a6392404.htm

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

Yes o No x

The Corporation had 1,790,599 shares, $0.01 par value, of common stock issued and outstanding as of August 10, 2010.

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

INDEX

Part I.	Financial Information	Page

	Item 1. Financial Statements

	Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	3

	Consolidated Statements of Loss for the three and six months ended June 30, 2010 and 2009	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	5

	Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the six months ended June 30, 2010 and 2009	6

	Notes to Consolidated Financial Statements	7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	35

	Item 4T. Controls and Procedures	35

Part II.	Other Information

	Item 1. Legal Proceedings	36

	Item 1A. Risk Factors	36

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36

	Item 3. Defaults Upon Senior Securities	36

	Item 4. Reserved	36

	Item 5. Other Information	36

	Item 6. Exhibits	37

	Signatures	37

Part 1. Financial Information
PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2010 and December 31, 2009

	June 30,			December 31,
ASSETS	2010			2009
	(Unaudited)			(Audited)
	(DOLLARS IN THOUSANDS)
Cash and due from banks	$	5,507			5,103
Interest earning balances with the Federal Reserve		4,989			5,241
Federal funds sold		8,974			5,287
Cash and cash equivalents		19,470			15,631
Investment and mortgage-backed securities
Held to maturity (market value of $3,976,000 at December 31, 2009)		--			3,934
Available for sale		143,896			147,816
Total investment and mortgage-backed securities		143,896			151,750

Loans, net of unearned fees		235,076			255,999
Allowance for loan losses (ALL)		(4,971	)		(5,579	)
Loans, net of ALL		230,105			250,420

Real estate acquired through foreclosure		6,008			5,917
Office properties and equipment, net		5,275			5,447
Federal Home Loan Bank stock, at cost		3,947			3,947
Federal Reserve Bank stock, at cost		832			832
Accrued interest receivable		1,750			2,238
Cash surrender value of life insurance		9,526			9,332
Other assets		11,415			11,489
TOTAL ASSETS	$	432,224		$	457,003

LIABILITIES

Demand and savings deposits	$	165,496		$	161,911
Time deposits		155,385			170,851
Total deposits		320,881			332,762
Advances from the Federal Home Loan Bank		59,500			64,500
Securities sold under agreements to repurchase		11,106			18,520
Floating rate junior subordinated deferrable interest debentures		12,372			12,372
Accrued interest payable		515			581
Other liabilities		2,112			2,147
TOTAL LIABILITIES		406,486			430,882

Commitments and contingencies-Note 5

SHAREHOLDERS' EQUITY

Serial preferred stock - $0.01 par value
authorized - 500, 000 shares
issued and outstanding - 9,266 shares		9,248			9,245
at June 30, 2010 and December 31, 2009, respectively
Common stock - $0.01 par value,
authorized - 5,000,000 shares,
issued and outstanding - 1,790,599 shares at June 30, 2010		20			20
and 1,790,599 at December 31, 2009
Common stock warrants		25			25
Additional paid-in capital		12,919			12,919
Accumulated other comprehensive income (loss)		(845	)		(972	)
Retained earnings, substantially restricted		10,671			11,184
Treasury stock, at cost		(6,300	)		(6,300	)
TOTAL SHAREHOLDERS' EQUITY		25,738			26,121

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	432,224		$	457,003

See notes to consolidated financial statements.

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS

Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
	(DOLLARS IN THOUSANDS EXCEPT PER SHARE)						(DOLLARS IN THOUSANDS EXCEPT PER SHARE)

Interest Income:
Loans	$	2,875		$	3,644		$	5,995		$	7,240
Deposits and federal funds sold		8			5			13			13
Interest and dividends on mortgage-backed securities		218			1,137			647			2,032
Interest and dividends on investment securities		1,010			558			1,985			1,196
Total interest income		4,111			5,344			8,640			10,481

Interest Expense:
Deposit accounts		1,294			2,111			2,841			4,203
Floating rate junior subordinated deferrable interest debentures		120			135			237			285
Advances from the FHLB and other borrowings		630			758			1,374			1,542
Total interest expense		2,044			3,004			4,452			6,030

Net Interest Income		2,067			2,340			4,188			4,451
Provision for loan losses		1,187			925			2,083			3,625
Net interest income after
provision for loan losses		880			1,415			2,105			826

Non-Interest Income:
Fees for financial services		734			736			1,396			1,410
Other fees, net		11			31			34			53
Other-than-temporary-impairment write-down on securities		(164	)		(782	)		(467	)		(1,091	)
Net gain on sale of investments		528			285			1,205			379
Total non-interest income		1,109			270			2,168			751

Non-Interest Expense:
Compensation and employee benefits		1,060			1,143			2,182			2,335
Occupancy and equipment		604			613			1,203			1,224
Deposit insurance premiums		146			273			290			329
Professional services		98			85			198			177
Advertising and public relations		17			27			30			57
Loan operations		165			92			258			179
Intangible amortization		--			76			--			171
Items processing		83			78			160			167
Telephone		51			47			87			100
Other		233			182			388			394
Total non-interest expense		2,457			2,616			4,796			5,133

Net loss before income taxes		(468	)		(931	)		(523	)		(3,556	)
Benefit for income taxes		(171	)		(364	)		(245	)		(1,295	)
Net loss		(297	)		(567	)		(278	)		(2,261	)
Accretion of preferred stock to redemption value and preferred dividends accrued		117			118			236			143
Net loss to common shareholders	$	(414	)	$	(685	)	$	(514	)	$	(2,404	)

Net loss per common share (basic)	$	(0.17	)	$	(0.32	)	$	(0.16	)	$	(1.26	)

Net loss per common share (diluted)	$	(0.17	)	$	(0.32	)	$	(0.16	)	$	(1.26	)

Cash dividend per common share	$	--		$	0.030		$	--		$	0.060

Weighted average number of common shares outstanding

Basic		1,790,599			1,789,844			1,790,599			1,788,873

Diluted		1,790,599			1,789,844			1,790,599			1,788,873

See notes to consolidated financial statements.

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2010 and 2009 (unaudited)

	Six Months Ended
	June 30,			June 30,
	2010			2009
	(IN THOUSANDS)

OPERATING ACTIVITIES:

Net loss	$	(278	)	$	(2,261	)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Provision for loan losses		2,083			3,625
Amortization of intangibles		--			171
Depreciation expense		235			261
Recognition of deferred income, net of costs		(105	)		(205	)
Deferral of fee income, net of costs		80			141
Other than temporary impairment charge on AFS securities		467			1,091
Gain on investment transactions		(1,205	)		(379	)
Gain on sale of assets acquired from foreclosed loans		--			(2	)
Changes in operating assets and liabilities:
Decrease in accrued interest receivable		488			168
Increase in cash surrender value of life insurance		(194	)		(200	)
Increase in other assets		(17	)		(1,455	)
Decrease (increase) in other liabilities		(35	)		537
Decrease (increase) in accrued interest payable		(66	)		35

Net cash provided by operating activities		1,453			1,527

INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
Available for sale		(106,233	)		(87,918	)
Held to maturity		--			(1,504	)
Proceeds from sale of investment and mortgage-
backed securities
Available for sale		47,806			20,294
Held to maturity		3,934			--
Proceeds from maturity of investment and mortgage-
backed securities:
Available for sale		53,529			21,234
Held to maturity		--			250
Principal repayments on mortgage-backed securities:
Available for sale		9,683			11,667
Net decrease in loans		17,818			5,281
Purchase of FHLB/FRB stock		--			(18	)
Proceeds from sales of foreclosed assets, net of costs and improvements		439			69
Purchase of office properties and equipment		(63	)		(74	)

Net cash provided (used) by investing activities		26,913			(30,719	)

FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan		--			16
Proceeds from issuance of preferred stock		--			9,240
Proceeds from issuance of warrants		--			25
Proceeds from redemption of life insurance		--			645
Dividends paid in cash		--			(107	)
Dividends paid on preferred stock		(232	)		(80	)
Decrease in other borrowings		(12,414	)		(6,526	)
Decrease (increase) in deposit accounts		(11,881	)		28,493

Net cash provided (used) by financing activities		(24,527	)		31,706

NET INCREASE IN CASH
AND CASH EQUIVALENTS		3,839			2,514

CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD		15,631			21,370

CASH AND CASH EQUIVALENTS
AT END OF PERIOD	$	19,470		$	23,884

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
Income taxes	$	28		$	510
Interest		4,518			5,995

Non-cash transactions:
Loans foreclosed	$	559		$	2,891
Unrealized gain (loss) on securities available for sale, net of income tax		(390	)		1,221
See notes to consolidated financial statements.

PROVIDENT COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS

SIX MONTHS ENDED JUNE 30, 2010 and 2009 (unaudited)

													Retained			Accumulated
	Preferred Stock				Common Stock						Additional Paid-in		Earnings, Substantially			Other Comprehensive			Treasury Stock			Total Shareholders'
	Shares		Amount		Shares		Amount		Warrants		Capital		Restricted			Income (loss)			at Cost			Equity
	(Dollars in Thousands, Except Share Data)

BALANCE AT DECEMBER 31, 2008						1,787,092	$	20			$	12,903	$	18,997		$	(1,696	)	$	(6,300	)	$	23,924

Net loss														(2,261	)								(2,261	)

Other comprehensive loss, net of
tax on unrealized holding losses
on securities available for sale
arising during period																	1,221						1,221
Less reclassification adjustment for
gains and other than temporary																	(463	)					(463	)
investment charge in net loss
Comprehensive loss																							(1,503	)

Dividend reinvestment plan contributions						3,507						16											16

Issuance of preferred stock		9,266		9,240																			9,240

Issuance of common stock warrants										25													25

Accretion of Preferred Stock to redemption value				3										(3	)								--

Preferred stock dividend														(79	)								(79	)

Cash dividend ($.06 per share)														(107	)								(107	)


BALANCE AT JUNE 30, 2009		9,266	$	9,243		1,790,599	$	20	$	25	$	12,919	$	16,547		$	(938	)	$	(6,300	)	$	31,516

BALANCE AT DECEMBER 31, 2009		9,266	$	9,245		1,790,599	$	20	$	25	$	12,919	$	11,184		$	(972	)	$	(6,300	)	$	26,121

Net loss														(278	)								(278	)

Other comprehensive loss, net of
tax on unrealized holding losses
on securities available for sale
arising during period																	(390	)					(390	)
Less reclassification adjustment for
gains and other than temporary																	517						517
investment charge in net income
Comprehensive loss																							(151	)

Accretion of Preferred Stock to redemption value				3										(3	)								--

Preferred stock dividend														(232	)								(232	)


BALANCE AT JUNE 30, 2010		9,266	$	9,248		1,790,599	$	20	$	25	$	12,919	$	10,671		$	(845	)	$	(6,300	)	$	25,738

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, 2010 are not necessarily indicative of the results which may be expected for the entire calendar year or for an y other period. 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.

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staff's understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President. The amendment had no impact on the financial statements.

In April 2010, guidance was issued related to accounting for acquired troubled loans that are subsequently modified. The guidance provides that if these loans meet the criteria to be accounted for within a pool, modifications to one or more of these loans do not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements.

Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board (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.

2. Loss Per Share

Basic loss per common share amounts for the three and six months ended June 30, 2010 and 2009 were computed based on the weighted average number of common shares outstanding during the period. Diluted loss per share adjusts for the dilutive effect of outstanding common stock options during the periods utilizing the treasury stock method. There were no common stock equivalents included in the diluted loss per share calculation for the three and six months ended June 30, 2010 and 2009. Anti-dilutive common stock equivalents that were excluded in the diluted loss per share calculation for the six months ended June 30, 2010 and 2009 were 269,743 and 272,993, respectively.

3. Assets Pledged

Approximately $72,563,000 and $94,598,000 of debt securities at June 30, 2010 and December 31, 2009, 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. Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures

On July 18, 2006, Provident Community Bancshares Capital Trust I (“Capital Trust I”) was formed. 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 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 fixed/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 is equal to 7.393% for the first five years. Thereafter, the interest r ate 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, Provident Community Bancshares Capital Trust (“Capital Trust II”) was established. The Corporation is the owner of all of the common securities of the Trust. On December 15, 2006, the Trust issued $8,000,000 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 inte rest 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	2010		2009		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		2.28	%	March 1, 2012	March 1, 2037	Quarterly
Total	$	12,000,000	$	12,000,000

5. 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, 2010 related to these items is summarized below:

Loan Commitments:	Contract Amount

Approved loan commitments	$	571,000
Commitments to fund commercial and construction loans		122,000
Unused portions of loans and credit lines		31,420,000
Total loan commitments	$	32,113,000

Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counter party. Collateral held is primarily residential and commercial property. Commitments outstanding at June 30, 2010 consisted of fixed and adjustable rate loans at rates ranging from 5.5% to 7.5%. 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 $32,113,000 at June 30, 2010. Of these lines, the outstanding loan balances totaled approximately $52,164,000.

6. Fair Value of Financial Instruments

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Effective January 1, 2008, the Corporation adopted FASB ASC 820-10-50 (“FASB Topic 820”) Fair Value Measurements which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. FASB ASC 820-10-50 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).

Fair Value Hierarchy

FASB ASC Topic 820 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. FASB ASC Topic 820 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	Valuation is based upon quoted prices in active markets for identical assets or liabilities.

Level 2	Valuation is based upon 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 3	Valuation is based upon quoted prices for similar assets or liabilities; quoted prices in markets that are not active; and model-based techniques whose value is determined using pricing models, discounted cash flow methodologies and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 may inc lude asset-backed securities in less liquid markets.

Loans

The Corporation is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and the related impairment is charged against the allowance or a specific allowance is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. 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 collateral net liquidation value, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayment or collateral meet or exceed the recorded investment in such loans. The Corporation considers all non-accrual loans and troubled debt restructurings to be impaired. Therefore, at June 30, 2010, loans classified as impaired totaled $30.1 million. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the impaired loans as nonrecurring Level 3.

Real Estate Acquired Through Foreclosure

Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the OREO as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present the balances of assets measured at fair value on a recurring basis by level within the hierarchy as of June 30, 2010 and December 31, 2009 (In thousands).


			Quoted Prices in Active Markets for		Significant Other Observable		Significant Unobservable
	June 30,		Identical Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Investment securities:
U.S. Agency obligations	$	3	$	3	$	--	$	--
Government Sponsored Enterprises		118,297		118,297		--		--
Trust Preferred securities		5,302		--		2,645		2,657
Total investment securities		123,602		118,300		2,645		2,657
Mortgage-backed and related securities		20,294		--		20,294		--
Total	$	143,896	$	118,300	$	22,939	$	2,657

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Investment securities:
U.S. Agency obligations	$	4	$	4	$	--	$	--
Government Sponsored Enterprises		78,471		78,471		--		--
Municipal securities		6,042		--		6,042		--
Trust Preferred securities		5,912		--		2,802		3,110
Total investment securities		90,429		78,475		8,844		3,110
Mortgage-backed and related securities		57,387		--		57,387		--
Total	$	147,816	$	78,475	$	66,231	$	3,110

The following is a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended June 30, 2010.

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Investment Securities
	Available-for-Sale
Beginning balance at December 31, 2009	$	3,110,000
Transfers into Level 3		--
Gain/(Loss) realized for the year		(453,000	)
Purchases, sales, issuances and settlements, net		--
Ending balance at June 30, 2010	$	2,657,000

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Corporation may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period and assumes all non-performing assets have specific reserves or have been written down to fair value.

Assets measured at fair value on a nonrecurring basis at June 30, 2010 are as follows:

	Total		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	27,401,000	$	--	$	27,401,000	$	--
Other real estate owned		6,008,000		--		6,008,000		--
Total assets at fair value	$	33,409,000	$	--	$	33,409,000	$	--

Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2009 are as follows:

	Total		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	20,869,000	$	--	$	20,869,000	$	--
Other real estate owned		5,917,000		--		5,917,000		--
Total assets at fair value	$	26,786,000	$	--	$	26,786,000	$	--

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

Cash and cash equivalents - 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. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Loans - The Corporation is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and the related impairment is charged against the allowance or a specific allowance is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. 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 collateral net liquidation value, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayment or collateral meet or exceed the recorded investment in such loans. The Corporation considers all non-accrual loans and troubled debt restructurings to be impaired.

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.

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.

The estimated fair values of the Corporation’s financial instruments were as follows at June 30, 2010

(in thousands):

	June 30, 2010
	Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	19,470	$	19,470
Securities available for sale		143,896		143,896
Federal Home Loan Bank stock, at cost		3,947		3,947
Federal Reserve Bank stock, at cost		832		832
Loans, net		230,105		230,611
Accrued interest receivable		1,750		1,750
Cash surrender value of life insurance		9,526		9,526

Financial liabilities
Deposits	$	320,881	$	312,731
Advances from FHLB and other borrowings		59,500		62,610
Securities sold under agreements to repurchase		11,106		11,103
Floating rate junior subordinated deferrable interest debentures		12,372		12,330
Accrued interest payable		515		515

Off-balance-sheet assets (liabilities)	Notional Amount		Fair Value
Commitments to extend credit	$	32,113	$	0

The estimated fair values of the Corporation’s financial instruments were as follows at December 31, 2009

(in thousands):

	December 31, 2009
	Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	15,631	$	15,631
Securities available for sale		147,816		147,816
Securities held to maturity		3,934		3,976
Federal Home Loan Bank stock, at cost		3,947		3,947
Federal Reserve Bank stock, at cost		832		832
Loans, net		250,420		250,455
Accrued interest receivable		2,238		2,238
Cash surrender value of life insurance		9,332		9,332

Financial liabilities
Deposits	$	332,762	$	323,113
Advances from FHLB and other borrowings		64,500		67,457
Securities sold under agreements to repurchase		18,520		18,544
Floating rate junior subordinated deferrable interest debentures		12,372		10,758
Accrued interest payable		581		581

Off-balance-sheet assets (liabilities)	Notional Amount		Fair Value
Commitments to extend credit	$	40,131	$	0

7. Preferred Stock

On March 13, 2009, as part of the United States Department of the Treasury’s Capital Purchase Program, the Corporation issued 9,266 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation preference, and a warrant to purchase up to 178,880 shares of the Corporation’s common stock for a period of ten years at an exercise price of $7.77 per share, in exchange for $9,266,000 in cash from the United States Department of the Treasury. The proceeds, net of issuance costs consisting primarily of legal fees, were allocated between the preferred stock and the warrant on a pro rata basis, based upon the estimated market values of the preferred stock and the warrant. As a result, $25,000 of the proceeds were allocated to the warrant, which increased additional paid-in-cap ital from common stock. The amount allocated to the warrant is considered a discount on the preferred stock and will be amortized using the level yield method over a five-year period through a charge to retained earnings. Such amortization will not reduce net income, but will reduce income available for common shares.

The preferred stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter. The Corporation may redeem the preferred stock at its liquidation preference plus accrued and unpaid dividends at any time with prior regulatory approval. The securities purchase agreement between the Corporation and the United States Department of the Treasury limits, for three years, the rate of dividend payments on the Corporation’s common stock to the amount of its last quarterly cash dividend before participation in the program of $0.03 per share unless an increase is approved by the Department of the Treasury, limits the Corporation’s ability to repurchase its common stock for three years and subjects the Corporation to certain executive compensation limitations included in the Emerge ncy Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.

8. Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events have occurred requiring accrual or disclosure.

The Corporation announced that it is exercising its right to defer the regularly scheduled quarterly distribution on its $12.4 million in subordinated debentures related to its two outstanding trust preferred security issuances and its regular quarterly cash dividend on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “TARP Preferred Stock”) issued to the U.S. Treasury Department in connection with the Corporation’s participation in the Treasury’s TARP Capital Purchase Program.

The Corporation decided to exercise its right to defer the payment of interest on its outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods). This and any future deferred distributions will continue to accrue interest at a current rate of 7.39% for the $4.0 million of trust preferred securities issued in July 2006 and at a current rate of 2.28% for the $8.0 million of trust preferred securities issued in December 2006. Distributions on the trust preferred securities are cumulative. Therefore, in accordance with generally accepted accounting principles, the Corporation will continue to accrue the monthly cost of the trust preferred securities as it has since issuance.

Under the terms of the TARP Preferred Stock, the Corporation is required to pay on a quarterly basis a dividend rate of 5% per year for the first five years, after which the dividend rate automatically increases to 9% per year. Dividend payments may be deferred, but the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the TARP Preferred Stock.

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. 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 size of the loan portfolio, overall portfolio quality, delinquency and charge-off 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 reevaluate d 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 and non-performing 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.

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, plans or strategies 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 stra tegies is inherently uncertain. Factors which could affect 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 and the demand for such products, 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 laws and regulations. The Corporation provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2009, 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 $24.8 million, or 5.4%, to $432.2 million at June 30, 2010 from $457.0 million at December 31, 2009. Investment securities at June 30, 2010 decreased 5.2% to $143.9 million from $151.8 million at December 31, 2009. Fed funds sold at June 30, 2010 increased $3.7 million to $9.0 million from $5.3 million at December 31, 2009 as a result of sales and maturities of securities. Net loans decreased $20.3 million from December 31, 2009 to June 30, 2010, due primarily to a significant reduction in loan demand as a result of economic conditions currently present in South Carolina.

Investment and Mortgage-backed Securities

Included in our investment securities are 7 pooled trust preferred securities with an amortized cost of $4.1 million and a fair value of $2.7 million. An other than temporary investment charge of $467,000 was recorded for the six-month period ended June 30, 2010 related to these trust preferred securities as a result of projected shortfalls of interest and principal payments in the cash flow analysis of the securities.

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

	June 30, 2010		December 31, 2009

	Amortized	Fair	Amortized	Fair
	Cost	Value	Cost	Value

Municipal Securities	$--	$--	$3,934	$3,976

The Corporation sold approximately $9.2 million in municipal securities during the current period, including held to maturity securities of $3.9 million, due to credit concerns in this segment of the investment market.

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

	June 30, 2010				December 31, 2009
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Investment Securities:
U.S. Agency Obligations	$	3	$	3	$	4	$	4
Government Sponsored Enterprises		117,740		118,297		79,162		78,471
Municipal Securities		--		--		5,781		6,042
Trust Preferred Securities		8,133		5,302		8,570		5,912
Total Investment Securities		125,876		123,602		93,517		90,429
Mortgage-backed Securities:
Fannie Mae		13,496		14,219		35,561		36,723
Ginnie Mae		4,837		5,131		16,569		17,030
Freddie Mac		428		439		3,068		3,154
Collateralized Mortgage Obligations		559		505		597		480
Total Mortgage-backed Securities		19,320		20,294		55,795		57,387
Total Available for Sale	$	145,196	$	143,896	$	149,312	$	147,816

The Corporation uses the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income from investment of funds, to provide liquidity to meet funding requirements, and to provide collateral for pledges on public funds and FHLB borrowings. The average yield on investments at June 30, 2010 was 3.25% compared to 4.04% at December 31, 2009. The carrying values of the investment securities at June 30, 2010 and December 31, 2009 and percentage of each category to total investments are as follows:


	June 30, 2010					December 31, 2009
Available for sale:	Fair Value		Percent of Portfolio			Fair Value		Percent of Portfolio

Investment securities:
U.S. Agency obligations	$	3		0.01	%	$	4		0.01	%
Government Sponsored Enterprises		118,297		82.21			78,471		53.08
Municipal securities		--		--			6,042		4.09
Trust Preferred securities		5,302		3.68			5,912		4.00
Total investment securities		123,602		85.90			90,429		61.18
Mortgage-backed and related securities		20,294		14.10			57,387		38.82
Total	$	143,896		100.00	%	$	147,816		100.00	%


	June 30, 2010					December 31, 2009
Held to maturity:	Carrying Value		Percent of Portfolio			Carrying Value		Percent of Portfolio

Municipal securities	$	--		--	%	$	3,934		100.00	%

Investment securities at June 30, 2010 decreased 5.2% to $143.9 million from $151.8 million at December 31, 2009. The Corporation sold approximately $9.2 million in municipal securities during the current period, including held to maturity securities of $3.9 million, due to credit concerns in this segment of the investment market. The Corporation continues to reposition the investment portfolio for the potential of rising interest rates.

The Corporation accounts for investment securities in accordance with FASB ASC Topic 320: Investments in Debt and Equity Securities. In accordance with FASB ASC Topic 320, 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 a nd 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 settlement 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.

The amortized cost and fair value of investment securities are summarized as follows:

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

	As of June 30, 2010
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Investment Securities:
U.S. Agency Obligations	$	3	$	–	$	--		$	3
Government Sponsored Enterprises		117,740		610		(53	)		118,297
Trust Preferred Securities		8,133		–		(2,831	)		5,302
Total Investment Securities		125,876		610		(2,884	)		123,602
Mortgage-backed Securities:
Fannie Mae		13,496		723		–			14,219
Ginnie Mae		4,837		294		–			5,131
Freddie Mac		428		11		–			439
Collateralized Mortgage Obligations		559		–		(54	)		505
Total Mortgage-backed Securities		19,320		1,028		(54	)		20,294
Total available for sale	$	145,196	$	1,638	$	(2,938	)	$	143,896

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

	As of December 31, 2009
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value

Municipal Securities	$	3,934	$	52	$	(10	)	$	3,976

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

	As of December 31, 2009
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Investment Securities:
U.S. Agency Obligations	$	4	$	--	$	--		$	4
Government Sponsored Enterprises		79,162		217		(908	)		78,471
Municipal Securities		5,781		261		--			6,042
Trust Preferred Securities		8,570		--		(2,658	)		5,912
Total Investment Securities		93,517		478		(3,566	)		90,429
Mortgage-backed Securities:

Fannie Mae		35,561		1,162		--			36,723
Ginnie Mae		16,569		461		--			17,030
Freddie Mac		3,068		86		--			3,154
Collateralized Mortgage Obligations		597		--		(117	)		480
Total Mortgage-backed Securities		55,795		1,709		(117	)		57,387
Total available for sale	$	149,312	$	2,187	$	(3,683	)	$	147,816

The maturities of securities at June 30, 2010 are as follows (in thousands):

	Held to Maturity				Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	--	$	--	$	10	$	10
Due after one year through five years		--		--		50		53
Due after five years through ten years		--		--		51,575		51,798
Due after ten years		--		--		93,561		92,035
Total investment and mortgage-backed securities	$	--	$	--	$	145,196	$	143,896

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 June 30, 2010 (in thousands).

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities Available for Sale

U.S. Agency Obligations	$	–	$	–	$	–	$	–	$	–	$	–
Government Sponsored Enterprises		20,522		53		–		–		20,522		53
Trust Preferred Securities		–		–		5,302		2,831		5,302		2,831
Mortgage-backed Securities		--		–		544		54		544		54
Total	$	20,522	$	53	$	5,846	$	2,885	$	26,368	$	2,938

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held to Maturity
Municipal Securities	$	494	$	9	$	833	$	1	$	1,326	$	10
Total	$	494	$	9	$	833	$	1	$	1,326	$	10

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities Available for Sale

U.S. Agency Obligations	$	–	$	–	$	–	$	–	$	–	$	–
Government Sponsored Enterprises		41,040		908		–		–		41,040		908
Municipal Securities		–		–		–		–		–		–
Trust Preferred Securities		–		–		5,912		2,658		5,912		2,658
Mortgage-backed Securities		--		--		532		117		532		117
Total	$	41,040	$	908	$	6,444	$	2,775	$	47,484	$	3,683

An other-than-temporary impairment charge of $164,000 from write-downs on trust preferred securities as a result of projected shortfalls of interest and principal payments in the cash flow analysis of the securities was recorded for the three months ended March 31, 2010 compared to $782,000 for the same period in 2009. Other than temporary impairment write-downs on securities were $467,000 the six months ended June 30, 2010 compared to $1.1 million for the same period in 2009 from write-downs recorded on trust preferred securities.

Loans

Net loans decreased to $230.1 million at June 30, 2010 compared to $250.4 million at December 31, 2009. The decrease was due to a significant reduction in loan demand as a result of economic conditions currently present in South Carolina and more conservative underwriting standards. Consumer loans decreased $4.2 million, or 8.0%, commercial loans decreased $15.7 million, or 8.7%, and residential mortgage loans decreased $2.3 million, or 11.3%, for the period ended June 30, 2010.

Loans receivable consisted of the following (in thousands):

	June 30,			December 31,
	2010			2009

Mortgage loans:
Fixed-rate residential	$	10,096		$	10,675
Adjustable-rate residential		5,879			6,202
Commercial real estate		110,030			110,901
Construction		1,464			2,923
Total mortgage loans		127,469			130,701
Commercial loans:
Commercial non-real estate		24,367			34,429
Commercial lines of credit		35,124			39,096
Total commercial loans		59,491			73,525
Consumer loans:
Home equity		16,748			17,395
Consumer and installment		31,339			34,578
Consumer lines of credit		292			314
Total consumer loans		48,379			52,287
Total loans		235,339			256,513
Less:
Undisbursed portion of interim construction loans		(122	)		(320	)
Unamortized loan discount		(287	)		(309	)
Allowance for loan losses		(4,971	)		(5,579	)
Net deferred loan origination costs		146			115
Total, net	$	230,105		$	250,420

Weighted-average interest rate of loans		4.92	%		4.87	%

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

	June 30, 2010			December 31, 2009

Non-accruing loans which are
contractually past due 90 days
or more:

Residential real estate	$	1,154		$	649
Commercial		25,063			19,045
Consumer		1,184			1,175
Total nonperforming loans		27,401			20,869

Real estate acquired through foreclosure and repossessed assets		6,008			5,917
Total nonperforming assets	$	33,409		$	26,786

Troubled debt restructurings	$	2,694		$	3,320

Nonperforming loans to total loans		11.65	%		8.13	%
Nonperforming assets to total assets		7.73	%		5.86	%
Allowance for loan losses to total loans outstanding		2.12	%		2.18	%
Allowance for loan losses to nonperforming loans		18.14	%		26.73	%
Allowance for loan losses	$	4,971		$	5,579

Loans which management identifies as impaired generally will be non-performing loans. Non-performing assets increased $6.6 million to $33.4 million at June 30, 2010, or 7.73% of total assets, as compared to $26.8 million or 5.86% of total assets at December 31, 2009. The majority of this increase was due to one commercial real estate loan for $4.7 million. Slow housing conditions have affected borrowers’ ability to sell the completed projects in a timely manner. Loans are currently being carried at management’s best estimate of net realizable value, although no assurance can be given that no further losses will be incurred on loans until the collateral has been acquired and liquidated or other arrangements can be made.

Interest income that would have been recorded for the period ended June 30, 2010 had non-accruing loans been current in accordance with their original terms amounted to approximately $943,000. There was no interest included in interest income on such loans for the period ended June 30, 2010.

Management has allocated specific reserves to these and other non-performing assets that it believes will offset losses, if any, arising from less than full recovery of the loans from the supporting collateral. Specific reserves for non-performing loans are charged to the loan as a write-down after completion of the impairment analysis for all collateral dependent loans. 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 additional reserves and established impairment of these loans will be adequate to account for the current risk associated with these loans as of June 30, 2010. Management continues to evaluate and assess all nonperforming assets on a regular basis as part of its well-established loan monitoring and review process.

At June 30, 2010, criticized and classified loans, which includes all non-performing loans, totaled $45.9 million, compared to $51.4 million at December 31, 2009 and $31.3 million at June 30, 2009. The reduction of $5.3 million for criticized and classified loans from December 31, 2009 to June 30, 2010 was due primarily to the payment in full of two commercial real estate loans. Our non-performing loans totaled $27.4 million at June 30, 2010 compared to $20.9 million at December 31, 2009. Non-performing and impaired loans, net of specific reserves, totaled $16.5 million at June 30, 2009 and $12.5 million at December 31, 2008. While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumption s used in making the valuations. Such adjustments would be made in the relevant period and may be material to the financial statements.

Real estate acquired through foreclosure increased $91,000 to $6.0 million at June 30, 2010 from $5.9 million at December 31, 2009, as a result of foreclosure on one commercial real estate property totaling $500,000. Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The properties are being actively marketed and maintained with the primary objective of liquidating the collateral at a level which most accurately approximates fair market value and allows recovery of as much of the unpaid balance as possible upon the sale of the properties in a reasonable period of time. The carrying values of these assets are believed to be representative of their fair ma rket value, although there can be no assurance that the ultimate proceeds from the sale of these assets will be equal to or greater than the carrying values.

Real estate acquired in settlement of loans through foreclosure is summarized as follows:

	June 30,			December 31,
	2010			2009

Balance at beginning of period	$	5,917		$	667
Foreclosures added during the period		530			5,959
Sales of foreclosed property		(439	)		(69	)
Provision charged as a write-down		--			(640	)
Balance at the end of period	$	6,008		$	5,917

Other Assets

Cash surrender value of life insurance increased $194,000, or 2.1%, to $9.5 million at June 30, 2010 from $9.3 million at December 31, 2009, due to accrued life insurance benefits.

Liabilities

Total liabilities decreased $24.4 million to $406.5 million at June 30, 2010 from $430.9 million at December 31, 2009. Deposits decreased $11.9 million, or 3.6%, to $320.9 million at June 30, 2010 from $332.8 million at December 31, 2009. The decrease was due to a $15.5 million decrease in certificates of deposit, offset by a $3.6 million increase in transaction accounts as a result of a special product promotion. The Corporation continues to target lower-cost demand deposit accounts through media advertising and special product promotions. FHLB advances decreased $5.0 million to $59.5 million at June 30, 2010 from $64.5 million at December 31, 2009 due to the maturity of advances. Additional advances were not needed due to the decrease in assets. Security agreements to repurchase decreased $7.4 million to $11.1 million at J une 30, 2010 from $18.5 million at December 31, 2009 due to the maturity of borrowings.

Deposit accounts were as follows (in thousands):

	June 30, 2010								December 31, 2009
	Rate			Balance		%			Rate			Balance		%

Account Type
NOW accounts:
Commercial non-interest-bearing		--		$	17,918		5.58	%		--		$	18,015		5.42	%
Non-commercial		1.84	%		96,197		29.98	%		2.30	%		98,274		29.53	%
Money market checking accounts		0.72	%		23,545		7.34	%		1.57	%		32,239		9.69	%
Regular savings		1.03	%		27,836		8.68	%		0.51	%		13,383		4.02	%
Total demand and savings deposits		1.34	%		165,496		51.58	%		1.74	%		161,911		48.66	%
Time deposits:
Up to 2.00%					86,464		26.95	%					79,098		23.77	%
2.01 %- 3.00%					58,314		18.17	%					55,966		16.82	%
3.01 %- 4.00%					802		0.25	%					20,885		6.27	%
4.01 %- 5.00%					8,803		2.74	%					13,744		4.13	%
5.01 %- 6.00%					1,002		0.31	%					1,158		0.35	%
Total time deposits		1.82	%		155,385		48.42	%		2.27	%		170,851		51.34	%
Total deposit accounts		1.57	%	$	320,881		100.00	%		2.02	%	$	332,762		100.00	%

The maturity of the advances from the FHLB is as follows (in thousands):

	June 30, 2010					December 31, 2009
	Balance		Wtd Avg Rate			Balance		Wtd Avg Rate

Contractual Maturity:
Within one year - fixed rate	$	--		--	%	$	5,000		4.93	%
After one but within three years - fixed rate		--		--	%		--		--	%
After one but within three years - adjustable rate		22,000		4.58	%		22,000		4.58	%
Greater than five years - adjustable rate		37,500		3.89	%		37,500		3.89	%
Total advances	$	59,500		4.15	%	$	64,500		4.20	%

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.

The Corporation had $11.1 million and $18.5 million borrowed under agreements to repurchase at June 30, 2010 and December 31, 2009, respectively.

Shareholders’ Equity

Shareholders’ equity decreased $383,000, or 1.5%, to $25.7 million at June 30, 2010 from $26.1 million at December 31, 2009 due primarily to a net loss to common shareholders of $514,000, offset by a $127,000 decrease in unrealized losses on securities available for sale. At June 30, 2010, the Bank continue to be well-capitalized by regulatory measures.

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, 2010, the Corporation’s investment in marketable securities totaled $143.9 million, all of which was available for sale. In addition, the Corporation had $9.0 million in fed funds sold at June 30, 2010 compared to $5.3 million at December 31, 2009. Approximately $72.6 million and $94.6 million of debt securities at June 30, 2010 and December 31, 2009, 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 $32.1 million at June 30, 2010. 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, 2010, totaled $102.4 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 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 fun ds are available through FHLB advances, securities sold under agreements to repurchase and lines of credit. At June 30, 2010, the Corporation had outstanding $59.5 million of FHLB borrowings and $11.1 million of securities sold under agreements to repurchase. At June 30, 2010, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $4.0 million and the ability to borrow an additional $39.0 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.

Provident Community Bancshares, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Provident Community Bancshares is responsible for paying any dividends declared to its shareholders and paying the obligations on its outstanding debentures and preferred stock. Provident Community Bancshares’ primary sources of income are proceeds that it retained from its offering of preferred stock and dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Provident Community Bancshares in any calendar year, without the receipt of prior approval from the Office of the Comptroller of the Currency cannot exceed retained net income for that year combined with retained net income for the prior two years less any transfers to surplus and capital distributions. At June 30, 2010, Provident Community Bancshares, Inc. had liquid assets of $1.3 million.

The Corporation announced that it is exercising its right to defer the regularly scheduled quarterly distribution on its $12.6 million in subordinated debentures related to its two outstanding trust preferred security issuances and its regular quarterly cash dividend on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “TARP Preferred Stock”) issued to the U.S. Treasury Department in connection with the Corporation’s participation in the Treasury’s TARP Capital Purchase Program. As a result of this decision, the Corporation will infuse $1 million in additional capital to the Bank.

Capital Management

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

Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). As of June 30, 2010, the Bank and the Corporation met the capital adequacy requirements to which they are subject.

As of June 30, 2010, 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, 2010

	Actual		Regulatory Minimum		“Well Capitalized”

	Amount	Ratio	Amount	Ratio	Amount	Ratio
	$	%	$	%	$	%
Leverage ratio
Corporation	31,432	7.29%	17,248	4.00%	n/a	n/a
Bank	33,412	7.75%	17,240	4.00%	21,550	5.00%

Tier 1 capital ratio
Corporation	31,432	11.07%	11,357	4.00%	n/a	n/a
Bank	33,412	11.78%	11,348	4.00%	17,022	6.00%

Total risk-based capital ratio
Corporation	38,135	13.43%	22,713	8.00%	n/a	n/a
Bank	36,976	13.03%	22,696	8.00%	28,370	10.00%

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 customers’ 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 $32.1 million at June 30, 2010. 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 t he 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, 2010, the Corporation did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

Results of operations for the three months ended June 30, 2010 and 2009

General

The Corporation recorded a net loss to common shareholders of $414,000 for the three months ended June 30, 2010 as compared to a net loss of $685,000 for the same period in 2009. Operating results for the current period were impacted by a compression of the net interest margin caused by declining market interest rates and higher provisions for loan losses due to an increase in non-performing loans, offset by lower operating expenses along with an increase in non-interest income due to higher gains from investment security sales and a decrease in other-than-temporary impairment on investment securities.

Average Yields and Rates

(dollars in thousands)

	Three Months Ended June 30,
	2010							2009
	Average				Average			Average				Average
	Balance		Interest		Yield/Cost(2)			Balance		Interest		Yield/Cost(2)
Interest-earning assets:
Loans (1)	$	235,433	$	2,875		4.88	%	$	281,347	$	3,644		5.18	%
Mortgage-backed securities		23,773		218		3.67	%		91,130		1,137		4.99	%
Investment securities		116,011		1,010		3.48	%		44,648		543		4.87	%
Other interest-earning assets		19,660		7		0.14	%		15,776		20		0.49	%
Total interest-earning assets		394,877		4,110		4.16	%		432,901		5,344		4.94	%
Non-interest-earning assets		40,113							30,172
Total assets	$	434,990						$	463,073
Interest-bearing liabilities:
Deposits		303,237		1,294		1.71	%		314,075		2,111		2.69	%
Floating rate junior subordinated deferrable interest debentures		12,372		119		3.85	%		12,372		135		4.36	%
FHLB advances and other borrowings		71,192		630		3.54	%		83,105		758		3.65	%
Total interest-bearing liabilities		386,801		2,043		2.11	%		409,552		3,004		2.93	%
Non-interest-bearing sources:
Non-interest-bearing deposits		19,075							18,278
Non-interest-bearing liabilities		3,071							3,530
Total liabilities		408,947							431,360
Shareholders’ equity		26,043							31,713
Total liabilities and shareholders’ equity	$	434,990						$	463,073
Net interest income			$	2,067						$	2,340
Interest rate spread						2.05	%						2.01	%
Impact of non-interest-bearing deposits						0.04							0.15
Net interest margin						2.09	%						2.16	%

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

(2) Annualized

Interest Income

Interest income decreased $1.2 million, or 23.1%, to $4.1 million for the three months ended June 30, 2010 as compared to the same period in 2009. Interest income on loans decreased by 21.1%, or $769,000, to $2.9 million for the three months ended June 30, 2010 from $3.6 million for the three months ended June 30, 2009, due primarily to lower average balances due to lower demand and a 30 basis point decrease in the average yield due to lower market interest rates and an increase in non-performing loans. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities decreased $465,000, or 27.3%, for the three months ended June 30, 2010 to $1.2 million from $1.7 million during the same period in 2009 due to lower yields resulting from declining market interest rates and a de crease in the average balance of mortgage-backed securities, offset by higher average balances of investment securities.

Interest Expense

Interest expense decreased $961,000, or 32.0%, to $2.0 million for the three months ended June 30, 2010 as compared to $3.0 million for the three months ended June 30, 2009. Interest expense on deposit accounts decreased $817,000, or 38.7%, to $1.3 million for the three months ended June 30, 2010 from $2.1 million during the same period in 2009 due primarily to lower average balances as a result of reductions in municipal deposits, lower market interest rates and a shift in the composition of the deposit portfolio from certificates of deposits to transaction accounts. The Corporation continues to target lower cost demand deposit accounts versus higher cost certificates of deposits in order to reduce overall funding costs. Interest expense on FHLB advances and other borrowings decreased $128,000, or 16.9%, for the three months ended Jun e 30, 2010 as compared to the same period in the previous year due primarily to lower average balances and lower rates paid. Interest expense on floating rate junior subordinated deferrable interest debentures decreased $16,000, or 11.9%, to $119,000 for the three months ended June 30, 2010 from $135,000 during the same period in 2009 due to lower market rates.

Provision for Loan Losses

We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. The Board of Directors reviews and approves the appropriate level for

Provident Community Bancshares allowance for loan losses quarterly based upon management’s recommendations, the results of the internal monitoring and reporting system, quarterly external independent loan reviews and the analysis of economic conditions in our local markets. Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are periodically made to maintain the allowance at an appropriate level based on our analysis of the potential risk in the loan portfolio. Loan losses, which include write downs and charge-offs are charged directly to the allowance while recoveries are credited against the allowance. The amount of the provision is a function of the level and composition of loans outstanding, the level of classified and non-performing loans, historical loan l oss experience, the amount of loan losses actually charged against the reserve during the given period, and current and anticipated economic conditions.

Our allowance for loan losses is based upon judgments and assumption of risk elements in the portfolio, future economic conditions and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, we monitor overall portfolio quality through observable trends in delinquency, charge offs, and general and economic conditions in the market area. The adequacy of the allowance for loan losses and the effectiveness of our monitoring and analysis system are also reviewed periodically by the banking regulators which may require that we increase the allowance for loan losses. Risks are inherent in making all loans, including risks with respect to the perio d of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which we believe to be reasonable, but which may not prove to be accurate. Thus, charge-offs in future periods could exceed the allowance for loan losses, or substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease of our net income and, possibly, our capital. Based on present information, we believe the allowance for loan losses is adequate at June 30, 2010 to meet presently known and inherent risks in the loan portfolio.

During the three months ended June 30, 2010, the provision for loan losses was $1.2 million as compared to $925,000 for the same period in the previous year, primarily due to the increase in non-performing loans, offset by a decrease in net loans. Non-performing loans increased $6.4 million from $20.9 million at June 30, 2009 to $27.4 million at June 30, 2010. The increase in non-performing loans over the previous year related primarily to commercial real estate relationships that have been affected by the downturn in the residential housing market. Slow housing conditions have affected these borrowers’ ability to sell the completed projects in a timely manner. Specific reserves for non-performing loans at June 30, 2010 were $844,000 compared to $4.5 million for nonperforming loans at June 30, 2009. All specific reserves for comm ercial real estate loans that were deemed collateral dependent were charged off against the loans as of December 31, 2009. 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 has sought to provide the amount estimated to be necessary to maintain an allowance for loan losses that is adequate to cover the level of loss that management believed to be inherent in the portfolio as a whole, taking into account the Corporation’s experience, economic conditions and information about borrowers available at the time of the analysis. However, management expects further deterioration of economic conditions in the Corporation’s market areas is likely in the short-term, especially with respect to real estate related activities and real property values. Consequently, management expects that further additions in provisions for loan losses could be needed in the future.

Non-Interest Income

Total non-interest income increased $839,000, or 310.7%, to $1.1 million for the three months ended June 30, 2010 from $270,000 for the same period in the previous year. The increase was due primarily to lower other-than-temporary impairment charges and higher gains on the sale of investments. Gains on sale of investments were $528,000 for the three months ended June 30, 2010 compared to $285,000 for the same period in the previous year. The Corporation continues to better position the investment portfolio for the potential of rising interest rates. An other-than-temporary impairment charge of $164,000 from write-downs on trust preferred securities as a result of projected shortfalls of interest and principal payments in the cash flow analysis of the securities was recorded for the three months ended June 30, 2010 compared to $782,000 for the same period in 2009. Net fees from financial services decreased $22,000, or 2.9%, to $745,000 for the three months ended June 30, 2010 from $767,000 for the same period in the previous year. The decrease was due to lower mortgage loan fees as a result of lower demand.

Non-Interest Expense

For the three months ended June 30, 2010, total non-interest expense decreased $159,000, or 6.1%, to $2.5 million from $2.6 million for the same period in 2009. Compensation and employee benefits decreased $83,000, or 7.3%, due primarily to reductions in mortgage commission compensation expense due to lower loan volumes and reductions in employee compensation costs due to prior year staffing reductions. Deposit insurance premiums expense decreased $127,000, to $146,000 for the three months ended June 30, 2010 from $273,000 for the same period in 2009, due to the prior year industry-wide FDIC special assessment, offset by higher industry-wide FDIC premium assessments. Professional services expense increased $13,000, or 15.3%, to $98,000 for the three months ended June 30, 2010 from $85,000 for the same period in 2009 due primarily to hi gher legal and audit expense. Advertising and public relations expense decreased $10,000, or 37.0%, to $17,000 for the three months ended June 30, 2010 from $27,000 for the same period in 2009 due primarily to lower deposit product and promotion expenses. Loan operations expense increased $73,000, or 79.4%, to $165,000 for the three months ended June 30, 2010 from $92,000 for the same period in 2009 due primarily to higher foreclosure expenses. All goodwill and related deposit premium intangibles were charged off in 2009 thereby eliminating amortization expenses. Other expense increased $51,000, or 28.0%, to $233,000 for the three months ended June 30, 2010 from $182,000 for the same period in 2009, due primarily to higher expenses for loan appraisals as a result of the increase in non-performing loans.

Income taxes

Our benefit for income taxes was $171,000 for the three months ended June 30, 2010 as compared to a benefit of $364,000 for the same period in 2009.

Results of operations for the six months ended June 30, 2010 and 2009

General

The Corporation recorded a net loss to common shareholders of $514,000 for the six months ended June 30, 2010 as compared to a net loss of $2.4 million for the same period in 2009. Operating results for the current period were impacted by a compression of the net interest margin caused by declining market interest rates, offset by lower operating expenses along with an increase in non-interest income due to higher gains from investment security sales and lower other-than-temporary-impairment write-downs on securities. In addition, lower provisions for loan losses were recorded as a result of reductions in charge-offs for non-performing loans.

Average Yields and Rates

(dollars in thousands)

			Six Months Ended June 30,
			2010							2009
	Average Balance		Interest		Average Yield/Cost(2)			Average Balance		Interest		Average Yield/Cost(2)
Interest-earning assets:
Loans (1)	$	241,696	$	5,995		4.96	%	$	282,936	$	7,240		5.12	%
Mortgage-backed securities		33,756		647		3.83	%		78,292		2,032		5.19	%
Investment securities		106,518		1,935		3.73	%		46,107		1,167		5.06	%
Other interest-earning assets		22,468		13		0.12	%		18,452		42		0.46	%
Total interest-earning assets		404,438		8,640		4.27	%		425,787		10,481		4.92	%
Non-interest-earning assets		40,470							29,964
Total assets	$	444,908						$	455,751
Interest-bearing liabilities:
Deposits	$	307,890		2,841		1.85	%	$	308,403		4,203		2.73	%
Floating rate junior subordinated deferrable interest debentures		12,372		237		3.83	%		12,372		285		4.61	%
FHLB advances and other borrowings		76,333		1,374		3.60	%		85,604		1,542		3.60	%
Total interest-bearing liabilities		396,595		4,452		2.25	%		406,379		6,030		2.97	%

Non-interest-bearing sources:
Non-interest-bearing deposits		18,905							18,671
Non-interest-bearing liabilities		3,149							2,981
Total liabilities		418,649							428,031
Shareholders’ equity		26,259							27,720
Total liabilities and shareholders’ equity	$	444,908						$	455,751
Net interest income			$	4,188						$	4,451
Interest rate spread						2.02	%						1.95	%
Impact of non-interest-bearing deposits						0.04							0.14
Net interest margin						2.06	%						2.09	%

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

(2) Annualized

Interest Income

Interest income decreased $1.8 million, or 17.6%, to $8.6 million for the six months ended June 30, 2010 as compared to the same period in 2009. Interest income on loans decreased by 17.2%, or $1.2 million, to $6.0 million for the six months ended June 30, 2010 from $7.2 million for the six months ended June 30, 2009, due to declining market interest rates and lower average balance of loans as a result of a decrease in demand. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities decreased $596,000, or 18.4%, for the six months ended June 30, 2010 to $2.6 million from $3.2 million during the same period in 2009 due to lower investment yields due to declining market interest rates, offset by higher average balances.

Interest Expense

Interest expense decreased $1.6 million, or 26.2%, to $4.5 million for the six months ended June 30, 2010 as compared to $6.0 million for the six months ended June 30, 2009. Interest expense on deposit accounts decreased $1.4 million, or 32.4%, to $2.8 million for the six months ended June 30, 2010 from $4.2 million during the same period in 2009 due primarily to lower market interest rates, a shift in the composition of the deposit portfolio from certificates of deposits to transaction accounts and with lower average balances. The Corporation continues to target lower cost demand deposit accounts versus higher cost certificates of deposits in order to reduce overall funding costs. Interest expense on borrowings decreased $168,000, or 10.9%, for the six months ended June 30, 2010 as compared to the same period in the previous year due to lower market interest rates and lower average balances. Interest expense on floating rate junior subordinated deferrable interest debentures decreased $48,000, or 16.8%, to $237,000 for the six months ended June 30, 2010 from $285,000 during the same period in 2009 due to lower market rates.

Provision for Loan Losses

During the six months ended June 30, 2010, the provision for loan losses was $2.1 million as compared to $3.6 million for the same period in the previous year due to reductions in partial loan write-downs on nonperforming loans and lower average loan balances. During the six months ended June 30, 2010, bad debt charge-offs, net of recoveries, were $2.7 million as compared to $2.6 million for the same period in the previous year. In addition, specific reserves on non-performing loans were $844,000 for the six months ended June 30, 2010 compared to $4.5 million for the same period in the previous year. The Corporation’s loan loss allowance at June 30, 2010 was approximately 2.1% of the Corporation’s outstanding loan portfolio compared to 2.8% of the Corporation’s outstanding loan portfolio at June 30, 2009. All specific reserves for commercial real estate loans that were deemed collateral dependent were charged off against the loans as of December 31, 2009.

The changes in the allowance for loan losses consisted of the following for the six months ended June 30, 2010.

	June 30, 2010			June 30, 2009
Balance at beginning of period	$	5,579		$	6,778

Provision for loan losses		2,083			3,625

Charge-offs, net		(2,691	)		(2,561	)

Balance at end of period	$	4,971		$	7,842

Non-Interest Income

Total non-interest income increased $1.4 million, or 188.7%, to $2.2 million for the six months ended June 30, 2010 from $751,000 for the same period in the previous year. The increase was due primarily to higher gain on sale of investment securities and a reduction in other than temporary impairment write-downs on securities. Gain on sale of investments were $1.2 million from security sales of $53.5 million for the six months ended June 30, 2010 compared to $379,000 from security sales of $19.9 million for the same period in the previous year, as the Corporation continues to better position the investment portfolio for the potential of rising interest rates. Other than temporary impairment write-downs on securities were $467,000 the six months ended June 30, 2010 compared to $1.1 million for the same period in 2009 from write-downs re corded on trust preferred securities as a result of projected shortfalls of interest and principal payments in the cash flow analysis of the securities. Fees from financial services decreased $33,000, or 2.3%, to $1.4 million for the six months ended June 30, 2010 from $1.5 million for the same period in the previous year. The decrease was due to lower loan fees from a reduction in loan volumes along with lower fees generated from third party investment brokerage and financing receivables programs as a result of lower product volumes.

Non-Interest Expense

For the six months ended June 30, 2010, total non-interest expense decreased $337,000, or 6.6%, to $4.8 million from $5.1 million for the same period in 2009. Compensation and employee benefits decreased $153,000, or 6.6%, to $2.2 million for the six months ended June 30, 2010 from $2.3 million for the same period in 2009 due primarily to reductions in employee compensation costs due to prior year staffing reductions and reductions in employee pension benefits costs. Occupancy and equipment expense decreased $21,000, or 1.7%, to $1.2 million for the six months ended June 30, 2010 from $1.2 million for the same period in 2009 due primarily to lower depreciation expenses as a result of reductions in capital expenses for the current year. Deposit insurance premiums expense decreased $39,000, to $290,000 for the six months ended June 30, 2010 from $329,000 for the same period in 2008, due to the prior year industry-wide FDIC special assessment, offset by higher industry-wide FDIC premium assessments. Professional services expense increased $21,000, or 11.9%, to $198,000 for the six months ended June 30, 2010 from $177,000 for the same period in 2009 due primarily to higher legal and audit expense. Advertising/public relations expense decreased $27,000, or 47.4%, to $30,000 for the six months ended June 30, 2010 from $57,000 for the same period in 2009 due primarily to lower deposit product and promotion expenses. Loan operations expense increased $79,000, or 44.1%, to $258,000 for the six months ended June 30, 2010 from $179,000 for the same period in 2009, due primarily to higher costs associated with loan foreclosures. All goodwill and related deposit premium intangibles were charged off in 2009 thereby eliminating amortization expenses. Telephone expense decreased $13,000, or 13.0%, to $87,000 for the six months ended June 30, 2010 from $100, 000 for the same period in 2009, due primarily to efficiency improvements in existing systems.

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) i s 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 quarter that has materially affected or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. The Dodd-Frank Act contains various provisions designed to enhance the regulations of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implement ing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

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, 2009, 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

In May 2005, 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 92,000 shares, in August 2006. The Corporation did not repurchase any shares during the three months ended June 30, 2010 and 36,034 shares remain under the previously authorized plans. As part of the Corporation’s participation in the Troubled Asset Relief Capital Purchase Program, prior to the earlier of March 6, 2012 or the date on which the preferred stock issued to the Treasury Department has been redeemed in full or transferred to non-affiliates, the Corporation cannot repurchase any shares of its common stock without the prior approval of the Treasury Department.

Item 3.	Defaults upon Senior Securities

	Not applicable.

Item 4.	Reserved

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

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 11, 2010	By:	/s/ Dwight V. Neese
		Dwight V. Neese, President and
		Chief Executive Officer

Date: August 11, 2010	By:	/s/ Richard H. Flake
		Richard H. Flake, Executive Vice President
		and Chief Financial Officer

EX-31.A 2 a6392404ex31a.htm EXHIBIT 31(A) Unassociated Document

EXHIBIT 31(a)

CERTIFICATION

I, Dwight V. Neese, certify that:

1.	I have reviewed this Form 10-Q of Provident Community Bancshares, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted account principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 11, 2010

/s/ Dwight V. Neese

Dwight V. Neese

President and Chief Executive Officer

EX-31.B 3 a6392404ex31b.htm EXHIBIT 31(B) a6392404ex31b.htm

EXHIBIT 31(b)

CERTIFICATION

I, Richard H. Flake, certify that:

1.	I have reviewed this Form 10-Q of Provident Community Bancshares, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 11, 2010

/s/ Richard H. Flake

Richard H. Flake

Executive Vice President and Chief Financial Officer

EX-32.A 4 a6392404ex32a.htm EXHIBIT 32(A) Unassociated Document

EXHIBIT 32(a)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Provident Community Bancshares, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission (the “Report”), I, Dwight V. Neese, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

	/s/ Dwight V. Neese
	Dwight V. Neese
	President and Chief Executive Officer

Date: August 11, 2010

EX-32.B 5 a6392404ex32b.htm EXHIBIT 32(B) Unassociated Document

EXHIBIT 32(b)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Provident Community Bancshares, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission (the “Report”), I, Richard H. Flake, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

	/s/ Richard H. Flake
	Richard H. Flake
	Executive Vice President and Chief Financial Officer

Date: August 11, 2010

-----END PRIVACY-ENHANCED MESSAGE-----

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