
                
                
                
                33,608
                
                
                
                18,284
                
                
                
                57,002Commercial
      loans
                
                
                49,747
                
                
                
                33,464
                
                
                
                10,801
                
                
                
                94,012Total
                
                $
                88,465
                
                
                $
                125,836
                
                
                $
                73,404
                
                
                $
                287,705





(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, 2008, 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
                  
                  
                  TotalReal
      estate loans:Residential
      loans
                  
                  $
                  12,748
                  
                  
                  $
                  7,445
                  
                  
                  $
                  20,193Commercial
      loans
                  
                  
                  61,407
                  
                  
                  
                  21,483
                  
                  
                  
                  82,890Consumer
      and installment loans
                  
                  
                  23,073
                  
                  
                  
                  28,819
                  
                  
                  
                  51,892Commercial
      loans
                  
                  
                  28,303
                  
                  
                  
                  15,962
                  
                  
                  
                  44,265Total
                  
                  $
                  125,531
                  
                  
                  $
                  73,709
                  
                  
                  $
                  199,240





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, 2008, $20.2 million, or 7.3% 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.


3


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, 2008, the Bank had
approximately $7.4 million of ARMs, or 2.7% of the Bank’s total loans
receivable. At December 31, 2008, $12.8 million, or 4.6%, 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 $110.6 million, or 39.7%, of the Bank’s net loan
portfolio at December 31, 2008. 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 real estate loan relationship was a $5.7 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, 2008.





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.


4


At December 31, 2008, the Bank had
approximately $5.9 million outstanding in construction loans, including
approximately $1.9 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.  Our largest
commercial real estate loan relationship was a $5.7 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, 2008.





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.


5


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 2008 or 2007 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 institutions. The Bank had
total purchases of participation interests of $13.5 million in fiscal 2008.
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 31,2008
                  
                  
                  2007
                  
                  
                  2006Loans
      originated:Real
      estate loans:Residential
      loans
                  
                  $
                  3,504
                  
                  
                  $
                  5,338
                  
                  
                  $
                  6,644Construction
      loans
                  
                  
                  1,556
                  
                  
                  
                  –
                  
                  
                  
                  945Commercial
      loans
                  
                  
                  33,725
                  
                  
                  
                  14,414
                  
                  
                  
                  16,785Total
      mortgage loans originated
                  
                  
                  38,785
                  
                  
                  
                  19,752
                  
                  
                  
                  24,374Consumer
      and installment loans
                  
                  
                  20,769
                  
                  
                  
                  17,924
                  
                  
                  
                  18,371Commercial
      loans
                  
                  
                  30,055
                  
                  
                  
                  45,449
                  
                  
                  
                  40,568Total
      loans originated
                  
                  $
                  89,609
                  
                  
                  $
                  83,125
                  
                  
                  $
                  83,313Loan
      participations purchased
                  
                  $
                  13,550
                  
                  
                  $
                  27,636
                  
                  
                  $
                  22,085Loan
      participations sold
                  
                  $
                  1,000
                  
                  
                  $
                  2,000
                  
                  
                  $
                  970





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.





6




Non-performing
assets were $16.7 million and $3.8 million at December 31, 2008 and December 31,
2007, respectively.





The following table sets forth
information with respect to the Bank’s non-performing assets for the
periods indicated (dollars in thousands).  The Bank did not have
any trouble debt restructurings at the dates presented.





At December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Real
      estate
                
                $
                389
                
                
                $
                356
                
                
                $
                459
                
                
                $
                461
                
                
                $
                217Commercial
                
                
                13,345
                
                
                
                2,445
                
                
                
                631
                
                
                
                436
                
                
                
                142Consumer
                
                
                2,267
                
                
                
                171
                
                
                
                205
                
                
                
                349
                
                
                
                391Total
                
                
                16,001
                
                
                
                2,972
                
                
                
                1,295
                
                
                
                1,246
                
                
                
                750Accruing
      loans which are contractually past due 90 days or more
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Real
      estate owned, net
                
                
                667
                
                
                
                856
                
                
                
                148
                
                
                
                224
                
                
                
                364Total
      non-performing assets
                
                $
                16,668
                
                
                $
                3,828
                
                
                $
                1,443
                
                
                $
                1,470
                
                
                $
                1,114Percentage
      of non-performing assets to loans receivable, net
                
                
                5.98
                %
                
                
                1.49
                %
                
                
                0.62
                %
                
                
                0.76
                %
                
                
                0.65
                %





Interest income that would have been
recorded for the year ended December 31, 2008 had non-accruing loans been
current in accordance with their original terms amounted to approximately
$715,000. There was no interest included in interest income on such loans for
the year ended December 31, 2008. Other than disclosed in the table above, there
are no other loans at December 31, 2008 that management has serious doubts about
the ability of borrowers to comply with present loan payment terms.





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


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 Ended
                    December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Balance
      at beginning of year
                  
                  $
                  3,344
                  
                  
                  $
                  2,754
                  
                  
                  $
                  2,394
                  
                  
                  $
                  2,026
                  
                  
                  $
                  2,383Loans
      charged off:Real
      estate
                  
                  
                  (28
                  )
                  
                  
                  –
                  
                  
                  
                  (25
                  )
                  
                  
                  (75
                  )
                  
                  
                  (62
                  )Commercial
                  
                  
                  (783
                  )
                  
                  
                  (668
                  )
                  
                  
                  (141
                  )
                  
                  
                  (302
                  )
                  
                  
                  (1,740
                  )Consumer
                  
                  
                  (65
                  )
                  
                  
                  (45
                  )
                  
                  
                  (74
                  )
                  
                  
                  (195
                  )
                  
                  
                  (40
                  )Total
      charge-offs
                  
                  
                  (876
                  )
                  
                  
                  (713
                  )
                  
                  
                  (240
                  )
                  
                  
                  (572
                  )
                  
                  
                  (1,842
                  )Recoveries:Real
      estate
                  
                  
                  23
                  
                  
                  
                  13
                  
                  
                  
                  44
                  
                  
                  
                  35
                  
                  
                  
                  22Commercial
                  
                  
                  45
                  
                  
                  
                  218
                  
                  
                  
                  66
                  
                  
                  
                  26
                  
                  
                  
                  192Consumer
                  
                  
                  32
                  
                  
                  
                  6
                  
                  
                  
                  20
                  
                  
                  
                  10
                  
                  
                  
                  21Total
      recoveries
                  
                  
                  100
                  
                  
                  
                  237
                  
                  
                  
                  130
                  
                  
                  
                  71
                  
                  
                  
                  235Net
      charge-offs
                  
                  
                  (776
                  )
                  
                  
                  (476
                  )
                  
                  
                  (110
                  )
                  
                  
                  (501
                  )
                  
                  
                  (1,607
                  )Provision
      for loan losses (1)
                  
                  
                  4,210
                  
                  
                  
                  1,066
                  
                  
                  
                  470
                  
                  
                  
                  869
                  
                  
                  
                  1,250Balance
      at end of year
                  
                  $
                  6,778
                  
                  
                  $
                  3,344
                  
                  
                  $
                  2,754
                  
                  
                  $
                  2,394
                  
                  
                  $
                  2,026Ratio
      of net charge-offs to average gross loans outstanding during the
      period
                  
                  
                  0.28
                  %
                  
                  
                  0.20
                  %
                  
                  
                  0.05
                  %
                  
                  
                  0.27
                  %
                  
                  
                  0.91
                  %











(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 $776,000
for fiscal 2008 compared to $476,000 for fiscal 2007. The increase in bad debt
charge-offs over the previous year relates to additional write-downs required in
the disposition of commercial real estate loans. The allowance for loan losses
to total loans ratio at the end of fiscal 2008 was 2.36% compared to 1.28% at
the end of fiscal 2007.





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 31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005
                                            
                                            
                                            2004Amount
                                            
                                            
                                            % of
      Loans
                                              in
      Each
                                              Category
      to
                                              Total
      Loans
                                            
                                            
                                            Amount
                                            
                                            
                                            % of
      Loans
                                              in
      Each
                                              Category
      to
                                              Total
      Loans
                                            
                                            
                                            Amount
                                            
                                            
                                            % of
      Loans
                                              in
      Each
                                              Category
      to
                                              Total
      Loans
                                            
                                            
                                            Amount
                                            
                                            
                                            % of
      Loans
                                              in
      Each
                                              Category
      to
                                              Total
      Loans
                                            
                                            
                                            Amount
                                            
                                            
                                            % of
      Loans
                                              in
      Each
                                              Category
      to
                                              Total
      LoansReal
      estate
                                            
                                            $
                                            3,068
                                            
                                            
                                            
                                            47.51
                                            %
                                            
                                            $
                                            1,297
                                            
                                            
                                            
                                            40.58
                                            %
                                            
                                            $
                                            993
                                            
                                            
                                            
                                            41.16
                                            %
                                            
                                            $
                                            975
                                            
                                            
                                            
                                            44.06
                                            %
                                            
                                            $
                                            984
                                            
                                            
                                            
                                            51.45
                                            %Commercial
                                            
                                            
                                            2,110
                                            
                                            
                                            
                                            32.68
                                            
                                            
                                            
                                            1,268
                                            
                                            
                                            
                                            39.68
                                            
                                            
                                            
                                            956
                                            
                                            
                                            
                                            39.41
                                            
                                            
                                            
                                            447
                                            
                                            
                                            
                                            20.18
                                            
                                            
                                            
                                            335
                                            
                                            
                                            
                                            17.48Consumer
                                            
                                            
                                            1,280
                                            
                                            
                                            
                                            19.81
                                            
                                            
                                            
                                            630
                                            
                                            
                                            
                                            19.74
                                            
                                            
                                            
                                            471
                                            
                                            
                                            
                                            19.43
                                            
                                            
                                            
                                            792
                                            
                                            
                                            
                                            35.76
                                            
                                            
                                            
                                            594
                                            
                                            
                                            
                                            31.07Unallocated
                                            
                                            
                                            320
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            149
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            334
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            180
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            113
                                            
                                            
                                            
                                            N/ATotal
      allowance  for loan losses
                                            
                                            $
                                            6,778
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            $
                                            3,344
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            $
                                            2,754
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            $
                                            2,394
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            $
                                            2,026
                                            
                                            
                                            
                                            100.00
                                            %





8


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
Corporation considers all non-accrual loans to be impaired. Therefore, at
December 31, 2008, loans classified as impaired under FASB 114 totaled $16.0
million and carried a specific reserve of $3.5 million. Management believes the
specific reserves allocated to these and other non accrual loans will offset
losses, if any, arising from less than full recovery of the loans from the
supporting collateral.


9


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 31,2008
                  
                  
                  2007
                  
                  
                  2006Available
      for sale:
                  
                  Carrying
                    Value
                  
                  
                  Percent of
                    Portfolio
                  
                  
                  Carrying
                    Value
                  
                  
                  Percent of
                    Portfolio
                  
                  
                  Carrying
                    Value
                  
                  
                  Percent of
                    PortfolioInvestment
      securities:U.S.
      Agency obligations
                  
                  $
                  6
                  
                  
                  
                  0.01
                  %
                  
                  $
                  488
                  
                  
                  
                  0.45
                  %
                  
                  $
                  500
                  
                  
                  
                  0.42
                  %Government
      Sponsored Enterprises
                  
                  
                  28,230
                  
                  
                  
                  28.11
                  
                  
                  
                  40,665
                  
                  
                  
                  37.63
                  
                  
                  
                  72,638
                  
                  
                  
                  61.04Municipal
      securities
                  
                  
                  6,358
                  
                  
                  
                  6.33
                  
                  
                  
                  9,601
                  
                  
                  
                  8.88
                  
                  
                  
                  10,970
                  
                  
                  
                  9.22Trust
      Preferred securities
                  
                  
                  8,392
                  
                  
                  
                  8.36
                  
                  
                  
                  12,093
                  
                  
                  
                  11.20
                  
                  
                  
                  14,644
                  
                  
                  
                  12.31Total
      investment securities
                  
                  
                  42,986
                  
                  
                  
                  42.81
                  
                  
                  
                  62,847
                  
                  
                  
                  58.16
                  
                  
                  
                  98,752
                  
                  
                  
                  82.99Mortgage-backed
      and  related securities
                  
                  
                  57,432
                  
                  
                  
                  57.19
                  
                  
                  
                  45,214
                  
                  
                  
                  41.84
                  
                  
                  
                  20,251
                  
                  
                  
                  17.01Total
                  
                  $
                  100,418
                  
                  
                  
                  100.00
                  %
                  
                  $
                  108,061
                  
                  
                  
                  100.00
                  %
                  
                  $
                  119,003
                  
                  
                  
                  100.00
                  %




At December 31,2008
                  
                  
                  2007
                  
                  
                  2006Held
      to maturity:
                  
                  Carrying Value
                  
                  
                  Percent of
                    Portfolio
                  
                  
                  Carrying
                    Value
                  
                  
                  Percent of
                    Portfolio
                  
                  
                  Carrying
                    Value
                  
                  
                  Percent of
                    PortfolioMunicipal
      securities
                  
                  $
                  2,430
                  
                  
                  
                  100.00
                  %
                  
                  $
                  3,126
                  
                  
                  
                  100.00
                  %
                  
                  $
                  3,182
                  
                  
                  
                  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 increased its level of
mortgage-backed securities by $12.2 million to $57.4 million with reductions in
municipal and government sponsored enterprises securities due to cash flow
liquidity generated with the securities along with lower risk weights required
for risk-based capital.





The Corporation 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, 2008 was
approximately $809,000 with a fair value of $595,000.





The Corporation has in the past
purchased trust preferred corporate securities, both fixed-rate and
adjustable-rate, with maturities up to thirty years. Trust preferred securities
are issued by financial institutions through a pooled trust preferred capital
offering. Because of the current trading dislocations in the debt markets, the
traditional methods of market quotes have become unreliable. FASB 115 permits
the use of reasonable management judgment regarding the probability of
collecting all projected cash flows generated by the financial instrument. The
market values of the corporate pooled securities were calculated based on cash
flow collection probability. Securities were tested for other than temporary
impairment by comparing the cash reserves in these pools to the principal
balances that have been reported in default. Currently, cash reserves on all
pools do not warrant other than temporary impairment adjustments to these items.
The amortized cost of the trust preferred securities at December 31, 2008 was
approximately $12.3 million with a fair value of $8.4 million. See Note 2 of
Notes to Consolidated Financial Statements for more information regarding
investment and mortgage-backed securities.


10





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, 2008 (dollars in thousands):





Amount
      Due or Repricing within:One
      Year
                  or
      Less
                
                
                Over
      One to
                  Five
      Years
                
                
                Over
      Five to
                  Ten
      Years
                
                
                Over
                  Ten
      Years
                
                
                TotalCarrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  YieldAvailable
      for Sale:Investment
      securities:U.S.
      Agency obligations
                
                $
                —
                
                
                
                —
                %
                
                $
                6
                
                
                
                8.07
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                6
                
                
                
                8.07
                %Government
      sponsored enterprises (1)
                
                
                3,000
                
                
                
                6.60
                
                
                
                —
                
                
                
                —
                
                
                
                5,018
                
                
                
                5.75
                
                
                
                20,212
                
                
                
                6.03
                
                
                
                28,230
                
                
                
                6.04Municipal
      securities
                
                
                252
                
                
                
                5.00
                
                
                
                456
                
                
                
                4.55
                
                
                
                431
                
                
                
                4.63
                
                
                
                5,219
                
                
                
                4.83
                
                
                
                6,358
                
                
                
                4.81Corporate
      securities
                
                
                6,445
                
                
                
                4.86
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,947
                
                
                
                7.00
                
                
                
                8,392
                
                
                
                5.35Total
      investment securities
                
                
                9,697
                
                
                
                5.40
                
                
                
                462
                
                
                
                4.59
                
                
                
                5,449
                
                
                
                5.66
                
                
                
                27,378
                
                
                
                5.87
                
                
                
                42,986
                
                
                
                5.73Mortgage-backed
      and related securities
                
                
                2,834
                
                
                
                2.64
                
                
                
                2,261
                
                
                
                3.05
                
                
                
                67
                
                
                
                5.45
                
                
                
                52,270
                
                
                
                5.76
                
                
                
                57,432
                
                
                
                5.50Total
      available for sale
                
                $
                12,531
                
                
                
                4.78
                
                
                $
                2,723
                
                
                
                3.31
                
                
                $
                5,516
                
                
                
                5.66
                
                
                $
                79,648
                
                
                
                5.80
                
                
                $
                100,418
                
                
                
                5.60Held
      to Maturity:Municipal
      securities
                
                $
                —
                
                
                
                —
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                2,430
                
                
                
                4.26
                %
                
                $
                2,430
                
                
                
                4.26
                %





(1)The
following GSE issuers exceed 10% of shareholders’ equity at
12/31/08.





Issuer
                  
                  Book Value
                  
                  
                  Market ValueFederal
      Home Loan Bank (FHLB)
                  
                  $
                  5,000
                  
                  
                  $
                  5,018Freddie Mac (FHLMC)
                  
                  
                  20,441
                  
                  
                  
                  20,743$
                  25,441
                  
                  
                  $
                  25,761


*The
weighted average yield is based upon the cost value and the total income
received of the instrument.  The weighted average yield on tax-exempt
securities is not presented on a tax-equivalent basis.




11


At December 31, 2008, approximately
$5.1 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 2008, the Bank experienced a net increase in
deposits of approximately $36.4 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 2008.





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 31,2008
                  
                  
                  2007
                  
                  
                  2006Up
      to
      2.0%
                  
                  $
                  13,254
                  
                  
                  $
                  228
                  
                  
                  $
                  1,9092.01%
      to
      4.0%
                  
                  
                  107,641
                  
                  
                  
                  31,805
                  
                  
                  
                  37,1394.01%
      to
      6.0%
                  
                  
                  66,143
                  
                  
                  
                  129,536
                  
                  
                  
                  111,0296.01%
      to
      8.0%
                  
                  
                  28
                  
                  
                  
                  26
                  
                  
                  
                  25Total
      time
      deposits
                  
                  $
                  187,066
                  
                  
                  $
                  161,595
                  
                  
                  $
                  150,102





The following table sets forth the
maturities of time deposits at December 31, 2008 (in thousands):





AmountWithin
      three months
                  
                  $
                  32,243After
      three months but within six months
                  
                  
                  38,367After
      six months but within one year
                  
                  
                  71,294After
      one year but within three years
                  
                  
                  43,060After
      three years but within five years
                  
                  
                  2,102Total
                  
                  $
                  187,066





Certificates of deposit with maturities
of less than one year increased to $141.9 million at December 31, 2008 from
$134.8 million at December 31, 2007.  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.




12




The following table indicates the
amount of the Bank’s jumbo certificates of deposit by time remaining until
maturity as of December 31, 2008 (in thousands).  Jumbo certificates
of deposit are certificates in amounts of $100,000 or more.





Maturity Period
                  
                  AmountThree
      months or less
                  
                  $
                  12,918Over
      three through six months
                  
                  
                  15,368Over
      six months through twelve months
                  
                  
                  28,556Over
      twelve months
                  
                  
                  18,088Total
      jumbo certificates
                  
                  $
                  74,930





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 31,2008
                    
                    
                    2007
                    
                    
                    2006Balance
      outstanding at end of period:FHLB
      advances
                    
                    $
                    69,500
                    
                    
                    $
                    69,500
                    
                    
                    $
                    70,000Other
      borrowings
                    
                    
                    31,377
                    
                    
                    
                    36,503
                    
                    
                    
                    40,905Weighted
      average rate paid on:FHLB
      advances
                    
                    
                    4.16
                    %
                    
                    
                    4.55
                    %
                    
                    
                    4.81
                    %Other
      borrowings
                    
                    
                    3.08
                    %
                    
                    
                    4.92
                    %
                    
                    
                    5.44
                    %





At or For the Year Ended December
      31,2008
                  
                  
                  2007
                  
                  
                  2006Maximum
      amount of borrowings  outstanding at any month
    end:FHLB
      advances
                  
                  $
                  77,500
                  
                  
                  $
                  85,250
                  
                  
                  $
                  81,500Other
      borrowings
                  
                  
                  35,761
                  
                  
                  
                  51,547
                  
                  
                  
                  47,413Approximate
      average borrowings  outstanding:FHLB
      advances
                  
                  
                  70,107
                  
                  
                  
                  66,893
                  
                  
                  
                  59,481Other
      borrowings
                  
                  
                  34,389
                  
                  
                  
                  40,932
                  
                  
                  
                  43,553Approximate
      weighted average rate paid on:FHLB
      advances
                  
                  
                  4.23
                  %
                  
                  
                  4.77
                  %
                  
                  
                  5.06
                  %Other
      borrowings
                  
                  
                  3.73
                  %
                  
                  
                  5.35
                  %
                  
                  
                  5.72
                  %





At December 31, 2008, the Corporation
had unused short-term lines of credit to purchase federal funds from unrelated
banks totaling $12.2 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, 2008, the Bank had unused lines of credit for
longer term advances totaling $15.0 million.




13




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 to issue 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 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.




14




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 are generally
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.




15




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, 2008, the Bank met each of its capital requirements.





16


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 FDIC.  The
Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006.  Under
the FDIC’s risk-based assessment system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors, with less risky institutions paying lower
assessments.  An institution’s assessment rate depends upon the
category to which it is assigned.  For 2008, assessments ranged from
five to forty-three basis points of assessable deposits.  Due to
losses incurred by the Deposit Insurance Fund in 2008 from failed institutions,
and anticipated future losses, the FDIC has adopted, pursuant to a Restoration
Plan to replenish the fund, an across the board seven basis point increase in
the assessment range for the first quarter of 2009.  The FDIC has
proposed further refinements to its risk-based assessment that would be
effective April 1, 2009 and would effectively make the range eight to 771/2 basis
points.  The FDIC may adjust the scale uniformly from one quarter to
the next, except that no adjustment can deviate more than three basis points
from the base scale without notice and comment rulemaking.  No
institution may pay a dividend if in default of the federal deposit insurance
assessment.





Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until January 1, 2010.  In addition, the FDIC
adopted an optional Temporary Liquidity Guarantee Program by which, for a fee,
noninterest bearing transaction accounts would receive unlimited insurance
coverage until December 31, 2009 and certain senior unsecured debt issued by
institutions and their holding companies between October 13, 2008 and June 30,
2009 would be guaranteed by the FDIC through June 30, 2012.  The Bank
made the business decision to participate in the unlimited noninterest bearing
transaction account coverage and the Bank and Provident Community Bancshares
optedto
participate in the unsecured debt guarantee program.





Federal law also provides for the
possibility that the FDIC 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, 2008 averaged 1.12 basis points of
assessable deposits.





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.





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.




17


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, 2008, the Bank’s limit on loans to one borrower was $5.7 million
and the Bank’s largest aggregate outstanding balance of loans to one borrower
was $5.7 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 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.





18


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, 2008 totaled
$100,000.





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 $44.4 million or less
(subject to adjustment by the FRB) the reserve requirement is 3%; and for
accounts aggregating greater than $44.4 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 $44.4 million. The first
$10.3 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,
2008 of $3.9 million.





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.


19


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
level of non-performing loans and classified assets expose us to increased
lending risks.  Further, our allowance for loan losses may prove to be
insufficient to absorb losses in our loan portfolio.
 
 At
December 31, 2008, our non-performing loans totaled $16.0 million, representing
5.6% of total loans.  Total loans that we have classified as impaired,
substandard or special mention including our non-performing loans totaled $36.1
million, representing 12.5% of total loans. If these loans do not perform
according to their terms and the collateral is insufficient to pay any remaining
loan balance, we may experience loan losses, which could have a material effect
on our operating results.  Like all financial institutions, we
maintain an allowance for loan losses to provide for loans in our portfolio that
may not be repaid in their entirety.  We believe that our allowance
for loan losses is maintained at a level adequate to absorb probable losses
inherent in our loan portfolio as of the corresponding balance sheet
date.  However, our allowance for loan losses may not be sufficient to
cover actual loan losses, and future provisions for loan losses could materially
adversely affect our operating results.
 
 In
evaluating the adequacy of our allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and classified loans.  In addition, we use
information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of
loss for those borrowers.  Finally, we also consider many qualitative
factors, including general and economic business conditions, current general
market collateral valuations, trends apparent in any of the factors we take into
account and other matters, which are by nature more subjective and
fluid.  Our estimates of the risk of loss and amount of loss on any
loan are complicated by the significant uncertainties surrounding our borrowers’
abilities to successfully execute their business models through changing
economic environments, competitive challenges and other
factors.  Because of the degree of uncertainty and susceptibility of
these factors to change, our actual losses may vary from our current
estimates.
 
 At
December 31, 2008, our allowance for loan losses as a percentage of total loans
was 2.36%.  Our regulators, as an integral part of their examination
process, periodically review our allowance for loan losses and may require us to
increase our allowance for loan losses by recognizing additional provisions for
loan losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries.  Any such additional
provisions for loan losses or charge-offs, as required by these regulatory
agencies, could have a material adverse effect on our financial condition and
results of operations.
 
 Our
increased emphasis on commercial lending may expose us to increased lending
risks.
 
 At December 31, 2008, 39.7% of our loan
portfolio consisted of commercial real estate loans and 33.7% 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.
  20
  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 $98.1 million, or 55.7% of total loans, at December 31, 2004 to
$204.6 million, or 71.1% of total loans, at December 31, 2008.  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 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.
 
 Program
may make our common stock less attractive of an investment.
 
 On March 6, 2009, the United States
Department of the Treasury (the “Treasury”) purchased newly issued shares of our
preferred stock as part of the Troubled Asset Relief Program (TARP) Capital
Purchase Program.  As part of this transaction, we agreed to not
increase the dividend paid on our common stock and to not repurchase shares of
our common stock for a period of three years.  These capital
management devices contribute to the attractiveness of our common stock and
limitations and prohibitions on such activities may make our common stock less
attractive to investors.
  21
  The
limitations on executive compensation imposed through our participation in the
Capital Purchase Program may restrict our ability to attract, retain and
motivate key employees, which could adversely affect our
operations.
 
 As part
of our participation in the TARP Capital Purchase Program, we agreed to be bound
by certain executive compensation restrictions, including limitations on
severance payments and the clawback of any bonus and incentive compensation that
were based on materially inaccurate financial statements or any other materially
inaccurate performance metric criteria.  The recently enacted American
Recovery and Reinvestment Act of 2009 provides more stringent limitations on
severance pay and the payment of bonuses to certain officers and highly
compensated employees.  To the extent that any of these compensation
restrictions do not permit us to provide a comprehensive compensation package to
our key employees that is competitive in our market area, we have difficulty in
attracting, retaining and motivating our key employees, which could have an
adverse effect on our results of operations.
 
 The
exercise of the warrant by Treasury will dilute existing stockowners’ ownership
interest and may make it more difficult for us to take certain actions that may
be in the best interests of shareholders.
 
 In
addition to the issuance of preferred shares, we also granted the Treasury a
warrant to purchase 179,110 shares of common at a price of $7.76 per
share.  If the Treasury exercises the entire warrant, it would result
in a significant dilution to the ownership interest of our existing stockholders
and dilute the earnings per share value of our common stock.  Further,
if the Treasury exercises the entire warrant, it will become the largest
shareholder of the Company.  The Treasury has agreed that it will not
exercise voting power with regard to the shares that it acquires by exercising
the warrant.  However, Treasury’s abstention from voting may make it
more difficult for us to obtain shareholder approval for those matters that
require a majority of total shares outstanding, such as a business combination
involving the Company.
 
 The
terms governing the issuance of the preferred stock to Treasury may be changed,
the effect of which may have an adverse effect on our operations.
 
 The
Securities Purchase Agreement that we entered into with the Treasury provides
that the Treasury may unilaterally amend any provision of the agreement to the
extent required to comply with any changes in applicable federal statutes that
may occur in the future.  The American Recovery and Reinvestment Act
of 2009 placed more stringent limits on executive compensation for participants
in the TARP Capital Purchase Program and established a requirement that
compensation paid to executives be presented to shareholders for a “non-binding”
vote.  Further changes in the terms of the transaction may occur in
the future.  Such changes may place further restrictions on our
business or results of operation, which may adversely affect the market price of
our common stock.
 
 Our
inability to raise capital at attractive rates may restrict our ability to
redeem the preferred stock we issued, which may lead to a greater cost of that
investment.
 
 The terms
of the preferred stock issued to the Treasury provide that the shares pay a
dividend at a rate of 5% per year for the first five years after which time the
rate will increase to 9% per year.  It is our current goal to repay
the Treasury before the date of the increase in the dividend rate on the
preferred stock.  However, our ability to repay the Treasury will
depend on our ability to raise capital, which will depend on conditions in the
capital markets at that time, which are outside of our control.  We
can give no assurance that we will be able to raise additional capital or that
such capital will be available on terms more attractive to us than the
Treasury’s investment.
 
 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, 2008, we held 8.47% 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 19 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.
  22
  Changes
in interest rates could reduce our net interest income and
earnings.
 
 Our net
interest income is the interest we earn on loans and investment less the
interest we pay on our deposits and borrowings. Our net interest margin is the
difference between the yield we earn on our assets and the interest rate we pay
for deposits and our other sources of funding.  Changes in interest
rates—up or down—could adversely affect our net interest margin and, as a
result, our net interest income. Although the yield we earn on our assets and
our funding costs tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing our net
interest margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding costs may
rise faster than the yield we earn on our assets, causing our net interest
margin to contract until the yield catches up.  Changes in the slope
of the “yield curve”—or the spread between short-term and long-term interest
rates—could also reduce our net interest margin. Normally, the yield curve is
upward sloping, meaning short-term rates are lower than long-term rates. Because
our liabilities tend to be shorter in duration than our assets, when the yield
curve flattens or even inverts, we could experience pressure on our net interest
margin as our cost of funds increases relative to the yield we can earn on our
assets.
 
 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.
 
 Recent declines in the housing market
have resulted in declines in real estate values in our market area. With most of
our loans concentrated in northwestern South Carolina, a continued decline in
local economic conditions or real estate values could adversely affect the value
of the real estate collateral securing our loans.  Further declines 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.
 
 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.
  23
  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.
 
 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.
  24
  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.
 
 Future FDIC
Assessments Will Hurt Our Earnings
 
 In February 2009, the FDIC adopted an
interim final rule imposing a special assessment on all insured institutions due
to recent bank and savings association failures.  The emergency
assessment amounts to 20 basis points of insured deposits as of June 30,
2009.  The assessment will be collected on September 30,
2009.  The special assessment will negatively impact the Corporation’s
earnings and the Corporation expects that the special assessment will amount to
approximately $645,000. In addition, the interim rule would also permit the FDIC
to impose additional emergency special assessments after June 30, 2009, of up to
10 basis points per quarter if necessary to maintain public confidence in
federal deposit insurance or as a result of deterioration in the deposit
insurance fund reserve ratio due to institution failures.  Any
additional emergency special assessments imposed by the FDIC will further hurt
the Corporation’s earnings.
 
 Additionally, the Federal Deposit
Insurance Corporation increased the assessment rates for deposits by seven basis
points for the first quarter of 2009.  The FDIC has the authority to
further increase insurance assessments, which would have an adverse impact on
our non-interest expenses and results of operations.
 
 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 $5.8 million at December 31,
2008.  See Note 4 of Notes to Consolidated Financial Statements.
All property is in good condition and meets the operating needs of the
Corporation.
 
 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.
  25
  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,
2008.
  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
March 4, 2009, there were 683 shareholders of record and 1,788,310 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.
 
 CalendarYear 2008
                    
                    High
                    
                    
                    Low
                    
                    
                    DividendFourth
      Quarter
                    
                    $
                    10.00
                    
                    
                    $
                    7.25
                    
                    
                    $
                    0.115Third
      Quarter
                    
                    $
                    11.77
                    
                    
                    $
                    6.44
                    
                    
                    $
                    0.115Second
      Quarter
                    
                    $
                    17.75
                    
                    
                    $
                    9.75
                    
                    
                    $
                    0.115First
      Quarter
                    
                    $
                    19.19
                    
                    
                    $
                    17.25
                    
                    
                    $
                    0.115
 
 CalendarYear 2007
                    
                    High
                    
                    
                    Low
                    
                    
                    DividendFourth
      Quarter
                    
                    $
                    21.24
                    
                    
                    $
                    19.00
                    
                    
                    $
                    0.115Third
      Quarter
                    
                    $
                    21.24
                    
                    
                    $
                    19.00
                    
                    
                    $
                    0.115Second
      Quarter
                    
                    $
                    21.20
                    
                    
                    $
                    19.63
                    
                    
                    $
                    0.115First
      Quarter
                    
                    $
                    21.04
                    
                    
                    $
                    19.40
                    
                    
                    $
                    0.110
 
 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.
 
 As part of the Company’s
participation in the Capital Repurchase Program of the U.S. Department of
Treasury’s Troubled Asset Relief Program, prior to the earlier of March 6, 2012
or the date on which the preferred stock issued in that transaction has been
redeemed in full or the Treasury has transferred its shares to non-affiliates,
the Company cannot increase its quarterly cash dividend above $0.03 per share,
without prior approval by the Treasury.
  26
  Purchases
of Equity Securities By Issuer
 
 The
following table provides certain information with regard to shares repurchased
by the Corporation in the 4th Quarter
of fiscal 2008.
 
 Period
                          
                          TotalNumber ofSharesPurchased
                          
                          
                          AveragePrice PaidPer Share
                          
                          
                          Total Numberof SharesPurchasedas Part ofPubliclyAnnounced Plans orPrograms
                          
                          
                          MaximumNumber of Sharesthat May Yet bePurchased Underthe Plans orProgramsOctober
      1, 2008 throughOctober
      31, 2008
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          37,120November
      1, 2008 throughNovember
      30, 2008
                          
                          
                          1,086
                          
                          
                          $
                          9.00
                          
                          
                          
                          1,086
                          
                          
                          
                          36,034December
      1, 2008 throughDecember
      31, 2008
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          36,034Total
                          
                          
                          1,086
                          
                          
                          $
                          9.00
                          
                          
                          
                          1,086
                          
                          
                          
                          N/A
 
 In May 2005, the Corporation
implemented a share repurchase program under which the Corporation may
repurchase up to 5% of the outstanding shares or 98,000 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.However, as part of the Company’s participation in the Capital
Repurchase Program of the U.S. Department of Treasury’s Troubled Asset
Repurchase Program, prior to the earlier of March 6, 2012 or the date on which
the preferred stock issued in that transaction has been redeemed in full or the
Treasury has transferred its shares to non-affiliates, the Company cannot
increase repurchase any shares of its common stock, without the prior approval
of the Treasury.
 
 Item 6. Selected Financial
Data
 
 Years Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Operations
      Data:Interest
      income
                        
                        $
                        22,785
                        
                        
                        $
                        26,009
                        
                        
                        $
                        23,491
                        
                        
                        $
                        19,213
                        
                        
                        $
                        16,952Interest
      expense
                        
                        
                        (13,206
                        )
                        
                        
                        (15,214
                        )
                        
                        
                        (12,967
                        )
                        
                        
                        (8,970
                        )
                        
                        
                        (7,246
                        )Net
      interest income
                        
                        
                        9,579
                        
                        
                        
                        10,795
                        
                        
                        
                        10,524
                        
                        
                        
                        10,243
                        
                        
                        
                        9,706Provision
      for loan losses
                        
                        
                        (4,210
                        )
                        
                        
                        (1,066
                        )
                        
                        
                        (470
                        )
                        
                        
                        (869
                        )
                        
                        
                        (1,250
                        )Net
      interest income after provision for loan losses
                        
                        
                        5,369
                        
                        
                        
                        9,729
                        
                        
                        
                        10,054
                        
                        
                        
                        9,374
                        
                        
                        
                        8,456Other
      income
                        
                        
                        3,684
                        
                        
                        
                        3,162
                        
                        
                        
                        2,876
                        
                        
                        
                        2,543
                        
                        
                        
                        2,561Other
      expense
                        
                        
                        (10,046
                        )
                        
                        
                        (10,167
                        )
                        
                        
                        (9,178
                        )
                        
                        
                        (8,537
                        )
                        
                        
                        (8,140
                        )Income
      (loss) before income taxes
                        
                        
                        (
      993
                        )
                        
                        
                        2,724
                        
                        
                        
                        3,752
                        
                        
                        
                        3,380
                        
                        
                        
                        2,877Income
      tax expense (benefit)
                        
                        
                        (596
                        )
                        
                        
                        (534
                        )
                        
                        
                        (949
                        )
                        
                        
                        (914
                        )
                        
                        
                        (721
                        )Net
      income (loss)
                        
                        $
                        (397
                        )
                        
                        $
                        2,190
                        
                        
                        $
                        2,803
                        
                        
                        $
                        2,466
                        
                        
                        $
                        2,156Net
      income (loss) per common share (Basic)
                        
                        $
                        (0.22
                        )
                        
                        $
                        1.21
                        
                        
                        $
                        1.50
                        
                        
                        $
                        1.29
                        
                        
                        $
                        1.10Net
      income (loss) per common share (Diluted)
                        
                        $
                        (0.22
                        )
                        
                        $
                        1.19
                        
                        
                        $
                        1.48
                        
                        
                        $
                        1.26
                        
                        
                        $
                        1.05Dividends
      paid per common stock
                        
                        $
                        0.46
                        
                        
                        $
                        0.455
                        
                        
                        $
                        0.43
                        
                        
                        $
                        0.40
                        
                        
                        $
                        0.40Weighted
      average number of common shares outstanding (Basic)
                        
                        
                        1,784,412
                        
                        
                        
                        1,810,916
                        
                        
                        
                        1,865,951
                        
                        
                        
                        1,914,357
                        
                        
                        
                        1,957,760Weighted
      average number of common shares outstanding (Diluted)
                        
                        
                        1,784,412
                        
                        
                        
                        1,846,980
                        
                        
                        
                        . 1,893,203
                        
                        
                        
                        1,962,920
                        
                        
                        
                        2,044,137
  27
  At December 31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004(Dollars In Thousands)Financial Condition:Total
      amount of:Assets
                            
                            $
                            434,218
                            
                            
                            $
                            407,641
                            
                            
                            $
                            387,630
                            
                            
                            $
                            371,042
                            
                            
                            $
                            351,598Cash
      and due from banks
                            
                            
                            21,370
                            
                            
                            
                            11,890
                            
                            
                            
                            9,124
                            
                            
                            
                            8,380
                            
                            
                            
                            13,197Securities
                            
                            
                            102,848
                            
                            
                            
                            111,187
                            
                            
                            
                            122,185
                            
                            
                            
                            146,283
                            
                            
                            
                            143,494Loans
      (net)
                            
                            
                            278,665
                            
                            
                            
                            256,487
                            
                            
                            
                            231,886
                            
                            
                            
                            192,577
                            
                            
                            
                            171,094Deposits
                            
                            
                            306,821
                            
                            
                            
                            270,399
                            
                            
                            
                            248,440
                            
                            
                            
                            234,988
                            
                            
                            
                            223,691Advances
      from Federal Home Loan Bank and other borrowings
                            
                            
                            69,500
                            
                            
                            
                            69,500
                            
                            
                            
                            70,000
                            
                            
                            
                            75,715
                            
                            
                            
                            63,500Securities
      sold under agreement to repurchase
                            
                            
                            19,005
                            
                            
                            
                            24,131
                            
                            
                            
                            28,533
                            
                            
                            
                            24,615
                            
                            
                            
                            27,898Floating
      rate junior subordinated deferrable interest debentures
                            
                            
                            12,372
                            
                            
                            
                            12,372
                            
                            
                            
                            12,372
                            
                            
                            
                            8,247
                            
                            
                            
                            8,247Shareholders’
      equity
                            
                            
                            23,924
                            
                            
                            
                            27,313
                            
                            
                            
                            25,967
                            
                            
                            
                            25,333
                            
                            
                            
                            26,019
 
 Years Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004Other Selected Data:Average
      interest rate spread
                      
                      
                      2.37
                      %
                      
                      
                      2.70
                      %
                      
                      
                      2.81
                      %
                      
                      
                      2.87
                      %
                      
                      
                      2.86
                      %Net
      interest margin
                      
                      
                      2.51
                      
                      
                      
                      2.91
                      
                      
                      
                      3.01
                      
                      
                      
                      3.02
                      
                      
                      
                      2.96Return
      on average assets
                      
                      
                      (0.10
                      )
                      
                      
                      0.55
                      
                      
                      
                      0.75
                      
                      
                      
                      0.68
                      
                      
                      
                      0.61Return
      on average shareholders’ equity
                      
                      
                      (1.46
                      )
                      
                      
                      8.25
                      
                      
                      
                      11.19
                      
                      
                      
                      9.68
                      
                      
                      
                      8.40Operating
      expense to average assets
                      
                      
                      2.33
                      
                      
                      
                      2.42
                      
                      
                      
                      2.28
                      
                      
                      
                      2.17
                      
                      
                      
                      2.14Ratio
      of average shareholders’ equity to average assets
                      
                      
                      6.60
                      
                      
                      
                      6.63
                      
                      
                      
                      6.68
                      
                      
                      
                      7.01
                      
                      
                      
                      7.28
 
 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.
 
 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.
  28
  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.
  29
  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 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Average
                                        Balance
                                      
                                      
                                      Interest
                                      
                                      
                                      Average
                                        Yield/Cost
                                      
                                      
                                      Average
                                        Balance
                                      
                                      
                                      Interest
                                      
                                      
                                      Average
                                        Yield/Cost
                                      
                                      
                                      Average
                                        Balance
                                      
                                      
                                      Interest
                                      
                                      
                                      Average
                                        Yield/Cost(Dollars in thousands)Interest-earning assets:Loans
      receivable, net (1)
                                      
                                      $
                                      275,238
                                      
                                      
                                      $
                                      17,230
                                      
                                      
                                      
                                      6.26
                                      %
                                      
                                      $
                                      240,192
                                      
                                      
                                      $
                                      19,048
                                      
                                      
                                      
                                      7.93
                                      %
                                      
                                      $
                                      211,799
                                      
                                      
                                      $
                                      16,924
                                      
                                      
                                      
                                      7.99
                                      %Mortgage-backed
      securities
                                      
                                      
                                      50,255
                                      
                                      
                                      
                                      2,710
                                      
                                      
                                      
                                      5.39
                                      
                                      
                                      
                                      30,059
                                      
                                      
                                      
                                      1,492
                                      
                                      
                                      
                                      4.96
                                      
                                      
                                      
                                      24,249
                                      
                                      
                                      
                                      1,041
                                      
                                      
                                      
                                      4.29Investment
      securities:Taxable
                                      
                                      
                                      41,147
                                      
                                      
                                      
                                      2,319
                                      
                                      
                                      
                                      5.64
                                      
                                      
                                      
                                      83,833
                                      
                                      
                                      
                                      4,708
                                      
                                      
                                      
                                      5.62
                                      
                                      
                                      
                                      96,489
                                      
                                      
                                      
                                      4,738
                                      
                                      
                                      
                                      4.91Nontaxable
                                      
                                      
                                      9,991
                                      
                                      
                                      
                                      471
                                      
                                      
                                      
                                      4.71
                                      
                                      
                                      
                                      12,906
                                      
                                      
                                      
                                      603
                                      
                                      
                                      
                                      4.67
                                      
                                      
                                      
                                      15,860
                                      
                                      
                                      
                                      736
                                      
                                      
                                      
                                      4.64Total
      investment securities
                                      
                                      
                                      51,138
                                      
                                      
                                      
                                      2,790
                                      
                                      
                                      
                                      5.46
                                      
                                      
                                      
                                      96,739
                                      
                                      
                                      
                                      5,311
                                      
                                      
                                      
                                      5.49
                                      
                                      
                                      
                                      112,349
                                      
                                      
                                      
                                      5,474
                                      
                                      
                                      
                                      4.87Deposits
      and federal funds sold
                                      
                                      
                                      4,364
                                      
                                      
                                      
                                      55
                                      
                                      
                                      
                                      1.26
                                      
                                      
                                      
                                      3,413
                                      
                                      
                                      
                                      158
                                      
                                      
                                      
                                      4.63
                                      
                                      
                                      
                                      1,117
                                      
                                      
                                      
                                      52
                                      
                                      
                                      
                                      4.66Total
      interest-earning assets
                                      
                                      
                                      380,995
                                      
                                      
                                      
                                      22,785
                                      
                                      
                                      
                                      5.98
                                      
                                      
                                      
                                      370,403
                                      
                                      
                                      
                                      26,009
                                      
                                      
                                      
                                      7.02
                                      
                                      
                                      
                                      349,514
                                      
                                      
                                      
                                      23,491
                                      
                                      
                                      
                                      6.72Non-interest-earning
      assets
                                      
                                      
                                      31,509
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      29,752
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      24,569Total
      assets
                                      
                                      $
                                      412,504
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      400,155
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      374,083Interest-bearing
      liabilities:Savings
      accounts
                                      
                                      
                                      12,888
                                      
                                      
                                      
                                      83
                                      
                                      
                                      
                                      0.64
                                      
                                      
                                      
                                      14,486
                                      
                                      
                                      
                                      111
                                      
                                      
                                      
                                      0.77
                                      
                                      
                                      
                                      16,137
                                      
                                      
                                      
                                      106
                                      
                                      
                                      
                                      0.66Negotiable
      order of withdrawal accounts (2)
                                      
                                      
                                      83,966
                                      
                                      
                                      
                                      2,147
                                      
                                      
                                      
                                      2.55
                                      
                                      
                                      
                                      74,326
                                      
                                      
                                      
                                      2,426
                                      
                                      
                                      
                                      3.26
                                      
                                      
                                      
                                      74,411
                                      
                                      
                                      
                                      2,339
                                      
                                      
                                      
                                      3.14Certificate
      accounts
                                      
                                      
                                      164,077
                                      
                                      
                                      
                                      6,729
                                      
                                      
                                      
                                      4.10
                                      
                                      
                                      
                                      155,490
                                      
                                      
                                      
                                      7,295
                                      
                                      
                                      
                                      4.69
                                      
                                      
                                      
                                      137,663
                                      
                                      
                                      
                                      5,291
                                      
                                      
                                      
                                      3.84FHLB
      advances and other borrowings
                                      
                                      
                                      104,496
                                      
                                      
                                      
                                      4,247
                                      
                                      
                                      
                                      4.06
                                      
                                      
                                      
                                      107,823
                                      
                                      
                                      
                                      5,382
                                      
                                      
                                      
                                      4.99
                                      
                                      
                                      
                                      103,034
                                      
                                      
                                      
                                      5,231
                                      
                                      
                                      
                                      5.08Total
      interest-bearing liabilities
                                      
                                      
                                      365,427
                                      
                                      
                                      
                                      13,206
                                      
                                      
                                      
                                      3.61
                                      
                                      
                                      
                                      352,125
                                      
                                      
                                      
                                      15,214
                                      
                                      
                                      
                                      4.32
                                      
                                      
                                      
                                      331,245
                                      
                                      
                                      
                                      12,967
                                      
                                      
                                      
                                      3.91Noninterest-bearing
      sources:Non-interest-bearing
      deposits
                                      
                                      
                                      16,807
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      18,288
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      15,397Non-interest-bearing
      liabilities
                                      
                                      
                                      3,026
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,007
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,183Total
      liabilities
                                      
                                      
                                      385,260
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      373,420
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      348,825Shareholders’
      equity
                                      
                                      
                                      27,244
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      26,735
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      25,258Total
      liabilities and shareholders’ equity
                                      
                                      $
                                      412,504
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      400,155
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      374,083Net
      interest income
                                      
                                      
                                      
                                      
                                      
                                      $
                                      9,579
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      10,795
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      10,524Interest
      rate spread (3)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.37
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.70
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.81
                                      %Impact
      of noninterest-bearing sources
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.14
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.21
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.20Net
      interest margin (4)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.51
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.91
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.01
                                      %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                                      
                                      
                                      1.04x
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1.05x
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      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.
  30
  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,
                      2008 vs. 2007Volume
                    
                    
                    Rate
                    
                    
                    Total(Dollars in Thousands)Change
      in interest income:Loans
                    
                    $
                    2,779
                    
                    
                    $
                    (4,597
                    )
                    
                    $
                    (1,818
                    )Mortgage-backed
      securities
                    
                    
                    1,002
                    
                    
                    
                    216
                    
                    
                    
                    1,218Investment
      securities (1)
                    
                    
                    (2,438
                    )
                    
                    
                    (186
                    )
                    
                    
                    (2,624
                    )Total
      interest income
                    
                    
                    1,343
                    
                    
                    
                    (4,567
                    )
                    
                    
                    (3,224
                    )Change
      in interest expense:Deposits
                    
                    
                    567
                    
                    
                    
                    (1,440
                    )
                    
                    
                    (873
                    )Borrowings
      and other
                    
                    
                    (166
                    )
                    
                    
                    (969
                    )
                    
                    
                    (1,135
                    )Total
      interest expense
                    
                    
                    401
                    
                    
                    
                    (2,409
                    )
                    
                    
                    (2,008
                    )Change
      in net interest income
                    
                    $
                    942
                    
                    
                    $
                    (2,158
                    )
                    
                    $
                    (1,216
                    )
 ________________________________
 (1)
Includes fed funds and overnight deposits.
 
 Results
of Operations
 
 Comparison
of Years Ended December 31, 2008 and December 31, 2007
 
 The Corporation recorded a net loss for
year ended December 31, 2008 of approximately $397,000 compared to net
income of approximately $2.2 million for the year ended December 31,
2007. Net loss per share was ($0.22) per share (basic) and ($0.22) per
share (diluted) for the year ended December 31, 2008 compared to $1.21 per share
(basic) and $1.19 per share (diluted) for the year ended December 31, 2007. Net
interest income before the loan loss provision for the year ended December 31,
2008 decreased $1.2 million, or 11.3%, to $9.6 million compared to $10.8 million
for the previous year.  The decrease was due primarily to a
compression of the net interest margin caused by declining interest rates along
with an increase in the provision for loan losses due to loan growth and the
increase in non-performing loans, classified loans and charge-offs, offset by an
increase in non-interest income and a reduction in non-interest
expense.
 
 Interest
Income.Total interest income decreased $3.2 million, or
12.4%, from $26.0 million for the year ended December 31, 2007 to $22.8
million for the year ended December 31, 2008. Interest income on loans decreased
$1.8 million, or 9.5%, from $19.0 million for 2007 to $17.2 million for 2008 due
primarily to declining market rates, offset by higher average balance of loans.
The Corporation’s continued focus on variable and prime-based lending resulted
in net growth in consumer and commercial real estate loans of 12.6% while
residential mortgage loans declined 2.9%. Interest income on deposits, federal
funds sold and investment securities decreased $1.4 million, or 20.2%, from $7.0
million for 2007 to $5.6 million for 2008.  The decrease was due primarily
to lower average balances as proceeds from the maturity and sale of investment
securities were utilized to fund growth in higher-yielding loans, offset by
higher investment yields.
 
 Interest
Expense.Interest expense decreased 13.2% to $13.2 million for
2008 from $15.2 million for 2007. Interest expense decreased $873,000 for
deposits and decreased $1.1 million for other borrowings and floating rate
junior subordinated deferrable interest debentures. Interest expense for
deposits decreased due primarily to lower market interest rates, offset by
higher average balances. Interest expense on other borrowings decreased due to
lower market interest rates and lower average balances.
  31
  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 $1.1 million for 2007 to $4.2 million
for 2008 primarily due to: (1) an increase in non-performing and classified
assets; (2) increased growth, primarily in commercial real estate 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 $3.4 million to $6.8 million as of December 31, 2008 compared
to $3.3 million as of December 31, 2007. Non-performing assets increased
$12.9 million from $3.8 million at December 31, 2007 to $16.7 million at
December 31, 2008. The majority of this increase relates primarily to four
commercial real estate relationships totaling $10.7 million that have been
affected by the downturn in the residential housing market. Slow housing
conditions have affected these borrowers’s ability to sell the completed
projects in a timely manner. The Corporation considers all non-accrual loans to
be impaired. Therefore, at December 31, 2008, loans classified as impaired under
FASB 114 totaled $16.0 million and carried a specific reserve of $3.5 million.
Management believes the specific reserves allocated to these and other non
accrual loans will offset losses, if any, arising from less than full recovery
of the loans from the supporting collateral. Management continues to evaluate
and assess all nonperforming assets on a regular basis as part of its
well-established loan monitoring and review process.  Total classified
loans, including non-performing  loans, increased $27.1 million to
$36.1 million as of December 31, 2008 compared to $9.0 million as of December
31, 2007. The majority of this increase relates primarily to commercial real
estate relationships that have been affected by the current economic
downturn.
 
 The Corporation experienced loan
charge-offs, net of recoveries, of approximately $776,000 for 2008 compared to
$476,000 for 2007.  The loan charge-offs for 2008 related primarily to
write-downs required in the disposition of commercial loans. The allowance for
loan losses to total loans at December 31, 2008 was 2.36% compared to 1.28% at
December 31, 2007.  The allowance for loan losses to non-performing loans
at December 31, 2008 was 40.6% compared to 88.37% at December 31,
2007.
 
 Non-Interest
Income.Non-interest income increased 16.5% to $3.7 million
for the year ended December 31, 2008 from $3.2 million for the year ended
December 31, 2007.  Fees for financial services increased $73,000 to $3.1
million, primarily due to higher fees as a result of an increase in transaction
accounts, offset by lower fees generated from third party investment brokerage
and financing receivables programs as a result of lower product
volumes.  Gain on sale of investments were $498,000 for 2008 as the
Corporation sold $30.9 million in investment securities to improve yield spreads
and to fund growth  in higher-yielding loans.
  32
  Non-Interest
Expense.Non-interest expense decreased 1.2% to $10.0 million
for the year ended December 31, 2008 from $10.2 million for the year ended
December 31, 2007. Compensation and employee benefits decreased .08%, or $4,000,
compared to the year ended December 31, 2007 due primarily to reductions in
accrued incentive compensation expense and reductions in employee pension
benefit costs, offset by normal merit salary increases. Occupancy and
equipment expenses decreased 2.1%, or $52,000, due to the closing of a banking
center in the previous year. Deposit insurance premiums expense increased
$70,000, or 233.3%, to $100,000 for 2008 from $30,000 for 2007, due to higher
FDIC premium assessments as a result of a one-time assessment credit under the
Federal Insurance Reform Act becoming fully utilized. Professional services
expense decreased 22.1%, or $102,000, due primarily to lower legal and
consultant expenses.  Advertising and public relations expense
decreased 11.6%, or $29,000, from the year ended December 31, 2007 to the year
ended December 31, 2008 due primarily to lower product and promotion
expenses. Loan operations costs increased $36,000, or 24.0%, to $186,000
for the year ended December 31, 2008 from $150,000 for the year ended December
31, 2007, due to higher disposition costs associated with foreclosed real estate
properties. Intangible amortization expense decreased $64,000, or
13.3%, to $416,000 for the year ended December 31, 2008 from $480,000 for 2007,
due to deposit premiums related to branch acquisitions becoming fully amortized.
Items processing expense increased $38,000, or 17.2%, to $259,000 for the
year ended December 31, 2008 from $221,000 for the year ended December 31, 2007
due to an increase in transaction accounts. Other operating expense
decreased 1.5%, or $14,000, for the year ended December 31, 2008 compared
to the year ended December 31, 2007 due primarily to lower postage and office
supply expense.
 
 Income Tax
Expense.Due to the net loss that the Corporation recorded for
the year ended December 31, 2008, the net income tax benefit was $596,000
compared to a net income tax expense of $534,000 for the year ended December 31,
2007 with an effective income tax rate of 19.60%.
 
 Financial
Condition, Liquidity and Capital Resources
 
 Financial
Condition
 
 Assets.At
December 31, 2008, the Corporation’s assets totaled $434.2 million,
an increase of $26.6 million, or 6.5%, as compared to
$407.6 million at December 31, 2007. Cash and due from banks increased $9.5
million to $21.4 million from $11.9 million at December 31, 2007. The increase
was due primarily to an increase in overnight deposits as a result of
significant deposit growth in the last month of the fiscal year. Investment and
mortgage-backed securities decreased $8.3 million to $102.8 million from $111.2
million at December 31, 2007 as proceeds from the maturity and sale of
investment securities were utilized to fund growth in higher-yielding loans. The
Corporation increased its level of mortgage-backed securities by $12.2 million
to $57.4 million with reductions in municipal and government sponsored
enterprises securities due to cash flow liquidity generated with the securities
along with lower risk weights required for risk-based capital.
 
 Total loans, net, increased $22.2
million, or 8.6%, to $278.7 million at December 31, 2008 from $256.5 million at
December 31, 2007. The Corporation continues to focus on originating 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 loans increased $5.2 million, or 9.9%, during 2008,
commercial loans increased $23.5 million, or 13.0%, and residential mortgage
loans decreased $3.6 million or 12.3%. Other assets increased $3.0 million,
or 87.5%, to $6.5 million at December 31, 2008 from $3.4 million at December 31,
2007 due to an increase in deferred income taxes as a result of the $397,000 net
loss in 2008 compared to the net income of $2.2 million for 2007.
 
 Liabilities.Total
liabilities increased $30.0 million, or 7.9%, to $410.3 million at December 31,
2008 from $380.3 million at December 31, 2007.
 
 Total deposits increased $36.4 million,
or 13.5%, from $270.4 million at December 31, 2007 to $306.8 million at December
31, 2008. Time deposits increased $25.5 million, or 15.8%, from $161.6 million
at December 31, 2007 to $187.1 million at December 31, 2008 while transaction
deposit accounts increased $10.9 million, or 10.1%, from $108.8 million at
December 31, 2007 to $119.8 million at December 31, 2008. The increase in
transaction accounts was due primarily to a special account promotion. The
Corporation continues to target lower cost demand deposit accounts versus
traditional higher cost certificates of deposits. The increase in deposits was
utilized to fund the loan growth and to pay down borrowings for the
year.
  33
  Shareholders’
Equity.Shareholders’ equity decreased $3.4 million, or 12.4%,
to $23.9 million at December 31, 2008 from $27.3 million at December 31, 2007
due to a net loss of $397,000, a $1.9 million increase in unrealized losses on
securities available for sale, the payment of $822,000 in dividends and $345,000
used to repurchase 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 2008,
the Corporation repurchased a total of 19,706 shares at a weighted average cost
of $17.51 per share for a total of $345,000 compared to the repurchase of 53,119
shares at a weighted average cost of $20.65 per share for a total of $1.1
million for 2007. However, as part of the Company’s participation in the
Capital Repurchase Program of the U.S. Department of Treasury’s Troubled Asset
Repurchase Program, prior to the earlier of March 13, 2012 or the date on which
the preferred stock issued in that transaction has been redeemed in full or the
Treasury has transferred its shares to non-affiliates, the Company cannot
increase repurchase any shares of its common stock, without the prior approval
of the Treasury.
 
 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, 2008, the Corporation originated $89.6
million in loans and purchased $13.5 million in loan participations. At
December 31, 2008, the Corporation’s holdings of investment and mortgage-backed
securities totaled $102.8 million, $100.4 million of which was available for
sale. Approximately $80.6 million and $74.1 million of investment securities at
December 31, 2008 and December 31, 2007, 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,
2008, total deposits increased $36.4 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, 2008, totaled
$141.9 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, 2008, the Corporation had outstanding $69.5 million of
FHLB borrowings and $19.0 million of securities sold under agreements to
repurchase. At December 31, 2008, the Corporation had unused short-term
lines of credit to purchase federal funds from unrelated banks totaling $12.3
million and the ability to borrow an additional $15.0 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, 2008, 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.
  34
  Off-Balance
Sheet Arrangements
 
 In the normal course of operations, the
Corporation engages in a variety of financial transactions that, in accordance
with generally accepted accounting principles are not recorded in its financial
statements. These transactions involve, to varying degrees, elements of credit,
interest rate and liquidity risk. Such transactions are used primarily to manage
customer’s requests for funding and take the form of legally binding agreements
to lend money to customers at predetermined interest rates for a specified
period of time. Outstanding loan commitments (including commitments to fund
credit lines) totaled $55.8 million at December 31, 2008. 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, 2008, the undisbursed
portion of construction loans was $1.9 million and the unused portion of credit
lines was $49.4 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, 2008,
the Corporation did not engage in any off-balance sheet transactions reasonably
likely to have a material effect on its financial condition, results of
operation and cash flows.
 
 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
 
 Not
applicable as issuer is a smaller reporting company.
 
 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, 2008, 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, 2008 is effective.
  35
  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.
  36
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The Board
of Directors
 Provident
Community Bancshares, Inc.
 Rock
Hill, South Carolina
 
 
 We have
audited the accompanying consolidated balance sheets of Provident Community
Bancshares, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the 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 the significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements present fairly, in all material
respects, the consolidated financial position of Provident Community Bancshares,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and the consolidated
results of their operations and their cash flows for the years then ended, 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, 2008 included in the accompanying
Management's Report on Internal Control over Financial Reporting, and
accordingly, we do not express an opinion thereon.
    /s/
Elliott Davis, LLC
  Elliott
Davis, LLC
 Columbia,
South Carolina
 March 9,
2009
 vvww.elliottdavis.com
  37
  Provident
Community Bancshares, Inc. and Subsidiaries
 Consolidated Balance
Sheets
 
 As of December 31,2008
                        
                        
                        2007(In Thousands)AssetsCash
      and due from banks
                        
                        $
                        21,370
                        
                        
                        $
                        11,890Investments
      and mortgage-backed securitiesHeld
      to maturity (market value of $2,310,000 and $3,135,000 atDecember
      31, 2008 and 2007)
                        
                        
                        2,430
                        
                        
                        
                        3,126Available
      for sale (at fair value)
                        
                        
                        100,418
                        
                        
                        
                        108,061Total
      investment and mortgage-backed securities
                        
                        
                        102,848
                        
                        
                        
                        111,187Loans,
      net of allowance for loan losses of $6,778,000 in 2008 and$3,344,000 in 2007
                        
                        
                        278,665
                        
                        
                        
                        256,487Federal
      Home Loan Bank stock, at cost
                        
                        
                        3,929
                        
                        
                        
                        3,826Federal
      Reserve Bank stock, at cost
                        
                        
                        599
                        
                        
                        
                        599Office
      properties and equipment, net
                        
                        
                        5,837
                        
                        
                        
                        5,145Accrued
      interest receivable
                        
                        
                        2,087
                        
                        
                        
                        2,625Intangible
      assets
                        
                        
                        2,845
                        
                        
                        
                        3,261Cash
      surrender value of life insurance
                        
                        
                        9,577
                        
                        
                        
                        9,175Other
      assets
                        
                        
                        6,461
                        
                        
                        
                        3,446Total
      assets
                        
                        $
                        434,218
                        
                        
                        $
                        407,641LiabilitiesDeposits
                        
                        $
                        306,821
                        
                        
                        $
                        270,399Advances
      from the Federal Home Loan Bank
                        
                        
                        69,500
                        
                        
                        
                        69,500Securities
      sold under agreements to repurchase
                        
                        
                        19,005
                        
                        
                        
                        24,131Floating
      rate junior subordinated deferrable interest debentures
                        
                        
                        12,372
                        
                        
                        
                        12,372Accrued
      interest payable
                        
                        
                        701
                        
                        
                        
                        742Other
      liabilities
                        
                        
                        1,895
                        
                        
                        
                        3,184Total
      liabilities
                        
                        
                        410,294
                        
                        
                        
                        380,328Commitments
      and contingencies – Note 14Shareholders’ equitySerial
      preferred stock, no par value, authorized – 500,000 shares,issued
      and outstanding – None
                        
                        
                        —
                        
                        
                        
                        —Common
      stock – $0.01 par value, authorized – 5,000,000 shares issuedand outstanding – 1,787,092 shares at December 31, 2008 and1,794,866 shares at December 31, 2007
                        
                        
                        20
                        
                        
                        
                        20Additional
      paid-in capital
                        
                        
                        12,903
                        
                        
                        
                        12,781Accumulated
      other comprehensive income (loss)
                        
                        
                        (1,696
                        )
                        
                        
                        191Retained
      earnings, substantially restricted
                        
                        
                        18,997
                        
                        
                        
                        20,276Treasury
      stock, at cost
                        
                        
                        (6,300
                        )
                        
                        
                        (5,955
                        )Total
      shareholders’ equity
                        
                        
                        23,924
                        
                        
                        
                        27,313Total
      liabilities and shareholders’ equity
                        
                        $
                        434,218
                        
                        
                        $
                        407,641
 
 See
Notes to Consolidated Financial Statements.
  38
  Provident
Community Bancshares, Inc. and Subsidiaries
 ConsolidatedStatements of
Income
 
 Years Ended
                  December 31,2008
                
                
                2007(In Thousands, Except Share Data)Interest
      Income:Loans
                
                $
                17,230
                
                
                $
                19,048Deposits
      and federal funds sold
                
                
                55
                
                
                
                158Securities
      available for sale:State
      and municipal (non taxable)
                
                
                352
                
                
                
                478Other
      investments (taxable)
                
                
                4,842
                
                
                
                5,953Securities
      held to maturity and FHLB/FRBstock
      dividends
                
                
                306
                
                
                
                372Total
      interest income
                
                
                22,785
                
                
                
                26,009Interest
      Expense:Deposit
      accounts
                
                
                8,959
                
                
                
                9,832Floating
      rate junior subordinated deferrableInterest
      debentures
                
                
                721
                
                
                
                897Advances
      from the FHLB and other borrowings
                
                
                3,526
                
                
                
                4,485Total
      interest expense
                
                
                13,206
                
                
                
                15,214Net
      Interest Income
                
                
                9,579
                
                
                
                10,795Provision
      for loan losses
                
                
                4,210
                
                
                
                1,066Net
      interest income after provision for loan losses
                
                
                5,369
                
                
                
                9,729Non-Interest
      income:Fees
      for financial services
                
                
                3,085
                
                
                
                3,012Other
      fees, net
                
                
                101
                
                
                
                90Net
      gain on sale of investments
                
                
                498
                
                
                
                58Total
      non-interest income
                
                
                3,684
                
                
                
                3,162Non-Interest
      Expense:Compensation
      and employee benefits
                
                
                4,946
                
                
                
                4,950Occupancy
      and equipment
                
                
                2,476
                
                
                
                2,528Deposit
      insurance premiums
                
                
                100
                
                
                
                30Professional
      services
                
                
                359
                
                
                
                461Advertising
      and public relations
                
                
                221
                
                
                
                250Loan
      operations
                
                
                186
                
                
                
                150Telephone
                
                
                190
                
                
                
                190Items
      processing
                
                
                259
                
                
                
                221Intangible
      amortization
                
                
                416
                
                
                
                480Other
                
                
                893
                
                
                
                907Total
      non-interest expense
                
                
                10,046
                
                
                
                10,167Income
      (loss) before income taxes
                
                
                (993
                )
                
                
                2,724Provision
      (benefit) for income taxes
                
                
                (596
                )
                
                
                534Net
      income (loss)
                
                $
                ( 397
                )
                
                $
                2,190Net
      income (loss) per common share (basic)
                
                $
                (0.22
                )
                
                $
                1.21Net
      income (loss) per common share (diluted)
                
                $
                ( 0.22
                )
                
                $
                1.19Cash
      dividends per common share
                
                $
                0.460
                
                
                $
                0.455Weighted
      average number of common sharesoutstanding
      (basic)
                
                
                1,784,412
                
                
                
                1,810,916Weighted
      average number of common shares outstanding (diluted)
                
                
                1,784,412
                
                
                
                1,846,980
  See
Notes to Consolidated Financial Statements.
  39
  Provident
Community Bancshares, Inc. and Subsidiaries
 Consolidated Statements of Changes in Shareholders’
Equity and Comprehensive Income
  Common StockShares
                                  
                                  
                                  Amount
                                  
                                  
                                  AdditionalPaid-InCapital
                                  
                                  
                                  Retained EarningsSubstantiallyRestricted
                                  
                                  
                                  Accumulated OtherComprehensive
                                    Income (Loss)
                                  
                                  
                                  TreasuryStock At Cost
                                  
                                  
                                  Total
                                    Shareholders’
                                    Equity(In
      Thousands, Except Share Data)Balance
      at December 31, 2006
                                  
                                  
                                  1,830,528
                                  
                                  
                                  $
                                  20
                                  
                                  
                                  $
                                  12,506
                                  
                                  
                                  $
                                  18,912
                                  
                                  
                                  $
                                  (610
                                  )
                                  
                                  $
                                  (4,861
                                  )
                                  
                                  $
                                  25,967Net
      Income
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  2,190
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  2,190Other
      comprehensive income, net of tax on unrealized holding gains arising
      during period
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  816
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  816Less
      reclassification adjustment for losses included in net
    income
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (15
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (15
                                  )Comprehensive
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,991Stock
      option activity, net
                                  
                                  
                                  11,561
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  157
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  157Dividend
      plan contributions
                                  
                                  
                                  5,896
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  118
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  118Share
      repurchase program
                                  
                                  
                                  (53,119
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (1,094
                                  )
                                  
                                  
                                  (1,097
                                  )Cash
      dividend ($0.455 per share)
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (826
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (826
                                  )Balance
      at December 31, 2007
                                  
                                  
                                  1,794,866
                                  
                                  
                                  $
                                  20
                                  
                                  
                                  $
                                  12,781
                                  
                                  
                                  $
                                  20,276
                                  
                                  
                                  $
                                  191
                                  
                                  
                                  $
                                  (5,955
                                  )
                                  
                                  $
                                  27,313Net
      Income (loss)
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (397
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (397
                                  )Other
      comprehensive loss, net of tax on unrealized holding gains arising during
      period
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (2,173
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (2,173
                                  )Less
      reclassification adjustment for gains included in net
    income
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  286
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  286Comprehensive
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (2,284
                                  )Stock
      option activity, net
                                  
                                  
                                  1,424
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  2Dividend
      plan contributions
                                  
                                  
                                  10,508
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  120
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  120Cumulative
      effect of change in accounting principal
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (60
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (60
                                  )Share
      repurchase program
                                  
                                  
                                  (19,706
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (345
                                  )
                                  
                                  
                                  (345
                                  )Cash
      dividend ($0.46 per share)
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (822
                                  )
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (822
                                  )Balance
      at December 31, 2008
                                  
                                  
                                  1,787,092
                                  
                                  
                                  $
                                  20
                                  
                                  
                                  $
                                  12,903
                                  
                                  
                                  $
                                  18,997
                                  
                                  
                                  $
                                  (1,696
                                  )
                                  
                                  $
                                  (6,300
                                  )
                                  
                                  $
                                  23,924
 
 See
Notes to Consolidated Financial Statements.
  40


Provident
Community Bancshares, Inc. and Subsidiaries
 ConsolidatedStatements of Cash
Flows
 
 Years Ended
                                                    December 31,2008
                                                  
                                                  2007(In Thousands)Operating
      activities:Net
      income
      (loss)
                                                  
                                                  $
                                                  (397
                                                  )
                                                  $
                                                  2,190Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision for loan
      losses
                                                  
                                                  
                                                  4,210
                                                  
                                                  
                                                  1,066Amortization
      expense
                                                  
                                                  
                                                  523
                                                  
                                                  
                                                  480Depreciation
      expense
                                                  
                                                  
                                                  652
                                                  
                                                  
                                                  652Recognition of deferred income,
      net of costs
                                                  
                                                  
                                                  (515
                                                  )
                                                  
                                                  (545
                                                  )Deferral of fee income, net of
      costs
                                                  
                                                  
                                                  435
                                                  
                                                  
                                                  653Stock compensation
      expense
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  45Loss on write-down of fixed
      asset
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  135Gain on
      investments
                                                  
                                                  
                                                  (498
                                                  )
                                                  
                                                  (58
                                                  )Decrease in accrued interest
      receivable
                                                  
                                                  
                                                  538
                                                  
                                                  
                                                  92Loss on sale of assets acquired
      from foreclosed loans
                                                  
                                                  
                                                  (28
                                                  )
                                                  
                                                  35Increase in bank owned life
      insurance
                                                  
                                                  
                                                  (402
                                                  )
                                                  
                                                  (362
                                                  )Increase in other
      assets
                                                  
                                                  
                                                  (594
                                                  )
                                                  
                                                  (1,312
                                                  )Decrease in accrued interest
      payable
                                                  
                                                  
                                                  (41
                                                  )
                                                  
                                                  (42
                                                  )Increase (decrease) in other
      liabilities
                                                  
                                                  
                                                  (1,290
                                                  )
                                                  
                                                  1,650Net
      cash provided by operating activities
                                                  
                                                  
                                                  2,593
                                                  
                                                  
                                                  4,679Investing
      activities:Purchase
      of investment and mortgage-backed  securities:Available
      for
      sale
                                                  
                                                  
                                                  (74,450
                                                  )
                                                  
                                                  (60,701
                                                  )Proceeds
      from maturity of investment and mortgage-backed
securities:Available
      for
      sale
                                                  
                                                  
                                                  34,650
                                                  
                                                  
                                                  53,966Held
      to
      maturity
                                                  
                                                  
                                                  696
                                                  
                                                  
                                                  —Proceeds
      from sale of investment and mortgage-backed securities:Available
      for
      sale
                                                  
                                                  
                                                  37,040
                                                  
                                                  
                                                  13,840Principal
      repayments on mortgage-backed securitiesAvailable
      for
      sale
                                                  
                                                  
                                                  7,394
                                                  
                                                  
                                                  4,558Purchase
      of bank owned life insurance
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  (3,200
                                                  )Net
      increase in
      loans
                                                  
                                                  
                                                  (28,063
                                                  )
                                                  
                                                  (25,574
                                                  )Purchase
      (redemption) of FHLB/FRB stock
                                                  
                                                  
                                                  (103
                                                  )
                                                  
                                                  97Proceeds
      from sales of foreclosed assets, net of costs and
    improvements
                                                  
                                                  
                                                  875
                                                  
                                                  
                                                  169Purchase
      of office properties and equipment
                                                  
                                                  
                                                  (1,344
                                                  )
                                                  
                                                  (480
                                                  )Net
      cash used in investing
      activities
                                                  
                                                  
                                                  (23,305
                                                  )
                                                  
                                                  (17,325
                                                  )Financing
      activities:Proceeds
      from the exercise of stock options
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  157Proceeds
      from dividend reinvestment plan
                                                  
                                                  
                                                  120
                                                  
                                                  
                                                  118Dividends
      paid in
      cash
                                                  
                                                  
                                                  (821
                                                  )
                                                  
                                                  (826
                                                  )Split
      dollar post retirement liability recapitalization
                                                  
                                                  
                                                  (60
                                                  )
                                                  
                                                  —Repayment
      of term borrowings,
      net
                                                  
                                                  
                                                  (5,126
                                                  )
                                                  
                                                  (4,902
                                                  )Share
      repurchase
      program
                                                  
                                                  
                                                  (345
                                                  )
                                                  
                                                  (1,094
                                                  )Increase
      in deposit
      accounts
                                                  
                                                  
                                                  36,422
                                                  
                                                  
                                                  21,959Net
      cash provided by financing activities
                                                  
                                                  
                                                  30,192
                                                  
                                                  
                                                  15,412Net
      increase in cash and due from banks
                                                  
                                                  
                                                  9,480
                                                  
                                                  
                                                  2,766Cash
      and due from banks at beginning of period
                                                  
                                                  
                                                  11,890
                                                  
                                                  
                                                  9,124Cash
      and due from banks at end of period
                                                  
                                                  $
                                                  21,370
                                                  
                                                  $
                                                  11,890
 
 41
  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 products and services through nine full-service
banking centers in five counties in South Carolina, including 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.
 
 Estimates - 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
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Loans - Loans are
stated at the principal balance outstanding. 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.
 
 Loans on non-accrual status as well as
real estate acquired through foreclosure or deed taken in lieu of foreclosure
are considered non-performing assets.
 
 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.
  43
  1.
                Summary
      of Significant Accounting Policies
(continued)
 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 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, 2008, impaired loans totaled $16.0 million
and the Corporation had recognized no interest income from impaired loans. The
average balance in impaired loans was $9.5 million for
2008.
 
 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.
  44
  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.
  45
  1.
              Summary of Significant
      Accounting Policies
(continued)
  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 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, 2008 were 0 compared
to 36,064 at December 31, 2007.
 
 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 anddue from banks - The carrying
amounts of cash and due from banks 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.
 
 46
 
 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 Corporation 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 Corporation 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 Corporation’s stock options because the option exercise
price in its plans equals the market price on the date of grant.
 
 There were no stock options granted in
2008 or 2007.
 
 47
 
 2.
              Investment
      and Mortgage-backed Securities
 
 Held to
Maturity - Securities classified as held to maturity consisted
of the following (in thousands):
 
 AsofDecember31,2008Amortized
                                
                                
                                Gross Unrealized
                                
                                
                                FairCost
                                
                                
                                Gains
                                
                                
                                Losses
                                
                                
                                ValueMunicipal
      Securities
                                
                                $
                                2,430
                                
                                
                                $
                                —
                                
                                
                                $
                                (120
                                )
                                
                                $
                                2,310
 
 Available for
Sale - Securities classified as available for sale consisted of
the following (in thousands):
 
 As of December 31, 2008Amortized
                          
                          
                          Gross Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueInvestment
      Securities:U.S. Agency
      Obligations
                          
                          $
                          6
                          
                          
                          $
                          –
                          
                          
                          $
                          —
                          
                          
                          $
                          6Government
      Sponsored Enterprises
                          
                          
                          27,901
                          
                          
                          
                          331
                          
                          
                          
                          (2
                          )
                          
                          
                          28,230Municipal
      Securities
                          
                          
                          6,135
                          
                          
                          
                          223
                          
                          
                          
                          –
                          
                          
                          
                          6,358Trust Preferred
      Securities
                          
                          
                          12,325
                          
                          
                          
                          –
                          
                          
                          
                          (3,933
                          )
                          
                          
                          8,392Total
      Investment
      Securities
                          
                          
                          46,367
                          
                          
                          
                          554
                          
                          
                          
                          (3,935
                          )
                          
                          
                          42,986Mortgage-backed
      Securities:Fannie
      Mae
                          
                          
                          31,989
                          
                          
                          
                          452
                          
                          
                          
                          (56
                          )
                          
                          
                          32,385Ginnie
      Mae
                          
                          
                          21,311
                          
                          
                          
                          567
                          
                          
                          
                          –
                          
                          
                          
                          21,878Freddie
      Mac
                          
                          
                          2,551
                          
                          
                          
                          33
                          
                          
                          
                          (10
                          )
                          
                          
                          2,574Collateralized Mortgage
      Obligations
                          
                          
                          809
                          
                          
                          
                          –
                          
                          
                          
                          (214
                          )
                          
                          
                          595Total
      Mortgage-backed Securities
                          
                          
                          56,660
                          
                          
                          
                          1,052
                          
                          
                          
                          (280
                          )
                          
                          
                          57,432Total
      available for
      sale
                          
                          $
                          103,027
                          
                          
                          $
                          1,606
                          
                          
                          $
                          (4,215
                          )
                          
                          $
                          100,418
 
 Held to
Maturity - Securities classified as held to maturity consisted
of the following (in thousands):
  As of December 31, 2007Amortized
                      
                      
                      Gross Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueMunicipal
      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, 2007Amortized
                      
                      
                      Gross Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueInvestment
      Securities:U.S. Agency
      Obligations
                      
                      $
                      507
                      
                      
                      $
                      –
                      
                      
                      $
                      (19
                      )
                      
                      $
                      488Government
      Sponsored Enterprises
                      
                      
                      40,457
                      
                      
                      
                      238
                      
                      
                      
                      (30
                      )
                      
                      
                      40,665Municipal
      Securities
                      
                      
                      9,296
                      
                      
                      
                      305
                      
                      
                      
                      –
                      
                      
                      
                      9,601Trust Preferred
      Securities
                      
                      
                      12,458
                      
                      
                      
                      –
                      
                      
                      
                      (365
                      )
                      
                      
                      12,093Total
      Investment
      Securities
                      
                      
                      62,718
                      
                      
                      
                      543
                      
                      
                      
                      (414
                      )
                      
                      
                      62,847Mortgage-backed
      Securities:Fannie
      Mae
                      
                      
                      27,511
                      
                      
                      
                      204
                      
                      
                      
                      (236
                      )
                      
                      
                      27,479Ginnie
      Mae
                      
                      
                      1,187
                      
                      
                      
                      13
                      
                      
                      
                      –
                      
                      
                      
                      1,200Freddie
      Mac
                      
                      
                      12,860
                      
                      
                      
                      226
                      
                      
                      
                      (6
                      )
                      
                      
                      13,080Collateralized Mortgage
      Obligations
                      
                      
                      3,492
                      
                      
                      
                      –
                      
                      
                      
                      (37
                      )
                      
                      
                      3,455Total
      Mortgage-backed Securities
                      
                      
                      45,050
                      
                      
                      
                      443
                      
                      
                      
                      (279
                      )
                      
                      
                      45,214Total
      available for
      sale
                      
                      $
                      107,768
                      
                      
                      $
                      986
                      
                      
                      $
                      (693
                      )
                      
                      $
                      108,061
 48
 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, 2008 (in thousands).
 
 Less than 12 Months
                      
                      
                      12 Months or More
                      
                      
                      TotalFair
                        Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      Fair
                        Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      Fair
                        Value
                      
                      
                      Unrealized
                        LossesSecuritiesAvailablefor SaleU.S.
      AgencyObligations
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      –Government
      Sponsored Enterprises
                      
                      
                      3,000
                      
                      
                      
                      2
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      3,000
                      
                      
                      
                      2Municipal
      Securities
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –Trust
      Preferred Securities
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      8,392
                      
                      
                      
                      3,933
                      
                      
                      
                      8,392
                      
                      
                      
                      3,933Mortgage-backedSecurities
                      
                      
                      126
                      
                      
                      
                      3
                      
                      
                      
                      8,629
                      
                      
                      
                      277
                      
                      
                      
                      8,755
                      
                      
                      
                      280Total
                      
                      $
                      3,126
                      
                      
                      $
                      5
                      
                      
                      $
                      17,021
                      
                      
                      $
                      4,210
                      
                      
                      $
                      20,147
                      
                      
                      $
                      4,215
 
 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
                    
                    
                    TotalFair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossesSecurities AvailableforSaleU.S.
      AgencyObligations
                    
                    $
                    –
                    
                    
                    $
                    –
                    
                    
                    $
                    481
                    
                    
                    $
                    19
                    
                    
                    $
                    481
                    
                    
                    $
                    19GovernmentSponsored
      Enterprises
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    13,445
                    
                    
                    
                    30
                    
                    
                    
                    13,445
                    
                    
                    
                    30Municipal
      Securities
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Trust
      Preferred Securities
                    
                    
                    5,743
                    
                    
                    
                    207
                    
                    
                    
                    6,350
                    
                    
                    
                    158
                    
                    
                    
                    12,093
                    
                    
                    
                    365Mortgage-backedSecurities
                    
                    
                    5,189
                    
                    
                    
                    37
                    
                    
                    
                    14,642
                    
                    
                    
                    242
                    
                    
                    
                    19,831
                    
                    
                    
                    279Total
                    
                    $
                    10,932
                    
                    
                    $
                    244
                    
                    
                    $
                    34,918
                    
                    
                    $
                    449
                    
                    
                    $
                    45,850
                    
                    
                    $
                    693
 
 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 31,2008
                          
                          
                          2007Proceeds
                          
                          $
                          37,040
                          
                          
                          $
                          13,840Gross
      gains
                          
                          
                          498
                          
                          
                          
                          108Gross
      losses
                          
                          
                          –
                          
                          
                          
                          (50
                          )Net
      gain (loss) on investmenttransactions
                          
                          $
                          498
                          
                          
                          $
                          58
 
 49
 
 2.
              Investment
      and Mortgage-backed Securities
(continued)
 
 The maturities of securities at
December 31, 2008 are as follows (in thousands):
 
 Held to Maturity
                    
                    
                    Available for SaleAmortized
                      Cost
                    
                    
                    Fair
                      Value
                    
                    
                    Amortized
                      Cost
                    
                    
                    Fair
                      ValueDue
      in one year or less
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    250
                    
                    
                    $
                    252Due
      after one year through five years
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    487
                    
                    
                    
                    493Due
      after five years through ten years
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,529
                    
                    
                    
                    5,563Due
      after ten years
                    
                    
                    2,430
                    
                    
                    
                    2,310
                    
                    
                    
                    96,761
                    
                    
                    
                    94,110Total
      investment and mortgage-backed securities
                    
                    $
                    2,430
                    
                    
                    $
                    2,310
                    
                    
                    $
                    103,027
                    
                    
                    $
                    100,418
 
 The mortgage-backed securities held at
December 31, 2008 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, 2008 and 2007, $80.6
million and $74.1 million, respectively, of securities recorded at book value
were pledged as collateral for certain deposits and borrowings.
 
 At December 31, 2008, approximately
$5.1 million of mortgage-backed securities were 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 31,2008
                    
                    
                    2007Mortgage
      loans:Fixed-rate
      residential
                    
                    $
                    12,847
                    
                    
                    $
                    16,214Adjustable-rate
      residential
                    
                    
                    7,388
                    
                    
                    
                    8,775Commercial real
      estate
                    
                    
                    110,589
                    
                    
                    
                    76,864Construction
                    
                    
                    5,867
                    
                    
                    
                    4,764Total
      mortgage loans
                    
                    
                    136,691
                    
                    
                    
                    106,617Commercial
      loans:Commercial non-real
      estate
                    
                    
                    27,946
                    
                    
                    
                    32,091Commercial lines of
      credit
                    
                    
                    66,066
                    
                    
                    
                    72,170Total
      commercial loans
                    
                    
                    94,012
                    
                    
                    
                    104,261Consumer
      loans:Home equity
                    
                    
                    17,371
                    
                    
                    
                    15,185Consumer and
      installment
                    
                    
                    39,301
                    
                    
                    
                    36,315Consumer lines of
      credit
                    
                    
                    330
                    
                    
                    
                    346Total
      consumer loans
                    
                    
                    57,002
                    
                    
                    
                    51,846Total
      loans
                    
                    
                    287,705
                    
                    
                    
                    262,724Less:Undisbursed  portion
      of interim construction loans
                    
                    
                    (1,926
                    )
                    
                    
                    (2,379
                    )Unamortized loan
      discount
                    
                    
                    (383
                    )
                    
                    
                    (476
                    )Allowance for loan
      losses
                    
                    
                    (6,778
                    )
                    
                    
                    (3,344
                    )Net deferred loan origination
      costs
                    
                    
                    47
                    
                    
                    
                    (38
                    )Total,
      net
                    
                    $
                    278,665
                    
                    
                    $
                    256,487Weighted-average
      interest rate of loans
                    
                    
                    5.47
                    %
                    
                    
                    7.56
                    %
 
 50
 
 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,
2008, the Bank had loans outstanding to one borrower ranging up to $5.7
million.
 
 Adjustable-rate residential real estate
loans (approximately $7.4 million and $8.8 million at December 31, 2008 and
2007, 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
$13.0 million and $15.6 million at December 31, 2008 and 2007,
respectively.
 
 At December 31, 2008 and 2007, loans
which are accounted for on a non-accrual basis or contractually past due ninety
days or more totaled approximately $16.0 million and $3.0 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, 2008 and 2007, 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 $715,000 and $156,000, respectively.
 
 The changes in allowance for loan
losses consisted of the following (in thousands):
 
 Years Ended December 31,2008
                    
                    
                    2007Balance
      at beginning of Period
                    
                    $
                    3,344
                    
                    
                    $
                    2,754Provision
      for loan losses
                    
                    
                    4,210
                    
                    
                    
                    1,066Net
      charge-offs
                    
                    
                    (776
                    )
                    
                    
                    (476
                    )Balance
      at end of
      period
                    
                    $
                    6,778
                    
                    
                    $
                    3,344
 
 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 31,2008
                          
                          
                          2007Balance
      at beginning of period
                          
                          $
                          349
                          
                          
                          $
                          326Loans
      originated during the period
                          
                          
                          219
                          
                          
                          
                          71Loan
      repayments during the period
                          
                          
                          (29
                          )
                          
                          
                          (48
                          )Balance
      at the end of period
                          
                          $
                          539
                          
                          
                          $
                          349
  51
  4.           Office
Properties and Equipment
 
 Office properties and equipment
consisted of the following (in thousands):
 
 As of December 31,2008
                    
                    
                    2007Land
                    
                    $
                    1,656
                    
                    
                    $
                    719Building
      and
      improvements
                    
                    
                    5,146
                    
                    
                    
                    5,065Office
      furniture, fixtures and equipment
                    
                    
                    2,989
                    
                    
                    
                    3,263Total
                    
                    
                    9,791
                    
                    
                    
                    9,047Less
      accumulated
      depreciation
                    
                    
                    (3,954
                    )
                    
                    
                    (3,902
                    )Office
      properties and equipment, net
                    
                    $
                    5,837
                    
                    
                    $
                    5,145
 
 Depreciation expense was $652,000 and
$652,000 for the years ended December 31, 2008 and 2007,
respectively.
 
 5.           Intangible
Assets
 
 Intangible assets consisted of the
following (in thousands):
  Years Ended December 31,2008
                  
                  
                  2007Core
      Deposit PremiumBalance
      at beginning of year
                  
                  $
                  932
                  
                  
                  $
                  1,412Amortization
                  
                  
                  (416
                  )
                  
                  
                  (480
                  )Balance
      at end of year
                  
                  
                  516
                  
                  
                  
                  932Goodwill
                  
                  
                  2,329
                  
                  
                  
                  2,329Total
                  
                  $
                  2,845
                  
                  
                  $
                  3,261
  Amortization expense is estimated to be
approximately $320,000 for 2009 and $200,000 in 2010.
 
 6.           Deposit
Accounts
 
 Deposit accounts at December 31 were as
follows (in thousands):
 
 2008
                    
                    
                    2007Rate
                    
                    
                    Balance
                    
                    
                    %
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    %Account TypeNOW
      accounts:Commercial
      non-interest-bearing
                    
                    
                    –
                    %
                    
                    $
                    17,002
                    
                    
                    
                    5.54
                    %
                    
                    
                    –
                    %
                    
                    $
                    16,568
                    
                    
                    
                    6.13
                    %Non-commercial
                    
                    
                    2.06
                    
                    
                    
                    68,033
                    
                    
                    
                    22.18
                    
                    
                    
                    2.14
                    
                    
                    
                    56,282
                    
                    
                    
                    20.81Money
      market
                    
                    
                    2.17
                    
                    
                    
                    22,313
                    
                    
                    
                    7.27
                    
                    
                    
                    4.44
                    
                    
                    
                    23,160
                    
                    
                    
                    8.57Savings
                    
                    
                    0.57
                    
                    
                    
                    12,407
                    
                    
                    
                    4.04
                    
                    
                    
                    0.79
                    
                    
                    
                    12,794
                    
                    
                    
                    4.73Total
      demand and time deposits
                    
                    
                    1.92
                    
                    
                    
                    119,755
                    
                    
                    
                    39.03
                    
                    
                    
                    2.47
                    
                    
                    
                    108,804
                    
                    
                    
                    40.24Time deposits:Up to 3.00%
                    
                    
                    
                    
                    
                    
                    41,720
                    
                    
                    
                    13.60
                    
                    
                    
                    
                    
                    
                    
                    5,768
                    
                    
                    
                    2.133.01% - 4.00%
                    
                    
                    
                    
                    
                    
                    79,176
                    
                    
                    
                    25.80
                    
                    
                    
                    
                    
                    
                    
                    26,265
                    
                    
                    
                    9.714.01% - 5.00%
                    
                    
                    
                    
                    
                    
                    58,962
                    
                    
                    
                    19.22
                    
                    
                    
                    
                    
                    
                    
                    34,988
                    
                    
                    
                    12.945.01% - 6.00%
                    
                    
                    
                    
                    
                    
                    7,180
                    
                    
                    
                    2.34
                    
                    
                    
                    
                    
                    
                    
                    94,548
                    
                    
                    
                    34.976.01% - 7.00%
                    
                    
                    
                    
                    
                    
                    28
                    
                    
                    
                    0.01
                    
                    
                    
                    
                    
                    
                    
                    26
                    
                    
                    
                    0.01Total
      time deposits
                    
                    
                    3.56
                    
                    
                    
                    187,066
                    
                    
                    
                    60.97
                    
                    
                    
                    4.67
                    
                    
                    
                    161,595
                    
                    
                    
                    59.76Total
      deposit accounts
                    
                    
                    2.91
                    %
                    
                    $
                    306,821
                    
                    
                    
                    100.00
                    %
                    
                    
                    3.78
                    %
                    
                    $
                    270,399
                    
                    
                    
                    100.00
                    %
 
 As of December 31, 2008 and 2007, total
deposit accounts include approximately $2.0 million and $2.1 million,
respectively, of deposits from the Corporation’s officers, directors, employees
or parties related to them.
  52
  6.           Deposit
Accounts (continued)
 
 At December 31, 2008 and 2007, time
deposit accounts with balances of $100,000 and over totaled approximately $74.9
million and $63.2 million, respectively.
 
 Time deposits by maturity were as
follows (in thousands):
 
 As of December 31,2008
                      
                      
                      2007Maturity DateWithin
      1 year
                      
                      $
                      141,904
                      
                      
                      $
                      134,839After
      1 but within 2 years
                      
                      
                      40,462
                      
                      
                      
                      23,287After
      2 but within 3 years
                      
                      
                      2,354
                      
                      
                      
                      2,001After
      3 but within 4 years
                      
                      
                      1,854
                      
                      
                      
                      1,367Thereafter
                      
                      
                      492
                      
                      
                      
                      101Total
      time
      deposits
                      
                      $
                      187,066
                      
                      
                      $
                      161,595
 
 Interest
expense on deposits consisted of the following (in thousands):
 
 Years Ended December 31,2008
                      
                      
                      2007Account TypeNOW
      accounts and money market deposit accounts
                      
                      $
                      2,147
                      
                      
                      $
                      2,426Passbook
      and statement savingsAccounts
                      
                      
                      83
                      
                      
                      
                      111Certificate
      accounts
                      
                      
                      6,758
                      
                      
                      
                      7,332Early
      withdrawal penalties
                      
                      
                      (29
                      )
                      
                      
                      (37
                      )Total
                      
                      $
                      8,959
                      
                      
                      $
                      9,832
  7.           Advances
from The Federal Home Loan Bank
 
 At December 31, 2008 and 2007, the Bank
had $69.5 million and $69.5 million, respectively, of advances outstanding from
the FHLB.  The maturity of the advances from the FHLB is as follows
(in thousands):
 
 As of December 31,2008
                  
                  
                  Weighted
                    Average Rate
                  
                  
                  2007
                  
                  
                  Weighted
                    Average RateContractual
      Maturity:Within
      one year – fixed rate
                  
                  $
                  5,000
                  
                  
                  
                  2.93
                  %
                  
                  $
                  –
                  
                  
                  
                  –
                  %Within
      one year – adjustable rate
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,000
                  
                  
                  
                  4.88After
      one but within three years – fixed rate
                  
                  
                  5,000
                  
                  
                  
                  4.93
                  
                  
                  
                  5,000
                  
                  
                  
                  4.93After
      one but within three years – adjustable rate
                  
                  
                  22,000
                  
                  
                  
                  4.58
                  
                  
                  
                  7,500
                  
                  
                  
                  5.30After
      three but within five years – adjustable rate
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  28,000
                  
                  
                  
                  4.61Greater
      than five years – adjustable rate
                  
                  
                  37,500
                  
                  
                  
                  3.89
                  
                  
                  
                  24,000
                  
                  
                  
                  4.10Total
      advances
                  
                  $
                  69,500
                  
                  
                  
                  4.11
                  %
                  
                  $
                  69,500
                  
                  
                  
                  4.55
                  %
 
 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 $48.5 million and $38.5
million, respectively, at December 31, 2008 and 2007.
  53
  8.           Securities
Sold Under Agreements to Repurchase
 
 The Company had $19,005,000 and
$24,131,000 borrowed under agreements to repurchase at December 31, 2008 and
2007, respectively. The amortized cost of the securities underlying the
agreements to repurchase at December 31, 2008 was $22,188,000 and $32,390,000 at
December 31, 2007. The maximum amount outstanding at any month end during 2008
was $23,389,000 and $39,175,000 for 2007. The average amount of outstanding
agreements for 2008 was $22,017,000 and $28,124,000 for 2007 and the approximate
weighted average interest rate was 2.55% in 2008 and 5.30% in 2007.
 
 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.  The Corporation
has the right, at one or more times, to defer interest payments on the
Debentures for up to twenty consecutive quarterly periods.  The
Corporation paid $229,000 and $305,000 in interest for the years ended December
31, 2008 and 2007, respectively, 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 a rate at
December 31, 2008 of 3.92%. 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.  The Corporation has the right, at one
or more times, to defer interest payments on the Debentures for up to twenty
consecutive quarterly periods.  The Corporation paid $492,000 and
$592,000 in interest to the Capital Trust II in 2008 and 2007,
respectively.
 
 54
 
 10.           Income
Taxes
 
 Income tax expense is summarized as
follows (in thousands):
 
 Years Ended December 31,2008
                    
                    
                    2007Current
                    
                    $
                    744
                    
                    
                    $
                    1,151Deferred
                    
                    
                    (1,340
                    )
                    
                    
                    (617
                    )Total
      income tax
      expense
                    
                    $
                    ( 596
                    )
                    
                    $
                    534
 
 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 31,2008
                    
                    
                    2007Tax
      and federal income tax rate
                    
                    $
                    (337
                    )
                    
                    $
                    926Increase
      (decrease) resulting from:State income taxes, net of
      federalbenefit
                    
                    
                    12
                    
                    
                    
                    95Interest on municipal
      bonds
                    
                    
                    (160
                    )
                    
                    
                    (205
                    )Non-taxable life insurance
      income
                    
                    
                    (136
                    )
                    
                    
                    (123
                    )Other,
      net
                    
                    
                    25
                    
                    
                    
                    (159
                    )Total
                    
                    $
                    (596
                    )
                    
                    $
                    534
 
 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.
 
 The tax effects of significant items
comprising the Corporation’s deferred taxes as of December 31, 2008 and 2007 are
as follows (in thousands):
 
 December 31,2008
                    
                    
                    2007Deferred
      tax assets:Book
      reserves in excess of tax basis bad debt reserves
                    
                    $
                    2,305
                    
                    
                    $
                    1,137Deferred
      compensation
                    
                    
                    453
                    
                    
                    
                    385SFAS No. 115 mark-to-market
      adjustment
                    
                    
                    913
                    
                    
                    
                    –Deferred loan
    fees
                    
                    
                    –
                    
                    
                    
                    10Other real estate
      owned
                    
                    
                    106
                    
                    
                    
                    154Core deposit
      intangible
                    
                    
                    131
                    
                    
                    
                    65Other
                    
                    
                    165
                    
                    
                    
                    50Total deferred tax
      asset
                    
                    
                    4,073
                    
                    
                    
                    1,801Deferred
      tax liabilities:Difference between book and tax
      property basis
                    
                    
                    97
                    
                    
                    
                    84Difference between book and tax
      Federal Home Loan Bank stock
                    
                    
                    85
                    
                    
                    
                    85Deferred loan
    fees
                    
                    
                    17
                    
                    
                    
                    –Core deposit
      intangible
                    
                    
                    –
                    
                    
                    
                    –SFAS No. 115 mark-to-market
      adjustment
                    
                    
                    –
                    
                    
                    
                    100Prepaid expenses
                    
                    
                    70
                    
                    
                    
                    81Total deferred tax
      liability
                    
                    
                    269
                    
                    
                    
                    350Net
      deferred tax asset
                    
                    $
                    3,804
                    
                    
                    $
                    1,451
 
 55
 
 10.           Income
Taxes (continued)
 
 The deferred tax assets of $3.8 million
and $1.5 million at December 31, 2008 and 2007 are included in other assets in
the balance sheet.
 
 Retained earnings at December 31, 2008
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 failure to meet the definition of a
bank, 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 $147,500 and $287,000 for the years ended December 31, 2008 and
2007, respectively.
 
 12.           Fair
Value of 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.
 
 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 31,2008
                      
                      
                      2007Fixed/variable
      interest rate commitments to fund residential credit
                      
                      $
                      4,539
                      
                      
                      $
                      1,906Commitments
      to fund commercial and construction loans
                      
                      
                      1,926
                      
                      
                      
                      2,379Unused
      portion of credit lines (principally variable-rate consumerlines
      secured by real estate)
                      
                      
                      49,380
                      
                      
                      
                      54,650Total
                      
                      $
                      55,845
                      
                      
                      $
                      58,935
 
 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, 2008 and
2007.
  56
  12.
              Fair
      Value of Financial Instruments
(continued)
 
 The estimated fair values of the
Corporation’s financial instruments were as follows at December 31, 2008 (in
thousands):
  December 31, 2008Carrying
                              Amount
                            
                            
                            Fair
                              ValueFinancial assetsCash
      and due from banks
                            
                            $
                            21,370
                            
                            
                            $
                            21,370Securities
      available for sale
                            
                            
                            100,418
                            
                            
                            
                            100,418Securities
      held to maturity
                            
                            
                            2,430
                            
                            
                            
                            2,310Federal
      Home Loan Bank stock, at cost
                            
                            
                            3,929
                            
                            
                            
                            3,929Federal
      Reserve Bank stock, at cost
                            
                            
                            599
                            
                            
                            
                            599Loans,
      net
                            
                            
                            278,665
                            
                            
                            
                            286,004Accrued
      interest receivable
                            
                            
                            2,087
                            
                            
                            
                            2,087Cash
      surrender value of life insurance
                            
                            
                            9,577
                            
                            
                            
                            9,577Financial liabilitiesDeposits
                            
                            $
                            306,821
                            
                            
                            $
                            315,542Advances
      from FHLB and other borrowings
                            
                            
                            69,500
                            
                            
                            
                            70,394Securities
      sold under agreement to repurchase
                            
                            
                            19,005
                            
                            
                            
                            19,232Floating
      rate junior subordinated deferrable interest debentures
                            
                            
                            12,372
                            
                            
                            
                            11,636Accrued
      interest payable
                            
                            
                            701
                            
                            
                            
                            701Off-balance-sheet assets
      (liabilities)Commitments
      to extend credit
                            
                            $
                            (55,845
                            )
                            
                            $
                            (55,845
                            )
 
 The
estimated fair values of the Corporation’s financial instruments were as follows
at December 31, 2007 (in thousands):
  December 31, 2007Carrying
                              Amount
                            
                            
                            Fair
                              ValueFinancial assetsCash
      and due from banks
                            
                            $
                            11,890
                            
                            
                            $
                            11,890Securities
      available for sale
                            
                            
                            108,061
                            
                            
                            
                            108,061Securities
      held to maturity
                            
                            
                            3,126
                            
                            
                            
                            3,135Federal
      Home Loan Bank stock, at cost
                            
                            
                            3,826
                            
                            
                            
                            3,826Federal
      Reserve Bank stock, at cost
                            
                            
                            599
                            
                            
                            
                            599Loans,
      net
                            
                            
                            256,487
                            
                            
                            
                            261,763Accrued
      interest receivable
                            
                            
                            2,625
                            
                            
                            
                            2,625Cash
      surrender value of life insurance
                            
                            
                            9,175
                            
                            
                            
                            9,175Financial liabilitiesDeposits
                            
                            $
                            270,399
                            
                            
                            $
                            276,947Advances
      from FHLB and other borrowings
                            
                            
                            69,500
                            
                            
                            
                            68,649Securities
      sold under agreement to repurchase
                            
                            
                            24,131
                            
                            
                            
                            24,402Floating
      rate junior subordinated deferrable interest debentures
                            
                            
                            12,372
                            
                            
                            
                            12,281Accrued
      interest payable
                            
                            
                            742
                            
                            
                            
                            742Off-balance-sheet assets
      (liabilities)Commitments
      to extend credit
                            
                            $
                            (58,935
                            )
                            
                            $
                            (58,935
                            )
 
 Effective
January 1, 2008, the Corporation adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”) which provides a framework for measuring and disclosing fair value
under generally accepted accounting principles. SFAS 157 requires disclosures
about the fair value of assets and liabilities recognized in the balance sheet
in periods subsequent to initial recognition, whether the measurements are made
on a recurring basis (for example, available for sale investment securities) or
on a nonrecurring basis (for example, impaired loans).
 
 57
 
 12.
              Fair
      Value of Financial Instruments
(continued)
 
 SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
 
 Level
      1
              Quoted
      prices in active markets for identical assets or liabilities. Level 1
      assets and liabilities include debt and equity securities and derivative
      contracts that are traded in an active exchange market, as well as U.S.
      Treasuries and money market funds.Level
      2
              Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or liabilities. Level 2
      assets and liabilities include debt securities with quoted prices that are
      traded less frequently than exchange-traded instruments, mortgage-backed
      securities, municipal bonds, corporate debt securities and derivative
      contracts whose value is determined using a pricing model with inputs that
      are observable in the market or can be derived principally from or
      corroborated by observable market data. This category generally includes
      certain derivative contracts and impaired loans.Level
      3
              Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities. Level 3 assets
      and liabilities include financial instruments whose value is determined
      using pricing models, discounted cash flow methodologies, or similar
      techniques, as well as instruments for which the determination of fair
      value requires significant management judgment or estimation. For example,
      this category generally includes certain private equity investments,
      retained residual interests in securitizations, residential mortgage
      servicing rights, and highly-structured or long-term derivative
      contracts.
 
 Assets
and liabilities measured at fair value on a recurring basis at December 31, 2008
are as follows:
 
 Quoted Market Price in
                            active markets
                            (Level 1)
                          
                          
                          Significant Other
                            Observable Inputs
                            (Level 2)
                          
                          
                          Significant Unobservable
                            Inputs
                            (Level 3)Available
      forSale
      Securities
                          
                          $
                          92,026,000
                          
                          
                          $
                          3,547,000
                          
                          
                          $
                          4,845,000
 
 Available-for-sale
investment securities are the only assets whose fair values are measured on a
recurring basis using Level 1, 2, or 3 inputs. The Corporation has no
liabilities carried at fair value or measured at fair value on a nonrecurring
basis.
 
 The
Corporation is predominantly an asset based lender with real estate serving as
collateral on a substantial majority of loans. Loans which are deemed to be
impaired are primarily valued at the fair values of the underlying real estate
collateral. Such fair values are obtained using independent appraisals, which
the Corporation considers to be level 2 inputs. The aggregate carrying amount of
impaired loans at December 31, 2008 was $12.5 million.
 
 Goodwill
and other intangible assets measured at fair value on a nonrecurring basis
relate to intangible assets (deposit premium intangible) that were acquired in
connection with acquisitions and were valued at their fair market values at the
time of acquisition using level 3 inputs.  FASB Staff Position No. FAS
157-2 delays the measurement of Goodwill and other intangible assets measured at
fair value on a nonrecurring basis until the first quarter of
2009.
  58
  13.
              Supplemental
      Cash Flow Disclosures
 
 Years Ended December 31,2008
                    
                    
                    2007Cash
      paid for:Income taxes
                    
                    $
                    680
                    
                    
                    $
                    1,407Interest
                    
                    
                    13,247
                    
                    
                    
                    15,172Non-cash
      transactions:Loans foreclosed
                    
                    
                    862
                    
                    
                    
                    856Unrealized gain (loss) on
      securitiesavailable
      for sale
                    
                    $
                    (2,609
                    )
                    
                    $
                    293
 
 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
      Ended2009
                    
                    $
                    446,1122010
                    
                    
                    446,1122011
                    
                    
                    446,1122012
                    
                    
                    446,1122013
                    
                    
                    446,112Thereafter
                    
                    
                    2,722,896
 
 Total rent expense for the years ended
December 31, 2008 and 2007 was $446,000 and $448,000,
respectively.
 
 Lines of credit - At
December 31, 2008, the Corporation had unused short-term lines of credit to
purchase federal funds from unrelated banks totaling $12.2 million and the
ability to borrow an additional $15.0 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 amounts due from
banks.
 
 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 $94.0 million at December
31, 2008 representing 392% of total equity and 34% of loans
receivable.  At December 31, 2007 this concentration totaled $104.2
million representing 385% of total equity and 41% 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 $18.7 million at December 31, 2008 representing 50% of the Bank’s
total risk-based capital.  These amounts exceeded regulatory guidelines
by $6.7 million and 16.9%, respectively.
  59
 14.
                Commitments
      and Contingencies (continued)
 
 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.
 
 15.
              Stock
      Option Plans
 
 At December 31, 2008, the Corporation
had the following stock options outstanding.
 
 Grant Date
                        
                        Shares
                          Granted
                        
                        
                        Average
                          Exercise
                          Price Per
                          Share
                        
                        
                        Average
                          Intrinsic
                          Value(1)
                        
                        Expiration Date
                        
                        Earliest Date
                          ExercisableOctober,
      2000
                        
                        
                        1,700
                        
                        
                        $
                        8.75
                        
                        
                        $
                        2,125
                        
                        October,
      2010
                        
                        October,
      2000January,
      2001
                        
                        
                        16,090
                        
                        
                        
                        9.06
                        
                        
                        
                        15,125
                        
                        January,
      2011
                        
                        January,
      2001January,
      2002
                        
                        
                        13,823
                        
                        
                        
                        10.36
                        
                        
                        
                        —
                        
                        January
      2012
                        
                        January,
      2002April,
      2002
                        
                        
                        750
                        
                        
                        
                        13.00
                        
                        
                        
                        —
                        
                        April,
      2012
                        
                        April,
      2002December,
      2003
                        
                        
                        38,500
                        
                        
                        
                        16.75
                        
                        
                        
                        —
                        
                        December,
      2013
                        
                        December,
      2003January,
      2005
                        
                        
                        1,000
                        
                        
                        
                        16.60
                        
                        
                        
                        —
                        
                        January,
      2015
                        
                        January,
      2005March,
      2005
                        
                        
                        22,250
                        
                        
                        
                        17.26
                        
                        
                        
                        —
                        
                        March,
      2015
                        
                        March,
      2005Total
      shares granted
                        
                        
                        94,113
                        
                        
                        
                        
                        
                        
                        $
                        17,250
 
 (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,
2008.  This amount changes based on changes in the market value of the
Corporation’s stock.
  60
  15.
              Stock
      Option Plans (continued)
 
 At December 31, 2008, the Corporation
had the following options exercisable:
 Fiscal Year
                    
                    Range of
                      exercise price
                    
                    Weighted Average
                      Remaining
                      Contractual Life
                    
                    Number Options
                      Exercisable
                    
                    
                    Average
                      Exercise
                      Price2000
                    
                    
                    8.75
                    
                    1.8
      years
                    
                    
                    1,700
                    
                    
                    
                    8.752001
                    
                    
                    9.06
                    
                    3
      years
                    
                    
                    16,090
                    
                    
                    
                    9.062002
                    
                    
                    10.36-13.00
                    
                    3.6
      years
                    
                    
                    14,573
                    
                    
                    
                    10.502003
                    
                    
                    16.75
                    
                    5
      years
                    
                    
                    38,500
                    
                    
                    
                    16.752005
                    
                    
                    16.60
                    
                    6
      years
                    
                    
                    1,000
                    
                    
                    
                    16.602005
                    
                    
                    17.26
                    
                    5.9
      years
                    
                    
                    22,250
                    
                    
                    
                    17.26$
                    8.75-$17.26
                    
                    3.8
      years
                    
                    
                    94,113
                    
                    
                    $
                    14.44
 
 Options for the two previous fiscal
years were forfeited and exercised as follows:
  Stock
                      options
                    
                    
                    Weighted
                      average
                      exerciseOutstanding
      at December 31, 2006
                    
                    
                    131,680
                    
                    
                    $
                    14.60Granted
                    
                    
                    –
                    
                    
                    
                    –Forfeited
                    
                    
                    (2,500
                    )
                    
                    
                    16.95Exercised
                    
                    
                    (18,487
                    )
                    
                    
                    14.36Outstanding
      at December 31, 2007
                    
                    
                    110,693
                    
                    
                    $
                    14.59Granted
                    
                    
                    –
                    
                    
                    
                    –Forfeited
                    
                    
                    (9,036
                    )
                    
                    
                    15.64Exercised
                    
                    
                    (7,544
                    )
                    
                    
                    15.57Outstanding
      at December 31, 2008
                    
                    
                    94,113
                    
                    
                    $
                    14.44
  The
intrinsic value of options exercised for the years ended December 31, 2008 and
2007 was $24,108 and $122,872, respectively.
 
 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.
  61


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





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, 2008, that the Bank and the Corporation
meet the capital adequacy requirements to which they are subject.





As of December 31, 2008 and 2007, the
Bank was “well capitalized” under the regulatory framework for prompt corrective
action based on its capital ratio calculations. In order to be “well
capitalized”, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since December 31, 2008 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.





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, 2008Actual
                
                
                Regulatory
      Minimum
                
                
                “Well
      Capitalized”Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioLeverage
      ratioCorporation
                
                $
                31,710
                
                
                
                7.46
                %
                
                $
                16,786
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/a
                %Bank
                
                
                33,698
                
                
                
                8.04
                
                
                
                16,772
                
                
                
                4.00
                
                
                
                20,965
                
                
                
                5.00Tier
      1 capital ratioCorporation
                
                
                31,710
                
                
                
                10.02
                
                
                
                12,494
                
                
                
                4.00
                
                
                
                n/a
                
                
                
                n/aBank
                
                
                33,698
                
                
                
                10.80
                
                
                
                12,480
                
                
                
                4.00
                
                
                
                18,720
                
                
                
                6.00Total
      risk-based capital ratioCorporation
                
                
                38,710
                
                
                
                12.39
                
                
                
                24,989
                
                
                
                8.00
                
                
                
                n/a
                
                
                
                n/aBank
                
                
                37,634
                
                
                
                12.06
                
                
                
                24,961
                
                
                
                8.00
                
                
                
                31,201
                
                
                
                10.00


62


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





December
      31, 2007Actual
                
                
                Regulatory
      Minimum
                
                
                “Well
      Capitalized”Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioLeverage
      ratioCorporation
                
                $
                32,867
                
                
                
                8.27
                %
                
                $
                15,892
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/a
                %Bank
                
                
                35,831
                
                
                
                8.78
                
                
                
                16,333
                
                
                
                4.00
                
                
                
                20,416
                
                
                
                5.00Tier
      1 capital ratioCorporation
                
                
                32,867
                
                
                
                10.97
                
                
                
                11,986
                
                
                
                4.00
                
                
                
                n/a
                
                
                
                n/aBank
                
                
                35,831
                
                
                
                11.97
                
                
                
                11,972
                
                
                
                4.00
                
                
                
                17,958
                
                
                
                6.00Total
      risk-based capital ratioCorporation
                
                
                39,204
                
                
                
                13.08
                
                
                
                23,973
                
                
                
                8.00
                
                
                
                n/a
                
                
                
                n/aBank
                
                
                39,175
                
                
                
                13.09
                
                
                
                23,944
                
                
                
                8.00
                
                
                
                29,930
                
                
                
                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 $2.5 at
December 31, 2008 and $1.4 million at December 31, 2007.





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 ratified
the consensuses reached by the FASB’s Emerging Issues Task Force (“EITF”)
relating to EITF 06-4 “Accounting for the Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.” EITF 06-4 addresses employer accounting for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods. Employers should recognize a liability
for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” or Accounting Principles Board
(“APB”) Opinion No. 12, “Omnibus Opinion—1967.” EITF 06-4 was effective January
1, 2008. The Corporation recorded a liability of $60,000 in the accompanying
consolidated financial statements for the cumulative effect of the
change.





In
December 2007, 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. SFAS 141(R) is effective for acquisitions by the Corporation taking
place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a
calendar year-end corporation is required to record and disclose business
combinations following existing accounting guidance until January 1, 2009. The
Corporation will assess the impact of SFAS 141(R) if and when a future
acquisition occurs.





Also, 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


63


17.
            Recently
      Issued Accounting Standards
(continued)




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” (“SFAS 161”).  SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities, thereby
improving the transparency of financial reporting.  It is intended to
enhance the current disclosure framework in SFAS 133 by requiring that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. This disclosure is intended to convey the
purpose of derivative use in terms of the risks that the entity is intending to
manage. SFAS 161 was effective for the Corporation on January 1, 2009 and will
result in additional disclosures if the Corporation enters into any material
derivative or hedging activities.





In
February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions,” (“FSP
140-3”).  This FSP provides guidance on accounting for a transfer of a
financial asset and the transferor’s repurchase financing of the asset.
 This FSP presumes that an initial transfer of a financial asset and a
repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS 140. However, if certain criteria are met, the initial
transfer and repurchase financing are not evaluated as a linked transaction and
are evaluated separately under SFAS 140.  FSP 140-3 was effective for the
Corporation on January 1, 2009.  The adoption of FSP 140-3 had no impact on
the Corporation’s financial position, results of operations or cash flows.





In April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets,” (“FSP 142-3”).  This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”).  The
intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141(R) and other U.S.
generally accepted accounting principles.  This FSP was effective for
the Corporation on January 1, 2009 and had no material impact on the
Corporation’s financial position, results of operations or cash
flows.





In May,
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS 162”).  SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  SFAS 162 is effective
November 15, 2008.  The FASB has stated that it does not expect SFAS
162 will result in a change in current practice. The application of SFAS 162 had
no effect on the Corporation’s financial position, results of operations or cash
flows.





The FASB
issued FASB Staff Position No. APB 14-1, “Accounting forConvertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement),” (“FSP APB 14-1”). The Staff Position specifies that issuers
of convertible debt instruments that may be settled in cash upon conversion
should separately account for the liability and equity components in a manner
that will reflect the entity’s nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods.  FSP APB 14-1 provides
guidance for initial and subsequent measurement as well as derecognition
provisions.  The Staff Position was effective as of January 1, 2009
and had no material effect on the Corporation’s financial position, results of
operations or cash flows.


64




17.
            Recently
      Issued Accounting Standards
(continued)




Position
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents are participating securities and
must be included in the earnings per share computation.  FSP EITF
03-6-1 was effective January 1, 2009 and had no effect on the Corporation’s
financial position, results of operations, earnings per share or cash
flows.





FSP SFAS
133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP
SFAS 133-1 and FIN 45-4”) was issued September 2008, effective for reporting
periods (annual or interim) ending after November 15, 2008.  FSP SFAS
133-1 and FIN 45-4 amends SFAS 133 to require the seller of credit derivatives
to disclose the nature of the credit derivative, the maximum potential amount of
future payments, fair value of the derivative, and the nature of any recourse
provisions. Disclosures must be made for entire hybrid instruments that have
embedded credit derivatives.





The Staff
Position also amends FASB Interpretation No. (“FIN”) 45 to require disclosure of
the current status of the payment/performance risk of the credit derivative
guarantee.  If an entity utilizes internal groupings as a basis for
the risk, how the groupings are determined must be disclosed as well as how the
risk is managed.





The Staff
Position encourages that the amendments be applied in periods earlier than the
effective date to facilitate comparisons at initial adoption.  After
initial adoption, comparative disclosures are required only for subsequent
periods.





FSP SFAS
133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that required
disclosures should be provided for any reporting period (annual or quarterly
interim) beginning after November 15, 2008.  The adoption of this
Staff Position had no material effect on the Corporation’s financial position,
results of operations or cash flows.





The SEC’s
Office of the Chief Accountant and the staff of the FASB issued press release
2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on
fair value accounting.  The Press Release includes guidance on the use
of management’s internal assumptions and the use of “market”
quotes.  It also reiterates the factors in SEC Staff Accounting
Bulletin (“SAB”) Topic 5M which should be considered when determining
other-than-temporary impairment: the length of time and extent to which the
market value has been less than cost; financial condition and near-term
prospects of the issuer; and the intent and ability of the holder to retain its
investment for a period of time sufficient to allow for any anticipated recovery
in market value.





On
October 10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS
157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value
Measurements” (see Note 12) in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that asset is not active.  The FSP
is effective upon issuance, including prior periods for which financial
statements have not been issued. For the Corporation, this FSP was effective for
the quarter ended September 30, 2008.





The
Corporation considered the guidance in the Press Release and in FSP SFAS 157-3
when conducting its review for other-than-temporary impairment as of December
31, 2008 as discussed in Note 2.





FSP SFAS
140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest Entities,”
(“FSP SFAS 140-4 and FIN 46(R)-8”) was issued in December 2008 to require public
entities to disclose additional information about transfers of financial assets
and to require public enterprises to provide additional disclosures about their
involvement with variable interest entities.  The FSP also requires
certain disclosures for public enterprises that are sponsors and servicers of
qualifying special purpose entities.  The FSP is effective for the
first reporting period ending after December 15, 2008.  This FSP had
no material impact on the financial position of the
Corporation.


65


17.
            Recently
      Issued Accounting Standards
(continued)





FSP EITF
99-20-1, “Amendments to the Impairment Guidance of EIFT Issue No. 99-20,” (“FSP
EITF 99-20-1”) was issued in January 2009.  Prior to the Staff
Position, other-than-temporary impairment was determined by using either EITF
Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests that Continue to be Held by a
Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”)
depending on the type of security.  EITF 99-20 required the use of
market participant assumptions regarding future cash flows regarding the
probability of collecting all cash flows previously projected.  SFAS
115 determined impairment to be other than temporary if it was probable that the
holder would be unable to collect all amounts due according to the contractual
terms. To achieve a more consistent determination of other-than-temporary
impairment, the Staff Position amends EITF 99-20 to determine any
other-than-temporary impairment based on the guidance in SFAS 115, allowing
management to use more judgment in determining any other-than-temporary
impairment.  The Staff Position is effective for interim and annual
reporting periods ending after December 15, 2008 and shall be applied
prospectively.  Retroactive application is not permitted. Management
has reviewed the Corporation’s security portfolio and evaluated the portfolio
for any other-than-temporary impairments as discussed in Note 2.





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


66


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 31,2008
                          
                          
                          2007Condensed Balance SheetsAssets:Cash
      and due from banks
                          
                          $
                          1,173
                          
                          
                          $
                          136Investment
      in subsidiary
                          
                          
                          34,849
                          
                          
                          
                          39,283Other
                          
                          
                          379
                          
                          
                          
                          384Total
      assets
                          
                          $
                          36,401
                          
                          
                          $
                          39,803Liabilities
      and Shareholders’ Equity:Accrued
      interest payable
                          
                          $
                          105
                          
                          
                          $
                          118Floating
      rate junior subordinated deferrable interest debentures
                          
                          
                          12,372
                          
                          
                          
                          12,372Shareholders’
      equity
                          
                          
                          23,924
                          
                          
                          
                          27,313Total
      liabilities and shareholders’ equity
                          
                          $
                          36,401
                          
                          
                          $
                          39,803




Years
      Ended December 31,2008
                          
                          
                          2007Condensed Statements of
    IncomeEquity
      in undistributed earnings of subsidiary
                          
                          $
                          412
                          
                          
                          $
                          3,209Interest
      expense
                          
                          
                          (721
                          )
                          
                          
                          (897
                          )Other
      expense, net
                          
                          
                          (88
                          )
                          
                          
                          (122
                          )Net
      income
                          
                          $
                          (397
                          )
                          
                          $
                          2,190Condensed Statements of Cash
      FlowsOperating
      Activities:Net
      income
                          
                          $
                          (397
                          )
                          
                          $
                          2,190Adjustments
      to reconcile net income to net cash used in operating
      activities:Equity
      in undistributed earnings of subsidiary
                          
                          
                          (412
                          )
                          
                          
                          (3,209
                          )Increase
      (decrease)  in other assets and liabilities, net
                          
                          
                          (10
                          )
                          
                          
                          8Net
      cash used in operating activities
                          
                          
                          (819
                          )
                          
                          
                          (1,011
                          )Financing
      Activities:Dividends
      received from subsidiary
                          
                          
                          2,900
                          
                          
                          
                          2,000Dividend
      reinvestment plan contributions
                          
                          
                          120
                          
                          
                          
                          118Dividends
      paid
                          
                          
                          (821
                          )
                          
                          
                          (826
                          )Share
      repurchase program
                          
                          
                          (345
                          )
                          
                          
                          (1,094
                          )Proceeds
      from the exercise of stock options
                          
                          
                          2
                          
                          
                          
                          157Net
      cash provided by financing activities
                          
                          
                          1,856
                          
                          
                          
                          355Net
      increase (decrease) in cash and due from banks
                          
                          
                          1,037
                          
                          
                          
                          (656
                          )Cash
      and due from banks at beginning of  period
                          
                          
                          136
                          
                          
                          
                          792Cash
      and due from banks at end of period
                          
                          $
                          1,173
                          
                          
                          $
                          136


67


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,
      2008First
                    quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    quarter
                  
                  
                  TotalInterest
      income
                  
                  $
                  6,175
                  
                  
                  $
                  5,700
                  
                  
                  $
                  5,533
                  
                  
                  $
                  5,377
                  
                  
                  $
                  22,785Interest
      expense
                  
                  
                  3,673
                  
                  
                  
                  3,236
                  
                  
                  
                  3,137
                  
                  
                  
                  3,160
                  
                  
                  
                  13,206Net
      interest income
                  
                  
                  2,502
                  
                  
                  
                  2,464
                  
                  
                  
                  2,396
                  
                  
                  
                  2,217
                  
                  
                  
                  9,579Provision
      for loan losses
                  
                  
                  310
                  
                  
                  
                  365
                  
                  
                  
                  615
                  
                  
                  
                  2,920
                  
                  
                  
                  4,210Non-interest
      income
                  
                  
                  885
                  
                  
                  
                  850
                  
                  
                  
                  1,062
                  
                  
                  
                  887
                  
                  
                  
                  3,684Non-interest
      expense
                  
                  
                  2,522
                  
                  
                  
                  2,550
                  
                  
                  
                  2,456
                  
                  
                  
                  2,518
                  
                  
                  
                  10,046Provision
      (benefit) for income taxes
                  
                  
                  134
                  
                  
                  
                  83
                  
                  
                  
                  81
                  
                  
                  
                  (894
                  )
                  
                  
                  (596
                  )Net
      income (loss)
                  
                  $
                  421
                  
                  
                  $
                  316
                  
                  
                  $
                  306
                  
                  
                  $
                  (1,440
                  )
                  
                  $
                  (397
                  )Net
      income (loss) per common share—Basic
                  
                  $
                  0.24
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.17
                  
                  
                  $
                  (0.81
                  )
                  
                  $
                  (0.22
                  )Net
      income (loss) per common share—Diluted
                  
                  $
                  0.23
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.17
                  
                  
                  $
                  (0.81
                  )
                  
                  $
                  (0.22
                  )




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




20. Subsequent
Event
  The
Corporation announced that it had received preliminary approval on February 13,
2009 to sell $9.3 million in preferred stock to the U.S. Treasury Department
through its Capital Purchase Program. The preferred stock will pay a 5% dividend
for the first five years. After that, the rate will increase to 9% if the
preferred shares are not redeemed by the Corporation. The anticipated sale of
the preferred stock, as well as warrants for up to $1.4 million in common stock
is expected to close on March 13, 2009.





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.


68


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.




(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, 2008 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 “Items to be Voted on By Shareholders — Item 1 — Election of
Directors” 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 “Other Information Relating to Directors and Executive
Officers — Section 16(a) Beneficial Ownership Reporting Compliance” 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.


69


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, 2008Dwight
      V. Neese
              
              58
              
              President,
      Chief Executive Officer and DirectorRichard
      H. Flake
              
              60
              
              Executive
      Vice President – Chief Financial OfficerLud
      W. Vaughn
              
              58
              
              Executive
      Vice President – Chief Operating
Officer




(1)       At
December 31, 2008.





Dwight V. Neese was appointed
as President and Chief Executive Officer of the Bank effective September 5,
1995.




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 — Committees of the Board of Directors” and “— Audit
Committee” 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.





(d)            Equity
Compensation Plan Information


70


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, 2008.





(a)
              
              
              (b)
              
              
              (c)Plan category
              
              Number of securities
                to be issued upon exercise
                of outstanding options,
                warrants and rights
              
              
              Weighted-average
                exercise price of
                outstanding options,
                warrants and rights
              
              
              Number of securities
                remaining available for
                future issuance under
                equity compensation
                plans (excluding securities
                reflected in column (a))Equity
      compensationplans
      approved by security holders
              
              
              94,113
              
              
              $
              14.44
              
              
              
              160,623Equity
      compensationplans
      not approved by security holders
              
              
              –
              
              
              
              –
              
              
              
              –Total
              
              
              94,113
              
              
              $
              14.44
              
              
              
              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 “Other Information
Relating to Director and Executive Officers—Policies and Procedures for Approval
of Related Person Transactions” and “—Transactions with Related Persons” in the
Proxy Statement.





Information concerning director
independence is incorporated herein by reference to the section titled
“Corporate Governance—Director Independence” 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 “Items to be Voted
On By Stockholders—Item 2—Ratification of the Appointment of the Independent
Registered Public Accounting Firm” in the Proxy Statement.


71


PART
IV





Item
15.   Exhibits





Exhibits





3(a)
            Amended
      and Restated Certificate of
Incorporation(1)


3(b)
            Bylaws


4(a)
            Certificate
      of Designations establishing Fixed Rate Cumulative Perpetual Preferred
      Stock, Series A, of Provident Community Bancshares
  (2)


4(b)
            Form
      of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock,
      Series A (2)


4(c)
            Warrant
      to Purchase 179,100 Shares of Common Stock of Provident Community
      Bancshares, Inc.(2)


10(a)
            Employment
      Agreement with Dwight V. Neese(3)


10(b)
            Employment
      Agreement with Richard H. Flake(3)


10(c)
            Form
      of First Amendment to the Employment Agreement by and between Provident
      Community Bancshares, Inc., Provident Community Bank and each of Dwight V.
      Neese and Richard R. Flake


10(d)
            Provident
      Community Bancshares, Inc. 1995 Stock Option
  Plan(4)


10(e)
            Provident
      Community Bancshares, Inc. 2001 Stock Option
  Plan(5)


10(f)
            Provident
      Community Bancshares, Inc. 2006 Stock Option
  Plan(6)


10(g)
            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(h)
            Form
      of First Amendment to the Amended and RestatedChange in Control
      Agreement by and between Provident Community Bancshares, Inc., Provident
      Community Bank and Lud W. Vaughn


10(i)
            Supplemental
      Executive Retirement Plan, by and between Dwight V. Neese and Provident
      Community Bank(8)


10(j)
            Supplemental
      Executive Retirement Plan #2, by and between Dwight V. Neese and Provident
      Community Bank(8)


10(k)
            Supplemental
      Executive Retirement Plan, by and between Richard H. Flake and Provident
      Community Bank(8)


10(l)
            Supplemental
      Executive Retirement Plan #2, by and between Richard H. Flake and
      Provident Community Bank(8)


10(m)
            Supplemental
      Executive Retirement Plan, by and between Lud W. Vaughn and Provident
      Community Bank(7)10(n)
            Form
      of Second Amendment to the Employment Agreement by and between Provident
      Community Bancshares, Inc., (formerly Union Financial Bancshares, Inc.)
      Provident Community Bank and each of Dwight V. Neese and Richard R.
      Flake




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 March 3, 2009.


(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.


72


(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.


73


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 25, 2009
              
              By:
              /s/
      Dwight V. NeeseDwight
      V. NeesePresident
      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. SmartDwight
      V. Neese
              
              
              Russell
      H. Smart(Principal
      Executive Officer)
              
              
              DirectorDate:
              March
      25, 2009
              
              Date:
              March
      25, 2009By:
              /s/
      Richard H. Flake
              
              By:
              /s/
      Philip C. WilkinsRichard
      H. Flake
              
              
              Philip
      C. Wilkins(Principal
      Financial and
              
              
              DirectorAccounting
      Officer)Date:
              March
      25, 2009
              
              Date:
              March
      25, 2009By:
              /s/
      Robert H. BreakfieldRobert
      H. BreakfieldDirectorDate:
              March
      25, 2009By:
              /s/
      William M. GrahamWilliam
      M. GrahamDirectorDate:
              March
      25, 2009By:
              /s/
      Carl L. MasonCarl
      L. MasonDirectorDate:
              March
      25, 2009


74