Provident Community Bancshares (PCBS) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

For the transition period from to

COMMISSION FILE NUMBER 1-5735
 

PROVIDENT COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its Charter)

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

2700 Celanese Road, Rock Hill, South Carolina 29732

(Address of Principal Executive Offices)
 

(803)-325-9400

(Registrant’s telephone number, including area code)
 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X                   No__

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

Large accelerated filer □ Accelerated filer □

Non-accelerated filer   □ Smaller Reporting Company ■

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes __No X
 

The Corporation had 1,783,037 shares, $0.01 par value, of common stock issued and outstanding as of August 5, 2008.

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

INDEX

Part I.	Financial Information	Page
	Item 1. Financial Statements (unaudited)
	Consolidated Balance Sheets as of June 30, 2008
	and December 31, 2007	3
	Consolidated Statements of Income for the three and six
	months ended June 30, 2008 and 2007	4
	Consolidated Statements of Cash Flows for the six
	months ended June 30, 2008 and 2007	5
	Consolidated Statements of Shareholders’ Equity and
	Comprehensive Income (Loss) for the six months
	ended June 30, 2008 and 2007	6
	Notes to Consolidated Financial Statements	7-12
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-26
	Item 3. Quantitative and Qualitative Disclosures
	about Market Risk	26
	Item 4T.Controls and Procedures	26
Part II.	Other Information
	Item 1. Legal Proceedings	27
	Item 1A. Risk Factors	27
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3. Defaults Upon Senior Securities	27
	Item 4. Submission of Matters to a Vote of Security Holders	28
	Item 5. Other Information	28
	Item 6. Exhibits	28
	Signatures	29

Part 1.    Financial Information

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2008 and December 31, 2007

	June 30,			December 31,
ASSETS	2008			2007
	(Unaudited)			(Audited)
	(DOLLARS IN THOUSANDS)
Cash and due from banks	$	12,319		$	11,890
Investment and mortgage-backed securities
Held to maturity		2,430			3,126
Available for sale		86,158			108,061
Total investment and mortgage-backed securities		88,588			111,187
Loans, net		276,460			256,487
Office properties and equipment, net		5,056			5,145
Federal Home Loan Bank Stock, at cost		3,907			3,826
Federal Reserve Stock, at cost		599			599
Accrued interest receivable		2,235			2,625
Intangible assets		3,053			3,261
Cash surrender value of life insurance		9,374			9,175
Other assets		3,472			3,446
TOTAL ASSETS	$	405,063		$	407,641
LIABILITIES
Deposits	$	272,185		$	270,399
Advances from the Federal Home Loan Bank		71,161			69,500
Securities sold under agreements to repurchase		19,966			24,131
Floating rate junior subordinated deferrable interest debentures		12,372			12,372
Accrued interest payable		643			742
Other liabilities		2,115			3,184
TOTAL LIABILITIES		378,442			380,328
Commitments and contingencies-Note 4
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None		--			--
Common stock - $0.01 par value,
authorized - 5,000,000 shares,
issued and outstanding - 1,783,037 shares at 6/30/08 and 1,794,866 at 12/31/07		20			20
Additional paid-in capital		12,844			12,781
Accumulated other comprehensive gain (loss)		(513	)		191
Retained earnings, substantially restricted		20,541			20,276
Treasury stock, at cost		(6,271	)		(5,955	)
TOTAL SHAREHOLDERS' EQUITY		26,621			27,313
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	405,063		$	407,641

See notes to consolidated financial statements.

3

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and Six Months Ended June 30, 2008 and 2007 (unaudited)

	Three Months Ended					Six Months Ended
	June 30,		June 30,			June 30,		June 30,
	2008		2007			2008		2007
	(DOLLARS IN THOUSANDS EXCEPT PER SHARE)					(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Interest Income:
Loans	$	4,378	$	4,803		$	9,000	$	9,579
Deposits and federal funds sold		6		54			22		81
Mortgage-backed securities		687		306			1,363		596
Interest and dividends on investment securities		629		1,297			1,490		2,623
Total Interest Income		5,700		6,460			11,875		12,879
Interest Expense:
Deposit accounts		2,218		2,397			4,680		4,786
Floating rate junior subordinated deferrable interest debentures		175		223			384		445
Advances from the FHLB and other borrowings		843		1,093			1,845		2,167
Total Interest Expense		3,236		3,713			6,909		7,398
Net Interest Income		2,464		2,747			4,966		5,481
Provision for loan losses		365		85			675		245
Net Interest Income After
Provision for Loan Losses		2,099		2,662			4,291		5,236
Non-Interest Income:
Fees for financial services		756		792			1,507		1,493
Other fees, net		28		21			50		43
Net gain (loss) on sale of investments		66		(1	)		177		(1	)
Total Non-Interest Income		850		812			1,734		1,535
Non-Interest Expense:
Compensation and employee benefits		1,288		1,281			2,601		2,464
Occupancy and equipment		636		719			1,257		1,303
Deposit insurance premiums		7		7			15		15
Professional services		104		114			203		225
Advertising and public relations		81		98			143		167
Loan operations		32		28			66		68
Intangible amortization		104		112			208		271
Items processing		66		55			116		111
Telephone		45		47			94		91
Other		187		250			369		436
Total Non-Interest Expense		2,550		2,711			5,072		5,151
Income Before Income Taxes		399		763			953		1,620
Income tax expense		83		162			217		370
Net Income	$	316	$	601		$	736	$	1,250
Basic Net Income Per Common Share	$	0.18	$	0.33		$	0.41	$	0.69
Diluted Net Income Per Common Share	$	0.18	$	0.32		$	0.41	$	0.67
Dividend Per Common Share	$	0.115	$	0.115		$	0.230	$	0.215
Weighted Average Number of
Common Shares Outstanding
Basic		1,782,395		1,819,761			1,783,436		1,823,546
Diluted		1,783,708		1,857,730			1,794,027		1,859,950

See notes to consolidated financial statements.

4

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2008 and 2007 (unaudited)

	Six Months Ended
	June 30,			June 30,
	2008			2007
	(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income	$	736		$	1,250
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		675			245
Amortization of intangibles		208			271
Depreciation expense		343			321
Recognition of deferred income, net of costs		(265	)		(258	)
Deferral of fee income, net of costs		209			311
Stock compensation expense		--			22
(Gain) loss on investment transactions		(177	)		1
Loss on writedown of fixed asset		--			135
Changes in operating assets and liabilities:
Decrease in accrued interest receivable		390			252
Increase in cash surrender value of life insurance		(199	)		(159	)
Increase in other assets		(26	)		(680	)
Increase (decrease) in other liabilities		(1,069	)		1,080
Increase (decrease) in accrued interest payable		(99	)		30
Net cash  provided by operating activities		726			2,821
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale		(14,242	)		(25,298	)
Proceeds from sale of investment and mortgage-backed securities available for sale		6,821			4,965
Proceeds from maturity of investment and mortgage-backed securities:
Available for sale		23,813			25,946
Held to maturity		696			49
Principal repayments on mortgage-backed securities:
Available for sale		4,984			2,533
Purchase of bank owned life insurance		--			(3,200	)
Net increase in loans		(20,592	)		(5,108	)
(Purchase) redemption of FHLB stock		(81)			742
Purchase of office properties and equipment		(254	)		(315	)
Net cash provided by investing activities		1,145			314
FINANCING ACTIVITIES:
Proceeds from the dividend reinvestment plan		61			57
Dividends paid in cash		(411	)		(411	)
Proceeds from the exercise of stock options		2			--
Split dollar post retirement liability recapitalization		(60	)		--
Share repurchase program		(316	)		(630	)
Increase (decrease) in term borrowings		1,661			(13,500	)
Increase (decrease) in other borrowings		(4,165	)		4,275
Increase in deposit accounts		1,786			10,185
Net cash used by financing activities		(1,442	)		(24	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		429			3,111
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		11,890			9,124
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,319		$	12,235
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes	$	281		$	717
Interest		7,008			7,368
Non-cash transactions:
Loans foreclosed		--			--

See notes to consolidated financial statements.

5

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

Six Months Ended June 30, 2008 and 2007 (unaudited)

								Retained			Accumulated
						Additional		Earnings,			Other						Total
	Common Stock					Paid-in		Substantially			Comprehensive			Treasury Stock			Shareholders'
	Shares			Amount		Capital		Restricted			Income (loss)			at Cost			Equity
	(Dollars in Thousands, Except Share Data)
BALANCE AT DECEMBER 31, 2006		1,830,528		$	20	$	12,506	$	18,912		$	(610	)	$	(4,861	)	$	25,967
Net income									1,250									1,250
Other comprehensive income, net of tax on
unrealized holding losses on securities available for sale
arising during period												(315	)					(315	)
Less reclassification adjustment for gains included												--						--
in net income
Comprehensive income
Stock option activity, net		396					22											22
Dividend  reinvestment plan contributions		2,823					57											57
Share repurchase program		(30,285	)												(630	)		(630	)
Cash dividend ($.215 per share)									(411	)								(411	)
BALANCE AT JUNE 30, 2007		1,803,462		$	20	$	12,585	$	19,751		$	(925	)	$	(5,491	)	$	25,940
BALANCE AT DECEMBER 31, 2007		1,794,866		$	20	$	12,781	$	20,276		$	191		$	(5,955	)	$	27,313
Net income									736									736
Other comprehensive loss, net of tax on
unrealized holding losses on securities available for sale
arising during period												(837	)					(837	)
Less reclassification adjustment for gains included												133						133
in net income
Comprehensive income																		32
Stock option activity, net		1,424					2											2
Dividend  reinvestment plan contributions		3,667					61											61
Cumulative effect of change in accounting principal									(60	)								(60	)
Share repurchase program		(16,920	)												(316	)		(316	)
Cash dividend ($.23 per share)									(411	)								(411	)
BALANCE AT JUNE 30, 2008		1,783,037		$	20	$	12,844	$	20,541		$	(513	)	$	(6,271	)	$	26,621

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PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Presentation of Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of Provident Community Bancshares, Inc. (the “Corporation”) were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments which are, in the opinion of management, necessary for the fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The results of operations for the six months ended June 30, 2008 are not necessarily indicative of the results which may be expected for the entire calendar year. Certain amounts in the prior year’s financial statements have been reclassified to conform to current year classifications.

Recently Issued Accounting Standards

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

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

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

7

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improving the transparency of financial reporting. It is intended to enhance the current disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 is effective for the Corporation on January 1, 2009. This pronouncement does not impact accounting measurements but will result in additional disclosures if the Corporation is involved in material derivative and hedging activities at that time.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140. FSP 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and earlier application is not permitted. Accordingly, this FSP is effective for the Corporation on January 1, 2009. The Corporation is currently evaluating the impact, if any, the adoption of FSP 140-3 will have on its financial position, results of operations and cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,”and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and early adoption is prohibited. Accordingly, this FSP is effective for the Corporation on January 1, 2009. The Corporation does not believe the adoption of FSP 142-3 will have a material impact on its financial position, results of operations or cash flows.

In May, 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Corporation’s financial position, results of operations or cash flows.

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

8

2. Income Per Share

Basic income per share amounts for the three and six months ended June 30, 2008 and 2007 were computed based on the weighted average number of common shares outstanding during the period. Diluted income per share adjusts for the dilutive effect of outstanding common stock options during the periods utilizing the treasury stock method. Common stock equivalents included in the diluted earnings per share calculation for the six months ended June 30, 2008 and 2007 were 10,591 and 36,404, respectively.

3. Assets Pledged

Approximately $67,997,000 and $74,410,000 of marketable debt securities at June 30, 2008 and December 31, 2007, respectively, were pledged by Provident Community Bank, N.A. (the “Bank”) as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements. The Bank pledges as collateral for Federal Home Loan Bank advances commercial and residential real estate mortgage loans under a collateral agreement with the Federal Home Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying mortgages (as defined) with unpaid principal balances equal to, when discounted at 75% of the unpaid principal balances, 100% of total advances. As part of the total assets pledged, the Bank will also pledge securities to cover additional advances from the Federal Home Loan Bank that exceed the qualifying mortgages balance along with security repurchase lines with various brokerage houses.

4. Contingencies and Loan Commitments

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

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at June 30, 2008 related to these items is summarized below:

Loan Commitments:	Contract Amount
Approved loan commitments	$	1,334,420
Unadvanced portions of loans and credit lines		55,002,000
Total loan commitments	$	56,336,420

Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counter party. Collateral held is primarily residential and commercial property. Commitments outstanding at June 30, 2008 consisted of fixed and adjustable rate loans at rates ranging from 6.5% to 8.5%. Commitments to originate loans generally expire within 30 to 60 days.

Commitments to fund loans, including credit lines (principally variable rate, consumer lines secured by real estate and overdraft protection) totaled approximately $142,800,000 at June 30, 2008. Of these lines, the outstanding loan balances totaled approximately $87,798,000.

9

5. Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures

On July 18, 2006, the Corporation sponsored the creation of Provident Community Bancshares Capital Trust I (“Capital Trust I”). The Corporation is the owner of all of the common securities of Capital Trust I. On July 21, 2006, Capital Trust I issued $4,000,000 in the form of fixed/floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporation’s $124,000 capital contribution for Capital Trust I’s common securities, were used to acquire $4,124,000 aggregate principal amount of the Corporation’s floating rate junior subordinated deferrable interest debentures due October 1, 2036, which constitute the sole asset of Capital Trust I. The interest rate on the debentures and the capital securities will be equal to 7.393% for the first five years. Thereafter, the interest rate is variable and adjustable quarterly at 1.74% over the three-month LIBOR. The debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after October 1, 2011. The debentures are also subject to redemption prior to October 1, 2011 at up to 103.7% of par after the occurrence of certain events.

On November 28, 2006, the Corporation sponsored the creation of Provident Community Bancshares Capital Trust (“Capital Trust II”). The Corporation is the owner of all of the common securities of the Trust. On December 15, 2006, the Trust issued $8,000,000 in the form of floating rate capital securities through a pooled trust preferred securities offering. The proceeds of Capital Trust II were utilized for the redemption of Union Financial Bancshares Statutory Trust issued on December 18, 2001. The proceeds from this issuance, along with the Corporation’s $248,000 capital contribution for the Trust’s common securities, were used to acquire $8,247,000 aggregate principal amount of the Corporation’s floating rate junior subordinated deferrable interest debentures due March 1, 2037, which constitute the sole asset of the Capital Trust II. The interest rate on the debentures and the capital securities is variable and adjustable quarterly at 1.74% over the three-month LIBOR. The debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after March 1, 2012. The debentures are also subject to redemption prior to March 1, 2012 at 103.5% of par after the occurrence of certain events.

A summary of the Subordinated Deferrable Interest Debentures issued and outstanding follows:

	Amount Outstanding at June 30,
Name	2008		2007		Rate			Prepayment Option Date	Maturity	Distribution Payment Frequency
Provident Community Bancshares Capital Trust I	$	4,000,000	$	4,000,000		7.39	%	October 1, 2011	October 1, 2036	Quarterly
Provident Community Bancshares Capital Trust II		8,000,000		8,000,000		4.42	%	March 1, 2012	March 1, 2037	Quarterly
Total	$	12,000,000	$	12,000,000

6. Fair Value Measurements

Effective January 1, 2008, the Corporation adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for

10

example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2008 are as follows:

		Quoted Market Price in active markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for Sale Securities	$	86,946,000	$	--	$	--

Available-for-sale investment securities are the only assets whose fair values are measured on a recurring basis using Level 1 inputs (active market quotes). The Corporation has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

The Corporation is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Corporation considers to be level 2 inputs. The aggregate carrying amount of impaired loans at June 30, 2008

11

was $2,214,000.

Goodwill and other intangible assets measured at fair value on a nonrecurring basis relate to intangible assets (deposit premium intangible) that were acquired in connection with acquisitions and were valued at their fair market values at the time of acquisition using level 3 inputs. FASB Staff Position No. FAS 157-2 delays the measurement of Goodwill and other intangible assets measured at fair value on a nonrecurring basis until the first quarter of 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The Corporation has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of financial statements.

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

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

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

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Forward Looking Statements

Management’s discussion and analysis of financial condition and results of operations and other portions of this Form 10-Q may contain certain “forward-looking statements” concerning the future operations of the Corporation and the Bank. These forward-looking statements are generally identified by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Management intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Corporation of the protections of such safe harbor with respect to all forward-looking statements contained in this report. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could effect actual results include interest rate trends, the general economic climate in the Corporation’s and the Bank’s market area and the country as a whole, the ability of the Corporation and the Bank to control costs and expenses, competitive products and pricing, loan delinquency rates, the quality and composition of the loan and investment portfolios, changes in accounting principles and guidelines and changes in federal and state regulation. The Corporation provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2007, including in the Risk Factors section of that report, and in its other SEC reports. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

Except as required by applicable law or regulation, the Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward looking statements to reflect events or circumstances after the date of these statements or to reflect the occurrence of anticipated or unanticipated events.

Financial Condition

Assets

Total assets of the Corporation decreased $2,578,000, or 0.63%, to $405,063,000 at June 30, 2008 from $407,641,000 at December 31, 2007. Investments and mortgage-backed securities decreased $22,599,000, or 20.33%, from December 31, 2007 to June 30, 2008, as proceeds from the maturity and sale of investment securities were utilized to fund growth in higher-yielding loans. Net loans increased $19,973,000, or 7.79%, from December 31, 2007 to June 30, 2008, due primarily to growth in commercial real estate and consumer loans partially offset by reductions in residential mortgage and commercial business loans.

Investment and Mortgage-backed Securities

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

	June 30, 2008				December 31, 2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Municipal Securities	$	2,430	$	2,409	$	3,126	$	3,135

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

	June 30, 2008				December 31, 2007
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Investment Securities:
U.S. Agency Obligations	$	7	$	7	$	507	$	488
Government Sponsored Enterprises		17,999		18,142		40,457		40,665
Municipal Securities		6,888		7,141		9,296		9,601
Other		12,381		11,293		12,458		12,093
Total Investment Securities		37,275		36,583		62,718		62,847
Mortgage-backed Securities:
Fannie Mae		39,462		39,198		27,511		27,479
Ginnie Mae		410		416		1,187		1,200
Freddie Mac		8,888		9,059		12,860		13,080
Collateralized Mortgage Obligations		911		902		3,492		3,455
Total Mortgage-backed Securities		49,671		49,575		45,050		45,214
Total Available for Sale	$	86,946	$	86,158	$	107,768	$	108,061

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Loans

Loans increased to $276,460,000 at June 30, 2008 compared to $256,487,000 at December 31, 2007. The Corporation continues to focus on growth of higher yielding consumer loans and specific commercial lending products that minimizes concentration risk to the loan portfolio.

Loans receivable consisted of the following (in thousands):

	June 30, 2008			December 31, 2007
Mortgage loans:
Fixed rate residential	$	14,254		$	16,214
Adjustable-rate residential		8,072			8,775
Commercial real estate		95,713			76,864
Construction		4,149			4,764
Total mortgage loans		122,188			106,617
Commercial loans:
Commercial non-real estate		31,829			32,091
Commercial lines of credit		70,767			72,170
Total commercial loans		102,596			104,261
Consumer loans:
Home equity		16,833			15,185
Consumer and installment		40,718			36,315
Consumer lines of credit		339			346
Total consumer loans		57,890			51,846
Total loans		282,674			262,724
Less:
Undisbursed portion of interim
construction loans		(2,043	)		(2,379	)
Unamortized loan discount		(423	)		(476	)
Allowance for loan losses		(3,773	)		(3,344	)
Net deferred loan origination costs		25			(38	)
Total, net	$	276,460		$	256,487
Weighted-average interest rate of loans		6.34	%		7.56	%

Liabilities

Total liabilities decreased $1,886,000 to $378,442,000 at June 30, 2008 from $380,328,000 at December 31, 2007. Deposits increased $1,786,000, or 0.66%, to $272,185,000 at June 30, 2008 from $270,399,000 at December 31, 2007. The overall growth includes a $5,860,000 increase in transaction accounts as a result of a special product promotion, while certificate accounts decreased $4,074,000. The Corporation continues to target lower-cost demand deposit accounts through media advertising and special product promotions.

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Deposit accounts were as follows (in thousands):

	June 30, 2008								December 31, 2007
	Rate			Balance		%			Rate			Balance		%
Account Type
NOW accounts:
Commercial non-interest-bearing		--		$	17,773		6.53	%		--		$	16,568		6.13	%
Non-commercial		2.34	%		64,103		23.55	%		2.14	%		56,282		20.81	%
Money market checking accounts		2.47	%		19,843		7.29	%		4.44	%		23,160		8.57	%
Regular savings		0.64	%		12,945		4.76	%		0.79	%		12,794		4.73	%
Total demand and savings deposits		1.82	%		114,664		42.13	%		2.47	%		108,804		40.24	%
Time deposits:
Up to 3.00%					28,504		10.47	%					5,768		2.13	%
3.01 %- 4.00%					42,783		15.72	%					26,265		9.71	%
4.01 %- 5.00%					42,873		15.75	%					34,988		12.94	%
5.01 %- 6.00%					43,334		15.92	%					94,548		34.97	%
6.01 %- 7.00%					27		0.01	%					26		0.01	%
Total time deposits		4.14	%		157,521		57.87	%		4.67	%		161,595		59.76	%
Total deposit accounts		3.17	%	$	272,185		100.00	%		3.78	%	$	270,399		100.00	%

At June 30, 2008 and December 31, 2007, the Bank had $71,161,000 and $69,500,000, respectively, of advances outstanding from the FHLB. The maturity of the advances from the FHLB is as follows (in thousands):
 

	June 30, 2008 Wtd Avg Rate				December 31,2007 Wtd Avg Rate
Contractual Maturity:
Within one year - adjustable rate	$	6,661	2.70	%	$	5,000	4.88	%
After one but within three years - fixed rate		5,000	4.93	%		5,000	4.93	%
After one but within three years - adjustable rate		--	--	%		7,500	5.30	%
After three but within five years - adjustable rate		22,000	4.58	%		28,000	4.61	%
Greater than five years - adjustable rate		37,500	3.89	%		24,000	4.10	%
Total advances	$	71,161	4.06	%	$	69,500	4.55	%

The Bank pledges as collateral for the advances its investment securities and has entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying loans with unpaid principal balances equal to, when discounted at 50% to 75% of the unpaid principal balances, 100% of total advances. Borrowings from the Federal Home Loan Bank (the “FHLB”) increased $1,661,000, or 2.39%, to $71,161,000 at June 30, 2008 from $69,500,000 at December 31, 2007. Securities sold under agreement to repurchase decreased $4,165,000 to $19,966,000 at June 30, 2008 from $24,131,000 at December 31, 2007. Excess funds from deposit growth, the sale and maturation of securities and , to a lesser extent, borrowings from the Federal Home Loan Bank were used to pay down matured borrowings under these arrangements.

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Shareholders’ Equity

Shareholders’ equity decreased $692,000, or 2.53%, to $26,621,000 at June 30, 2008 from $27,313,000 at December 31, 2007 due primarily to the repurchase of 16,920 shares at a cost of $316,000, dividend payments of $0.23 per share at a cost of $411,000, and a $704,000 increase in unrealized losses on securities available for sale, offset by net income of $736,000.

Liquidity

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

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

At June 30, 2008, the Corporation’s investment in marketable securities totaled $88,588,000, nearly all of which is available for sale. Approximately $67,997,000 and $74,410,000 of debt securities at June 30, 2008 and December 31, 2007, respectively, were pledged by the Bank as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements.

Outstanding loan commitments (including commitments to fund credit lines) totaled $142,800,000 at June 30, 2008. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments.

The Corporation closely monitors its liquidity position on a daily basis. Time deposits that are scheduled to mature in one year or less from June 30, 2008, totaled $139,388,000. The Corporation relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Corporation will also offer special products to its customers to increase retention and to attract new deposits. Based upon the Corporation’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances, securities sold under agreements to repurchase and lines of credit. At June 30, 2008, the Corporation had outstanding $71,161,000 of FHLB borrowings and $19,966,000 of securities sold under agreements to repurchase. At June 30, 2008, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $30,000,000 and the ability to borrow an additional $20,000,000 from the FHLB and secured borrowing lines. Lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have reserved the right to withdraw these lines at their option.

Capital Management

The Bank and the Corporation are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s

17

consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weights and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of June 30, 2008, that the Bank and the Corporation met the capital adequacy requirements to which they are subject.

As of June 30, 2008, the Bank was "well capitalized" under the regulatory framework for prompt corrective action based on its capital ratio calculations. In order to be "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

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

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

June 30, 2008
	Actual					Regulatory Minimum					“Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	$			%		$			%		$			%
Leverage ratio
Corporation		33,216		8.21	%		16,180		4.00	%		n/a		n/a
Bank		35,397		8.76	%		16,351		4.00	%		20,439		5.00	%
Tier 1 capital ratio
Corporation		33,216		10.70	%		12,403		4.00	%		n/a		n/a
Bank		35,397		11.42	%		12,403		4.00	%		18,605		6.00	%
Total risk-based capital ratio
Corporation		39,853		12.84	%		24,807		8.00	%		n/a		n/a
Bank		39,170		12.63	%		24,807		8.00	%		31,009		10.00	%

During fiscal 2003, the Corporation implemented a share repurchase program under which the Board of Directors of the Corporation authorized the repurchase of up to 5% of the outstanding shares or 98,000 shares. The program was expanded by an additional 5%, or 98,000 shares, in fiscal 2004, by an additional 5%, or 95,000 shares in fiscal 2005 and by an additional 5%, or 92,000 shares in fiscal 2006. The shares are to be repurchased, either through open market purchases or privately negotiated transactions, depending on market conditions and other factors.

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Repurchased shares will be held in treasury and will be available for the Corporation’s benefit plans. During the six months ended June 30, 2008, the Corporation repurchased 16,920 shares. As of June 30, 2008, the Corporation had repurchased a total of 346,180 shares and had 38,820 shares available for repurchase under these authorizations.

Off-Balance Sheet Risk

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customer’s requests for funding and take the form of legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. Outstanding loan commitments (including commitments to fund credit lines) totaled $142,800,000 at June 30, 2008. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on the credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The credit risk on these commitments is managed by subjecting each customer to normal underwriting and risk management processes. For the period ended June 30, 2008, the Corporation did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operation and cash flows.

Results of operations for the three months ended June 30, 2008 and 2007

General

Net income decreased $285,000, or 47.42%, to $316,000 for the three months ended June 30, 2008 as compared to $601,000 for the same period in 2007. The decrease in net income for the period was due primarily to a compression of the net interest margin caused by declining interest rates along with an increase in the provision for loan losses due to loan growth and the increase in nonperforming loans, offset by a decrease in non-interest expense.

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Average Yields and Rates

(dollars in thousands)

	Three Months Ended June 30,
			2008							2007
	Average Balance		Interest		Average Yield/Cost			Average Balance		Interest		Average Yield/Cost
Interest-earning assets:
Loans (1)	$	276,355	$	4,378		6.34	%	$	237,514	$	4,803		8.09	%
Mortgage-backed securities		52,041		687		5.28	%		26,102		306		4.69	%
Investment securities		40,655		562		5.53	%		91,077		1,234		5.42	%
Other interest-earning assets		5,658		73		5.18	%		8,294		117		5.62	%
Total interest-earning assets		374,709		5,700		6.08	%		362,987		6,460		7.12	%
Non-interest-earning assets		32,608							31,698
Total assets	$	407,317						$	394,685
Interest-bearing liabilities:
Deposits		273,403		2,218		3.25	%		259,778		2,397		3.69	%
Floating rate junior subordinated deferrable interest debentures		12,372		175		5.65	%		12,372		223		7.20	%
FHLB advances and other borrowings		91,084		843		3.70	%		92,846		1,093		4.71	%
Total interest-bearing liabilities		376,859		3,236		3.43	%		364,996		3,713		4.07	%
Non-interest-bearing liabilities		3,838							2,780
Total liabilities		380,697							367,776
Shareholders’ equity		26,620							26,909
Total liabilities and shareholders’ equity	$	407,317						$	394,685
Net interest income/spread			$	2,464		2.65	%			$	2,747		3.05	%
Net yield on earning assets						2.63	%						3.03	%

(1) Average balances of loans include non-accrual loans.

Interest Income

Interest income decreased $760,000, or 11.76%, to $5,700,000 for the three months ended June 30, 2008 as compared to the same period in 2007. Interest income on loans decreased by 8.85%, or $425,000, to $4,378,000 for the three months ended June 30, 2008 from $4,803,000 for the three months ended June 30, 2007, due to declining market interest rates, offset by higher average balance of loans. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities decreased $335,000 for the three months ended June 30, 2008 to $1,322,000 from $1,657,000 during the same period in 2007 due to lower average balances, offset by higher investment yields as a result of a higher concentration of mortgage-backed securities.

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Interest Expense

Interest expense decreased $477,000, or 12.85%, to $3,236,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Interest expense on deposit accounts decreased $179,000, or 7.47%, to $2,218,000 for the three months ended June 30, 2008 from $2,397,000 during the same period in 2007 due primarily to lower market interest rates and a shift in the composition of the deposit portfolio from certificates of deposits to transaction accounts, offset by higher average balances. The Corporation continues to target lower cost demand deposit accounts versus traditional higher cost certificates of deposits in order to reduce overall funding costs. Interest expense on borrowings decreased $250,000, or 22.87%, for the three months ended June 30, 2008 as compared to the same period in the previous year due to lower market interest rates and, to a lesser extent, lower average balances. Interest expense on floating rate junior subordinated deferrable interest debentures decreased $48,000, or 21.52%, to $175,000 for the three months ended June 30, 2008 from $223,000 during the same period in 2007 due to lower market rates.

Provision for Loan Losses

During the three months ended June 30, 2008, the provision for loan losses was $365,000 as compared to $85,000 for the same period in the previous year due to an increase in nonperforming loans and loans charged-off and loan growth. The provision also reflects the Corporation’s continued movement from longer-term, fixed-rate residential mortgage loans to shorter-term, floating-rate consumer and commercial loans. Consumer and commercial loans carry higher risk weighted rates in the reserve calculation as compared to residential mortgage loans. During the three months ended June 30, 2008, bad debt charge-offs, net of recoveries, were $56,000 as compared to $50,000 for the same period in the previous year. Real estate acquired in foreclosure and nonperforming loans increased $3,600,000 from $2,253,000 at June 30, 2007 to $5,853,000 at June 30, 2008. The increase in nonperforming loans over the previous year related primarily to four commercial real estate relationships that has be affected by the downturn in the residential housing market. Slow housing conditions have affected some of these borrowers’ ability to sell the completed projects in a timely manner. Specific reserves for nonperforming loans at June 30, 2008 were $967,000 compared to $258,000 for nonperforming loans at June 30, 2007. Management believes the specific reserves allocated to these and other non accrual loans will offset losses, if any, arising from less than full recovery of the loans from the supporting collateral. Management continues to evaluate and assess all nonperforming assets on a regular basis as part of its well-established loan monitoring and review process.

Non-Interest Income

Total non-interest income increased $38,000, or 4.68%, to $850,000 for the three months ended June 30, 2008 from $812,000 for the same period in the previous year, primarily due to a gain in the sale of securities, offset by a decrease in fees for financial services. During the quarter ended June 30, 2008, the Corporation sold approximately $1.6 million in investment securities at a gain of $66,000 in order to improve yield spreads and to fund growth in higher-yielding loans. Fees from financial services decreased $36,000, or 4.55%, to $756,000 for the three months ended June 30, 2008, from $792,000 for the same period in the previous year. The decrease was due primarily to lower fees generated from third party investment brokerage and financing receivables programs as a result of lower product volumes.

Non-Interest Expense

For the three months ended June 30, 2008, total non-interest expense decreased $161,000, or 5.94%, to $2,550,000 from $2,711,000 for the same period in 2007. Compensation and employee benefits increased $7,000, or 0.55%, to $1,288,000 for the three months ended June 30, 2008 from $1,281,000 for the same period in 2007 due primarily to higher compensation costs from normal merit salary increases, offset by reductions in accrued incentive

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compensation expense and reductions in employee pension benefits costs. Occupancy and equipment expense decreased $83,000, or 11.54%, to $636,000 for the three months ended June 30, 2008 from $719,000 for the same period in 2007, due the previous year including expenses related to the closing of a banking center. Professional services expense decreased $10,000, or 8.77%, to $104,000 for the three months ended June 30, 2008 from $114,000 for the same period in 2007, due to lower legal expenses. Advertising/public relations expense decreased $17,000, or 17.35%, to $81,000 for the three months ended June 30, 2008 from $98,000 for the same period in 2007 due primarily to lower product and promotion expenses. Intangible amortization expense decreased $8,000, or 7.14%, to $104,000 for the three months ended June 30, 2008 from $112,000 for the same period in 2007, due to deposit premiums related to branch acquisitions becoming fully amortized. Other expense decreased $63,000, or 25.20%, to $187,000 for the three months ended June 30, 2008 from $250,000 for the same period in 2007, due primarily to lower costs associated with deposit account charge-offs.

Results of operations for the six months ended June 30, 2008 and 2007

General

Net income decreased $514,000, or 41.12%, to $736,000 for the six months ended June 30, 2008 as compared to $1,250,000 for the same period in 2007. The decrease in net income for the period was due primarily to a compression of the net interest margin caused by declining interest rates along with an increase in the provision for loan losses due to loan growth and the increase in nonperforming loans, offset by a decrease in non-interest expense.

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Average Yields and Rates

(dollars in thousands)

	Period Ended June 30,
	2008							2007
	Average Balance		Interest		Average Yield/Cost			Average Balance		Interest		Average Yield/Cost
Interest-earning assets:
Loans (1)	$	270,184	$	9,000		6.66	%	$	235,785	$	9,579		8.13	%
Mortgage-backed securities		51,472		1,363		5.30	%		25,132		596		4.74	%
Investment securities		49,128		1,365		5.56	%		93,705		2,503		5.34	%
Other interest-earning assets		6,089		147		4.84	%		7,327		201		5.50	%
Total interest-earning assets		376,873		11,875		6.30	%		361,949		12,879		7.12	%
Non-interest-earning assets		32,791							31,658
Total assets	$	409,664						$	393,607
Interest-bearing liabilities:
Deposits		272,595		4,680		3.43	%		260,578		4,786		3.67	%
Floating rate junior subordinated deferrable interest debentures		12,372		384		6.21	%		12,372		445		7.19	%
FHLB advances and other borrowings		94,244		1,845		3.92	%		91,259		2,167		4.75	%
Total interest-bearing liabilities		379,211		6,909		3.64	%		364,209		7,398		4.06	%
Non-interest-bearing liabilities		2,951							2,738
Total liabilities		382,162							366,947
Shareholders’ equity		27,502							26,660
Total liabilities and shareholders’ equity	$	409,664						$	393,607
Net interest income/spread			$	4,966		2.66	%			$	5,481		3.05	%
Net yield on earning assets						2.64	%						3.03	%

(1) Average balances of loans include non-accrual loans.

Interest Income

Interest income decreased $1,004,000, or 7.80%, to $11,875,000 for the six months ended June 30, 2008 as compared to the same period in 2007. Interest income on loans decreased by 6.04%, or $579,000, to $9,000,000 for the six months ended June 30, 2008 from $9,579,000 for the six months ended June 30, 2007, due to declining market interest rates, offset by higher average balance of loans. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities decreased $425,000 for the six months ended June 30, 2008 to $2,875,000 from $3,300,000 during the same period in 2007 due to lower average balances, offset by higher investment yields as a result of a higher concentration of mortgage-backed securities.

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Interest Expense

Interest expense decreased $489,000, or 6.61%, to $6,909,000 for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007. Interest expense on deposit accounts decreased $106,000, or 2.21%, to $4,680,000 for the six months ended June 30, 2008 from $4,786,000 during the same period in 2007 due primarily to lower market interest rates and a shift in the composition of the deposit portfolio from certificates of deposit to transaction accounts, offset by higher average balances. The Corporation continues to target lower cost demand deposit accounts versus traditional higher cost certificates of deposits in order to reduce overall funding costs. Interest expense on borrowings decreased $322,000, or 14.86%, for the six months ended June 30, 2008 as compared to the same period in the previous year due to lower market interest rates, offset by higher average balances. Interest expense on floating rate junior subordinated deferrable interest debentures decreased $61,000, or 13.71%, to $384,000 for the six months ended June 30, 2008 from $445,000 during the same period in 2007 due to lower market rates.

Provision for Loan Losses

During the six months ended June 30, 2008, the provision for loan losses was $675,000 as compared to $245,000 for the same period in the previous year due to an increase in nonperforming loans and loans charged-off and loan growth. The provision also reflects the Corporation’s continued movement from longer-term, fixed-rate residential mortgage loans to shorter-term, floating-rate consumer and commercial loans. Consumer and commercial loans carry higher risk weighted rates in the reserve calculation as compared to residential mortgage loans. During the six months ended June 30, 2008, bad debt charge-offs, net of recoveries, was $246,000 as compared to $58,000 for the same period in the previous year. The increase in bad debt charge-offs over the previous year relates to additional write-downs required in the disposition of commercial loans during the six months ended June 30, 2008. The Corporation’s loan loss allowance at June 30, 2008 was approximately 1.35% of the Corporation’s outstanding loan portfolio and 64.46% of non-performing loans compared to 1.28% of the Corporation’s outstanding loan portfolio and 88.37% of non-performing loans at December 31, 2007.

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

Balance at beginning of period	$	3,344
Provision for loan losses		675

Charge-offs, net		(246	)
Balance at end of period	$	3,773

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

	June 30, 2008			December 31, 2007
Non-accruing loans which are contractually past due 90 days or more:
Residential real estate	$	199		$	356
Commercial		4,857			2,445
Consumer		797			171
Total non-accruing loans		5,853			2,972
Real estate acquired through
foreclosure and repossessed assets		28			856
Total non-performing assets	$	5,881		$	3,828
Percentage of loans receivable		2.08	%		1.49	%
Percentage of allowance for loan losses to total loans outstanding		1.35	%		1.28	%
Allowance for loan losses	$	3,773		$	3,344

Nonperforming assets increased $2,053,000 to $5,881,000 at June 30, 2008, or 1.45% of total assets, as compared to $3,828,000 or 0.94% of total assets, at December 31, 2007. Approximately 34% or $2,000,000 of nonperforming assets as of June 30, 2008 related to two commercial loan relationships that were also nonperforming at December 31, 2007. Consumer and Commercial nonperforming loans increased approximately $3,038,000 since the year ended December 31, 2007 due to the continuing downturn in the economy leading to the deterioration in these loans. This increase in nonperforming loans was offset by an $828,000 decline in other real estate owned due to the disposition of properties during the first quarter of 2008. Management has allocated specific reserves to these and other non accrual loans that it believes will offset losses, if any, arising from less than full recovery of the loans from the supporting collateral. These additional reserves are based on management’s evaluation of a number of factors including the estimated value of the collateral supporting each of these loans. Management believes that the combination of specific reserves in the allowance for loan losses and established impairment of these loans will be adequate to account for the current risk associated with these loans as of June 30, 2008.

The allowance for loan loss calculation includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is rated for all loans including performing groups. The weight assigned to each performing group is developed from previous loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition to loan loss experience, management’s evaluation of the loan portfolio includes the market value of the underlying collateral, growth and composition of the loan portfolio, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically and the allowance for loan loss calculation will adjust accordingly.

Non-Interest Income

Total non-interest income increased $199,000, or 12.96%, to $1,734,000 for the six months ended June 30, 2008 from $1,535,000 for the same period in the previous year. Fees from financial services increased $14,000, or

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0.94%, to $1,507,000 for the six months ended June 30, 2008 from $1,493,000 for the same period in the previous year. The increase was due to higher service fees as a result of an increase in transaction accounts, offset by lower fees generated from third party investment brokerage and financing receivables programs as a result of lower product volumes. Gain on sale of investments were $177,000  for the six months ended June 30, 2008 as the  Corporation sold approximately $6.8 million in investment securities in order to improve  yield spreads and to fund growth in higher-yielding loans.

Non-Interest Expense

For the six months ended June 30, 2008, total non-interest expense decreased $79,000, or 1.53%, to $5,072,000 from $5,151,000 for the same period in 2007. Compensation and employee benefits increased $137,000, or 5.56%, to $2,601,000 for the six months ended June 30, 2008 from $2,464,000 for the same period in 2007 due primarily  to higher compensation costs from normal merit salary increases, offset by lower incentive compensation. Occupancy and equipment expense decreased $46,000, or 3.53%, to $1,257,000 for the six months ended June 30, 2008 from $1,303,000 for the same period in 2007 due primarily to previous year including expenses related to the closing of a banking center. Professional services expense decreased $22,000, or 9.78%, to $203,000 for the six months ended June 30, 2008 from $225,000 for the same period in 2007, due to lower legal expenses. Advertising/public relations expense decreased $24,000, or 14.37%, to $143,000 for the six months ended June 30, 2008 from $167,000 for the same period in 2007 due primarily to lower product and promotion expenses. Intangible amortization expense decreased $63,000, or 23.25%, to $208,000 for the six months ended June 30, 2008 from $271,000 for the same period in 2007, due to deposit premiums related to branch acquisitions becoming fully amortized. Other expense decreased $67,000, or 15.37%, to $369,000 for the six months ended June 30, 2008 from $436,000 for the same period in 2007, due primarily to lower costs associated with deposit account charge-offs.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable as the registrant is a smaller reporting company.

Item 4T. Controls and Procedures

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

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

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PART II - OTHER INFORMATION

Item  1.                 Legal Proceedings

The Corporation is not involved in any legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the normal course of business. Management believes that these proceedings are immaterial to the Corporation’s financial condition and results of operations.

Item  1A.              Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

The following table provides certain information with regard to shares repurchased by the Corporation during the first quarter of 2008.

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per share	(c) Total Number of Shares Purchased as part of Publicly Announced Programs	(d) Maximum Number of Shares that may be purchased under Program
April 1, 2008 through April 30, 2008	49	$13.00	49	38,820
May 1, 2008 through May 31, 2008	--	--	--	38,820
June 1, 2008 through June 30, 2008	--	--	--	38,820
Total	49	$13.00	49	N/A

In May 2005, the Corporation implemented a share repurchase program under which the Corporation could repurchase up to 5% of the outstanding shares or 98,000 shares. In August 2006, the program was expanded by an additional 5% or 92,000 shares. The repurchase program will continue until it is completed or terminated by the Board of Directors.

Item  3.                 Defaults upon Senior Securities

Not applicable.

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

The Annual Meeting of the Stockholders of the Corporation was held on April 23, 2008. The results of the vote on the matters presented at the meeting are as follows:

1. The following individuals were elected as directors, each for a three-year term by the following vote:

	Votes For	Votes Withheld
William M. Graham	1,400,312	18,297
Carl L. Mason	1,377,962	40,647

2. The appointment of Elliott Davis, LLC, as auditors for the Corporation for the year ending December 31, 2008 was ratified by the stockholders by the following vote:

For 1,395,350 Against 19,779 Abstain 3,480

Item 5.                  Other Information

None

Item  6.                 Exhibits

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

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

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PROVIDENT COMMUNITY BANCSHARES, INC. (Registrant)
Date: August 8, 2008	By:      /s/ Dwight V. Neese Dwight V. Neese, President and Chief Executive Officer
Date: August 8, 2008	By:      /s/ Richard H. Flake Richard H. Flake, Executive Vice President and Chief Financial Officer