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

                                    FORM 10-Q
(Mark One)

 X       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---      ACT OF 1934 For the quarterly period ended September 30, 2005

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---      EXCHANGE ACT OF 1934
         For the transition period from                to
                                         ------------      ------------

                          COMMISSION FILE NUMBER 1-5735

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

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

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

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

                                 Not Applicable
                                 --------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

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

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

The Corporation had 1,916,482 shares, $0.01 par value, of common stock issued
and outstanding as of October 25, 2005.

                                       1

<PAGE>



                        UNION FINANCIAL BANCSHARES, INC.

                                      INDEX

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

                Item 1. Consolidated Financial Statements (unaudited)

                Consolidated Balance Sheets as of September 30, 2005 and
                 December 31, 2004                                             3

                Consolidated Statements of Income for the three and nine
                 months ended September 30, 2005 and 2004                      4

                Consolidated Statements of Cash Flows for the nine
                 months ended September 30, 2005 and 2004                      5

                Consolidated Statements of Shareholders' Equity for the
                 nine months ended September 30, 2005 and 2004                 6

                Notes to Consolidated Financial Statements                  7-10

                Item 2.  Management's Discussion and Analysis of
                Financial Condition and Results of Operations              11-21

                Item 3.  Quantitative and Qualitative Disclosures
                about Market Risk                                          21-23

                Item 4.  Controls and Procedures                              23

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

                Item 1. Legal Proceedings                                     24

                Item 2. Unregistered Sales of Equity Securities and
                Use of Proceeds                                               24

                Item 3. Defaults Upon Senior Securities                       24

                Item 4. Submission of Matters to a Vote of Security
                Holders                                                       25

                Item 5. Other Information                                     25

                Item 6. Exhibits                                              25

                Signatures                                                    26

                                       2


<PAGE>

Part 1. Financial Information
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2005 (unaudited) and December 31, 2004
<TABLE>
<CAPTION>
<S>                                                                             <C>             <C>


                                                                           September 30,    December 31,
ASSETS                                                                         2005             2004
                                                                         ----------------  ---------------
                                                                               (DOLLARS IN THOUSANDS)

Cash                                                                    $          7,623  $         1,586
Short term interest-earning deposits                                               3,361           11,611
                                                                         ----------------  ---------------
Total cash and cash equivalents                                                   10,984           13,197
                                                                         ----------------  ---------------
Investment and mortgage-backed securities
  Held to maturity                                                                 3,209            1,630
  Available for sale                                                             140,251          141,864
                                                                         ----------------  ---------------
Total investment and mortgage-backed securities                                  143,460          143,494
                                                                         ----------------  ---------------
Loans, net                                                                       181,441          171,094
Office properties and equipment, net                                               5,148            5,635
Federal Home Loan Bank Stock, at cost                                              3,561            3,522
Federal Reserve Stock, at cost                                                       539              539
Accrued interest receivable                                                        1,961            2,068
Intangible assets                                                                  3,735            4,212
Cash surrender value of life insurance                                             5,353            5,206
Other assets                                                                       3,071            2,631
                                                                         ----------------  ---------------
TOTAL ASSETS                                                            $        359,253  $       351,598
                                                                         ================  ===============

LIABILITIES

Deposit accounts                                                        $        239,316  $       227,589
Advances from the Federal Home Loan Bank and other borrowings                     62,500           63,500
Securities sold under agreements to repurchase                                    20,000           24,000
Floating rate junior subordinated deferrable interest debentures                   8,247            8,247
Accrued interest on deposits                                                         506              333
Advances from borrowers for taxes and insurance                                      237               40
Other liabilities                                                                  2,911            1,870
                                                                         ----------------  ---------------
TOTAL LIABILITIES                                                                333,717          325,579
                                                                         ----------------  ---------------

Commitments and contingencies-Note 4

SHAREHOLDERS' EQUITY

Serial preferred stock, no par value, authorized - 500,000 shares,
  issued and outstanding - None                                                       --               --
Common stock - $0.01 par value, authorized - 5,000,000 shares,
  issued and outstanding - 1,916,482 shares at 9/30/05 and 1,957,989
  at 12/31/04                                                                         19               20
Additional paid-in capital                                                        12,271           12,109
Accumulated other comprehensive gain (loss)                                         (336)             109
Retained earnings, substantially restricted                                       16,371           15,221
Treasury stock, at cost                                                           (2,789)          (1,440)
                                                                         ----------------  ---------------
TOTAL SHAREHOLDERS' EQUITY                                                        25,536           26,019
                                                                         ----------------  ---------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $        359,253  $       351,598
                                                                         ================  ===============

See notes to consolidated financial statements.
</TABLE>


                                       3

<PAGE>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2005 and 2004 (unaudited)

<TABLE>
<CAPTION>
<S>                                                         <C>               <C>               <C>               <C>
                                                               Three Months Ended                   Nine Months Ended
                                                        September 30,     September 30,       September 30,   September 30,
                                                            2005             2004                 2005            2004
                                                        ------------      ------------        ------------    -----------
                                                 (DOLLARS IN THOUSANDS EXCEPT PER SHARE) (DOLLARS IN THOUSANDS EXCEPT PER SHARE)

Interest Income:
  Loans                                                 $    3,243        $    2,643          $    9,108      $    7,599
  Deposits and federal funds sold                               37                 5                 109              20
  Mortgage-backed securities                                   305               463               1,050           1,442
  Interest and dividends on investment securities            1,319             1,172               3,756           3,464
                                                        ------------      ------------        ------------    -----------
Total Interest Income                                        4,904             4,283              14,023          12,525
                                                        ------------      ------------        ------------    -----------

Interest Expense:
  Deposit accounts                                           1,349               960               3,770           2,881
  Floating rate junior subordinated deferrable interest        150               109                 417             308
  Advances from the FHLB and other borrowings                  827               745               2,308           2,191
                                                        ------------      ------------        ------------    -----------
Total Interest Expense                                       2,326             1,814               6,495           5,380
                                                        ------------      ------------        ------------    -----------
Net Interest Income Provision for loan losses                2,578             2,469               7,528           7,145
                                                               220               390                 768             775
                                                        ------------      ------------        ------------    -----------
Net Interest Income After Provision for Loan Losses          2,358             2,079               6,760           6,370
                                                        ------------      ------------        ------------    -----------

Non-Interest Income:
  Fees for financial services                                  667               601               1,856           1,811
  Other fees                                                    14                16                  44              49
  Net gain on sale of loans                                     11                30                  37              72
  Net gain (loss) on sale of investments                        --                (8)                  5              (8)
Total Non-Interest Income                                      692               639               1,942           1,924

Non-Interest Expense:
  Compensation and employee benefits                         1,012               907               3,010           2,882
  Occupancy and equipment                                      492               540               1,523           1,562
  Deposit insurance premiums                                     8                 8                  24              24
  Professional services                                         86                67                 276             226
  Advertising/Public relations                                  46                40                 106             121
  Loan operations                                              101                48                 179             111
  Deposit premium intangible                                   159               159                 477             477
  Items processing                                              49                67                 110             190
  Telephone                                                     50                34                 135             111
  Other                                                        167               181                 523             515
                                                        ------------      ------------        ------------    -----------
Total Non-Interest Expense                                   2,170             2,051               6,363           6,219
                                                        ------------      ------------        ------------    -----------
Income Before Income Taxes                                     880               667               2,339           2,075
Income tax expense                                             242               159                 613             510
                                                        ------------      ------------        ------------    -----------
Net Income                                              $      638        $      508          $    1,726      $    1,565
                                                        ============      ============        ============    ===========
Basic Net Income Per Common Share                       $     0.33        $     0.26          $     0.90      $     0.80
                                                        ============      ============        ============    ===========
Diluted Net Income Per Common Share                     $     0.33        $     0.25          $     0.88      $     0.76
                                                        ============      ============        ============    ===========
Weighted Average Number of Common Shares Outstanding

Basic                                                    1,906,555         1,954,680           1,914,269       1,957,055

Diluted                                                  1,952,840         2,022,522           1,971,592       2,049,073


See notes to consolidated financial statements.
</TABLE>



                                       4


<PAGE>
<TABLE>
<CAPTION>
<S>                                                                          <C>                  <C>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 and 2004 (unaudited)

                                                                                 Nine Months Ended
                                                                          September 30,        September 30,
                                                                               2005                2004
                                                                       -----------------     -----------------
                                                                        (IN THOUSANDS)

OPERATING ACTIVITIES:

Net income                                                                $   1,726             $   1,565
Adjustments to reconcile net income to
 net cash provided by operating activities:
  Provision for loan losses                                                     768                   775
  Amortization of intangibles                                                   477                   477
  Depreciation expense                                                          672                   738
  Recognition of deferred income, net of costs                                 (272)                 (250)
  Deferral of fee income, net of costs                                          238                   262
  Gain on investment transactions                                               (42)                  (64)
  Changes in operating assets and liabilities:
  (Increase) decrease in accrued interest receivable                            107                  (152)
  (Increase) decrease in other assets                                          (587)                  239
  Increase in other liabilities                                               1,238                 1,552
  Increase in accrued interest payable                                          173                    53
                                                                          ---------             ---------
Net cash provided by operating activities                                     4,498                 5,195
                                                                          ---------             ---------
INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
   Available for sale                                                       (49,746)              (96,907)
   Held to maturity                                                          (4,605)                   --
Proceeds from sale of investment and mortgage-backed securities
   Available for sale                                                        10,911                 4,702
Proceeds from maturity of investment and mortgage-backed securities:
   Available for sale                                                        31,705                46,939
   Held to maturity                                                           3,000                    --
Principal repayments on mortgage-backed securities:
   Available for sale                                                         8,360                14,346
Net increase in loans                                                       (11,075)              (15,040)
Purchase of FHLB stock                                                          (39)                   --
Redemption of FHLB stock                                                         --                   587
Purchase of office properties and equipment                                    (185)                 (153)
                                                                          ---------             ---------
Net cash used by investing activities                                       (11,674)              (45,526)
                                                                          ---------             ---------
FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan                                     78                    84
Dividends paid in cash ($0.30 per share -2005
and $0.30 per share - 2004)                                                    (577)                 (587)
Proceeds from the exercise of stock options                                      84                    72
Share repurchase program                                                     (1,349)                 (810)
Proceeds (repayment) of term borrowings                                      (5,000)               16,500
Increase in deposit accounts                                                 11,727                 1,328
                                                                          ---------             ---------
Net cash  provided by financing activities                                    4,963                16,587
                                                                          ---------             ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                    (2,213)              (23,744)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             13,197                28,702
                                                                          ---------             ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $10,984               $ 4,958
                                                                          =========             =========
SUPPLEMENTAL DISCLOSURES:

Cash paid for:
  Income taxes                                                              $ 1,652               $   120
  Interest                                                                    6,292                 5,327

Non-cash transactions:
  Loans foreclosed                                                          $    54               $   647

See notes to consolidated financial statements.
</TABLE>

                                       5

<PAGE>

<TABLE>
<CAPTION>
<S>                 <C> <C>                 <C>        <C>   <C>             <C>            <C>            <C>        <C>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2005 and 2004 (unaudited)

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

BALANCE AT DECEMBER 31, 2003                1,969,770  $20   $11,906         $13,848        $   99         ($366)     $25,507

Net income                                                                     1,565                                    1,565

Other comprehensive income, net of tax:
  Unrealized holding gains on securities
  available for sale arising during period,
  net of tax effect of $171 thousand                                                           220                        220
                                                                                                                       -------
Comprehensive income                                                                                                    1,785

Stock option activity                        40,043      1        71                                                       72

Dividend  reinvestment plan
 contributions                                5,280               84                                                       84

Share repurchase program                    (47,832)                                                        (810)        (810)

Cash dividend ($.30 per share)                                                  (587)                                    (587)

                                            ---------------------------------------------------------------------------------

BALANCE AT SEPTEMBER 30, 2004               1,967,261  $21   $12,061         $14,826        $  319       ($1,176)     $26,051
                                            =================================================================================

BALANCE AT DECEMBER 31, 2004                1,957,989  $20   $12,109         $15,221        $  109       ($1,440)     $26,019

Net income                                                                     1,726                                    1,726

Other comprehensive income, net of tax
  Unrealized holding losses on securities
   available for sale arising during period,
   net of tax effect of $181 thousand                                                         (450)                      (450)
  Reclassification adjustment for gains                                                          5                          5
   included in net income                                                                    ------                    -------
  Comprehensive loss                                                                                                    1,281

Stock option activity                        35,044               84                                                       84

Dividend  reinvestment plan
 contributions                                4,557               78                                                       78

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

Cash dividend ($.30 per share)                                                  (577)                                    (577)

                                            ---------------------------------------------------------------------------------

BALANCE AT SEPTEMBER 30, 2005               1,916,482  $19   $12,271         $16,371         ($336)      ($2,789)     $25,536
                                            =================================================================================
</TABLE>


                                       6

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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

     The  accompanying  unaudited  consolidated  financial  statements  of Union
     Financial  Bancshares,  Inc. (the  "Corporation" or "Union Financial") were
     prepared in accordance with instructions for Form 10-Q and,  therefore,  do
     not  include  all  disclosures  necessary  for a complete  presentation  of
     consolidated financial condition,  results of operations, and cash flows in
     conformity  with  accounting  principles  generally  accepted in the United
     States of America.  However,  all adjustments  which are, in the opinion of
     management, necessary for the fair presentation of the interim consolidated
     financial  statements  have been included.  All such  adjustments  are of a
     normal and recurring nature.  The results of operations for the nine months
     ended  September  30, 2005 are not  necessarily  indicative  of the results
     which may be expected for the entire calendar year.  Certain amounts in the
     prior year's  financial  statements have been  reclassified to conform with
     current year classifications.

     Recently Issued Accounting Standards

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

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
     Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 123 (revised
     2004),  "Share-Based  Payment" ("SFAS No. 123(R))").  SFAS No. 123(R)) will
     require companies to measure all employee  stock-based  compensation awards
     using  a fair  value  method  and  record  such  expense  in its  financial
     statements.  In  addition,  the  adoption  of  SFAS  No.  123(R))  requires
     additional  accounting  and  disclosure  related to the income tax and cash
     flow effects  resulting from  share-based  payment  arrangements.  SFAS No.
     123(R)) is effective  beginning as of the first interim or annual reporting
     period  beginning  after  December 15, 2006.  The  Corporation is currently
     evaluating  the impact that the  adoption of SFAS No.  123(R)) will have on
     its  financial  position,   results  of  operations  and  cash  flows.  The
     cumulative  effect of adoption,  if any, will be measured and recognized in
     the statement of income on the date of adoption.

     In April 2005, the Securities and Exchange Commission's Office of the Chief
     Accountant  and its  Division of  Corporation  Finance has  released  Staff
     Accounting  Bulletin  ("SAB")  No.107 to  provide  guidance  regarding  the
     application of SFAS No.123  (revised  2004),  "Share-Based  Payment".  SFAS
     No.123(R))  covers a wide range of  share-based  compensation  arrangements
     including share options, restricted share plans,  performance-based awards,
     share  appreciation  rights, and employee share purchase plans. SAB No. 107
     provides  interpretive  guidance  related to the  interaction  between SFAS
     No.123(R))  and certain SEC rules and  regulations,  as well as the staff's
     views  regarding  the valuation of  share-based  payment  arrangements  for
     public  companies.  SAB  No.  107  also  reminds  public  companies  of the
     importance  of  including  disclosures  within  filings  made  with the SEC
     relating  to  the  accounting   for   share-based   payment   transactions,
     particularly during the transition to SFAS No.123(R)).

                                       7

<PAGE>

     In May 2005, the FASB issued  Statement of Financial  Accounting  Standards
     No. 154,  "Accounting  Changes and Error Corrections - a replacement of APB
     Opinion No. 20 and FASB  Statement  No. 3" ("SFAS No.  154").  SFAS No. 154
     establishes  retrospective application as the required method for reporting
     a change in accounting principle, unless it is impracticable, in which case
     the changes  should be applied to the latest  practicable  date  presented.
     SFAS No. 154 also  requires  that a correction of an error be reported as a
     prior period  adjustment by restating  prior period  financial  statements.
     SFAS No. 154 is effective for accounting  changes and corrections of errors
     made in fiscal years beginning after December 15, 2005.

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

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

     Basic  income  per  share  amounts  for the  three  and nine  months  ended
     September  30, 2005 and 2004 were  computed  based on the weighted  average
     number of common shares outstanding  during the period.  Diluted income per
     share adjusts for the dilutive  effect of outstanding  common stock options
     during the periods  utilizing  the  treasury  stock  method.  Common  stock
     equivalents  included in the diluted earnings per share calculation for the
     three  months  ended  September  30,  2005 and 2004 were 46,285 and 67,842,
     respectively and for the nine months ended September 30, 2005 and 2004 were
     57,323 and 92,018, respectively.

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

     Approximately  $77,675,000  and $62,396,000 of debt securities at September
     30, 2005 and  December 31,  2004,  respectively,  were pledged by Provident
     Community  Bank,  N.A. (the "Bank") as collateral to secure deposits of the
     State of South  Carolina,  and Union,  Laurens and York counties along with
     additional  borrowings  and  repurchase  agreements.  The Bank  pledges  as
     collateral for Federal Home Loan Bank advances the Bank's Federal Home Loan
     Bank stock and has entered  into a blanket  collateral  agreement  with the
     Federal  Home  Loan  Bank  whereby  the  Bank  maintains,   free  of  other
     encumbrances,  qualifying  mortgages  (as  defined)  with unpaid  principal
     balances equal to, when discounted at 75% of the unpaid principal balances,
     100% of total advances.  As part of the total assets pledged, the Bank will
     also pledge  securities to cover additional  advances from the Federal Home
     Loan Bank that exceed the qualifying  mortgages balance along with security
     repurchase lines with various brokerage houses.

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

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

                                       8

<PAGE>

     The Bank's  exposure to credit loss in the event of  nonperformance  by the
     other party to the financial instrument for commitments to extend credit is
     represented by the contractual amount of those  instruments.  The Bank uses
     the same credit policies in making commitments and conditional  obligations
     as it does for  on-balance-sheet  instruments.  Total  credit  exposure  at
     September  30,  2005  related  to these  items is  summarized  below:

                Loan Commitments:                               Contract Amount

                Approved loan commitments                        $  1,086,000
                Unadvanced portions of loans and
                 credit lines                                      39,787,000
                                                                   ----------
                Total loan commitments                           $ 40,873,000
                                                                   ==========

     Loan  commitments  to extend credit are agreements to lend to a customer as
     long as there is no violation of any condition established in the contract.
     Loan commitments generally have fixed expiration dates or other termination
     clauses  and  may  require  payment  of a  fee.  The  Bank  evaluates  each
     customer's   creditworthiness  on  a  case-by-case  basis.  The  amount  of
     collateral  obtained  upon  extension  of credit  is based on  management's
     credit  evaluation  of the  counter  party.  Collateral  held is  primarily
     residential and commercial property.

     Commitments  outstanding  at  September  30,  2005  consisted  of fixed and
     adjustable  rate loans at rates ranging from 5.0% to 6.5%.  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  $87,345,000  at September 30, 2005. Of these lines,
     the outstanding loan balances totaled approximately $47,558,000.

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

     On December 18, 2001,  Union  Financial  Statutory  Trust I, (the  "Trust")
     issued  $8,000,000  of floating  rate capital  securities  through a pooled
     trust preferred securities offering. The proceeds from this issuance, along
     with the Corporation's $247,000 capital contribution for the Trust's common
     securities,  were used to acquire $8,247,000  aggregate principal amount of
     the Corporation's  floating rate junior  subordinated  deferrable  interest
     debentures due December 18, 2031 (the  "Debentures"),  which constitute the
     sole  asset of the  Trust.  The  interest  rate on the  Debentures  and the
     capital  securities is variable and adjustable  quarterly at 3.60% over the
     three-month  LIBOR. A rate cap of 12.50% is effective  through December 18,
     2006. The Corporation  has,  through the Trust Agreement  establishing  the
     Trust, the Guarantee Agreement, the notes and the related Debentures, taken
     together,  fully  irrevocably  and  unconditionally  guaranteed  all of the
     Trust's obligations under the capital securities.

                                       9

<PAGE>


     A summary of the Trust securities issued and outstanding follows:
<TABLE>
<CAPTION>
<S>                        <C>         <C>      <C>             <C>                  <C>                <C>

 -------------------------------------------------------------------------------------------------------------------
                                   Amount                                                               Distribution
                                Outstanding                      Prepayment                                Payment
                               September 30,                     Option Date          Maturity           Frequency
 -------------------------------------------------------------------------------------------------------------------
     Name                   2005          2004       Rate
 -------------------------------------------------------------------------------------------------------------------
 -------------------------------------------------------------------------------------------------------------------
 Union Financial         $8,000,000   $8,000,000     7.48%     December 18, 2006    December 18, 2031      Quarterly
 Statutory Trust I
 -------------------------------------------------------------------------------------------------------------------
</TABLE>


     The stated  maturity of the  Debentures  is December 18, 2031. In addition,
     the  Debentures  are  subject  to  redemption  at par at the  option of the
     Corporation,  subject to prior regulatory approval,  in whole or in part on
     any interest  payment date after December 18, 2006. The Debentures are also
     subject to redemption prior to December 18, 2006 at 107.5% of par after the
     occurrence  of certain  events that would either have a negative tax effect
     on the Trust or the  Corporation or would result in the Trust being treated
     as an  investment  company  that is  required  to be  registered  under the
     Investment Company Act of 1940.

     The  Corporation  has the right,  at one or more times,  to defer  interest
     payments on the Debentures for up to twenty consecutive  quarterly periods.
     During  any  deferral  period,  each  installment  of  interest  that would
     otherwise have been due and payable will bear  additional  interest (to the
     extent  payment  of such  interest  would be  legally  enforceable)  at the
     applicable  distribution rate, compounded quarterly.  Additionally,  during
     any deferral  period,  the Corporation will be prohibited from declaring or
     paying cash dividends on its common stock.




                                       10

<PAGE>



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

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

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

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

     Financial Condition
     -------------------

     Assets
     ------

     Total  assets  of  the  Corporation  increased  $7,655,000,  or  2.18%,  to
     $359,253,000 at September 30, 2005 from $351,598,000 at December 31, 2004.

     Loans  increased  $10,347,000,  or 6.05%,  to $181,441,000 at September 30,
     2005. The Corporation continues to focus on consumer and commercial lending
     with  specialized  loan officers and products.  Short term interest earning
     deposits decreased $8,250,000, or 71.05%, to $3,361,000,  from December 31,
     2004 to September 30, 2005,  as these  deposits were used to fund growth in
     loans.  Other assets increased  $440,000,  or 16.72%,  to $3,071,000,  from
     December  31,  2004 to  September  30,  2005,  due to an  increase in a net
     deferred tax receivable  that was related to the mark to market  adjustment
     for investments available for sale.

                                       11

<PAGE>

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

     Total  liabilities  increased  $8,138,000,  or 2.50%,  to  $333,717,000  at
     September  30,  2005 from  $325,579,000  at  December  31,  2004.  Deposits
     increased $11,727,000, or 5.15%, to $239,316,000 at September 30, 2005 from
     $227,589,000 at December 31, 2004. The increase was due primarily to growth
     in lower cost demand  accounts  partially  offset by a reduction  in higher
     cost certificates of deposit accounts.  The Corporation continues to target
     lower  cost  demand  deposit  accounts  through  media  advertising  versus
     traditional higher cost certificates of deposits.

     Borrowings  from  the  Federal  Home  Loan  Bank  (the  "FHLB")   decreased
     $1,000,000, or 1.57%, to $62,500,000 at September 30, 2005 from $63,500,000
     at  December  31,  2004.  Securities  sold under  agreement  to  repurchase
     decreased  $4,000,000 to $20,000,000 at September 30, 2005 from $24,000,000
     at December 31,  2004.  Borrowings  were  reduced  with deposit  growth and
     reductions  in short term  interest  earning  deposits.  Other  liabilities
     increased $1,041,000 to $2,911,000 at September 30, 2005 from $1,870,000 at
     December  31,  2004,  due  primarily  to an  increase in  outstanding  loan
     fundings.

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

     Shareholders'  equity  decreased  $483,000,  or 1.86%,  to  $25,536,000  at
     September  30,  2005  from  $26,019,000  at  December  31,  2004 due to the
     repurchase of 81,108 shares at a cost of $1,349,000,  dividend  payments of
     $0.30 per share at a cost of $577,000 and a $445,000 increase in unrealized
     losses  on  securities   available  for  sale,  offset  by  net  income  of
     $1,726,000.

     Liquidity
     ---------

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

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

     During the nine months ended  September 30, 2005,  the  Corporation's  loan
     originations totaled $55,589,000.  At September 30, 2005, the Corporation's
     investment in agency and mortgage-backed  securities totaled  $143,460,000,
     nearly all of which is available for sale.  Approximately  $77,675,000  and
     $62,396,000 of debt securities at September 30, 2005 and December 31, 2004,
     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.

                                       12

<PAGE>

     Additionally,  outstanding loan commitments  (including commitments to fund
     credit lines) totaled $40,873,000 at September 30, 2005.  Management of the
     Corporation  anticipates  that it will have  sufficient  funds available to
     meet its current loan commitments.

     During the nine months ended September 30, 2005,  total deposits  increased
     $11,727,000.  The Corporation  closely monitors its liquidity position on a
     daily basis.  Certificates of deposit, which are scheduled to mature in one
     year or less from September 30, 2005, totaled $93,985,000.  The Corporation
     relies primarily on competitive rates,  customer service, and long-standing
     relationships  with  customers to retain  deposits.  From time to time, the
     Corporation  will also offer special  products to its customers to increase
     retention  and to  attract  new  deposits.  Based  upon  the  Corporation's
     experience  with  deposit  retention  and  current  retention   strategies,
     management  believes  that,  although it is not possible to predict  future
     terms and conditions upon renewal,  a significant  portion of such deposits
     will remain with the Corporation.  If the Corporation requires funds beyond
     its ability to generate them  internally,  additional  sources of funds are
     available through FHLB advances and lines of credit. At September 30, 2005,
     the  Corporation  had  outstanding   $62,500,000  of  FHLB  borrowings  and
     $20,000,000 of securities sold under agreements to repurchase. At September
     30, 2005, the Corporation had unused short-term lines of credit to purchase
     federal funds from unrelated banks totaling  $17,000,000 and the ability to
     borrow an additional  $22,000,000 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.

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

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

     Quantitative measures established by regulations to ensure capital adequacy
     require the Bank and the Corporation to maintain minimum amounts and ratios
     of total and Tier 1 capital to risk-weighted  assets, and of Tier 1 capital
     to average assets (as defined in the regulations).  Management believes, as
     of September 30, 2005, that the Bank and the  Corporation  meet the capital
     adequacy requirements to which they are subject.

                                       13

<PAGE>


     As of  September  30,  2005,  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).


                                        September 30, 2005
                                        ------------------
<TABLE>
<CAPTION>
<S>                              <C>        <C>         <C>       <C>         <C>        <C>
                                     Actual          Regulatory Minimum     "Well Capitalized"
                               -----------------     ------------------     ------------------
                               Amount      Ratio     Amount      Ratio      Amount       Ratio
-----------------------------------------------------------------------------------------------
                                 $          %           $          %           $           %
-----------------------------------------------------------------------------------------------
Leverage ratio
-----------------------------------------------------------------------------------------------
 Corporation                  30,054       8.31%     14,469       4.00%       n/a         n/a
-----------------------------------------------------------------------------------------------

 Bank                         29,294       8.10%     14,469       4.00%    18,086        5.00%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Tier 1 capital ratio
-----------------------------------------------------------------------------------------------
 Corporation                  30,054      13.71%      8,770       4.00%       n/a         n/a
-----------------------------------------------------------------------------------------------
 Bank                         29,294      13.35%      8,776       4.00%    13,164        6.00%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Total risk-based
 capital ratio
-----------------------------------------------------------------------------------------------
 Corporation                  32,652      14.89%     17,541       8.00%       n/a         n/a
-----------------------------------------------------------------------------------------------
 Bank                         31,891      14.54%     17,552       8.00%    21,940       10.00%
-----------------------------------------------------------------------------------------------
</TABLE>


                                       14


<PAGE>


     During fiscal 2003, the Corporation  implemented a share repurchase program
     under  which the  Board of  Directors  of the  Corporation  authorized  the
     repurchase  of up to 5% of the  outstanding  shares or 98,000  shares.  The
     program was expanded by an additional 5%, or 98,000 shares,  in fiscal 2004
     and by an additional 5%, or 95,000 shares in fiscal 2005. The shares are to
     be repurchased either through open market purchases or privately negotiated
     transactions  and  will be made  from  time to  time  depending  on  market
     conditions and other factors.  Repurchased  shares will be held in treasury
     and will be available for the  Corporation's  benefit plans. The repurchase
     program is expected to improve the Corporation's operating performance on a
     per share basis and enhance,  in the long term,  the market price per share
     of the Corporation's  common stock.  During the three and nine months ended
     September 30, 2005, the Corporation  repurchased  17,140 and 81,108 shares,
     respectively.  As of September 30, 2005, the  Corporation had repurchased a
     total  of  164,093  shares  under  these   authorizations.   Of  the  three
     authorizations,  32,000  shares  remain to be  purchased  under the  second
     authorization.

     Off-Balance Sheet Risk
     ----------------------

     In the normal course of operations, the Corporation engages in a variety of
     financial   transactions   that,  in  accordance  with  generally  accepted
     accounting principles, are not recorded in its financial statements.  These
     transactions involve, to varying degrees, elements of credit, interest rate
     and  liquidity  risk.  Such  transactions  are  used  primarily  to  manage
     customer's  requests  for  funding  and take the  form of  legally  binding
     agreements to lend money to customers at predetermined interest rates for a
     specified  period  of  time.   Outstanding   loan  commitments   (including
     commitments  to fund credit  lines)  totaled  $47,558,000  at September 30,
     2005.  Each  customer's  credit  worthiness is evaluated on a  case-by-case
     basis.  The  amount of  collateral  obtained,  if deemed  necessary  by the
     Corporation upon extension of credit,  is based on the credit evaluation of
     the  borrower.  Collateral  varies  but may  include  accounts  receivable,
     inventory,  property, plant and equipment,  commercial and residential real
     estate.  The credit risk on these commitments is managed by subjecting each
     customer to normal underwriting and risk management processes.

     For the period ended  September 30, 2005, the Corporation did not engage in
     any off-balance  sheet  transactions  reasonably  likely to have a material
     effect on its financial condition, results of operation and cash flows.

                                       15

<PAGE>

     Results of  operations  for the three months ended  September  30, 2005 and
     ---------------------------------------------------------------------------
     2004
     ----

     General
     -------

     Net income increased $130,000,  or 25.59%, to $638,000 for the three months
     ended  September  30, 2005 as  compared to $508,000  for the same period in
     2004 as  increases  in net  interest  income  and  non-interest  income and
     reductions  in the provision  for loan losses were  partially  offset by an
     increase in non-interest expense.

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

     Interest income increased $621,000,  or 14.50%, to $4,904,000 for the three
     months  ended  September  30,  2005 as compared to the same period in 2004.
     Interest  income on loans increased by 22.70%,  or $600,000,  to $3,243,000
     for the three months ended September 30, 2005 from $2,643,000 for the three
     months  ended  September  30, 2004,  due  primarily  to  increasing  market
     interest rates along with a higher  average  balance of loans with a higher
     average rate due to our increased  emphasis on commercial and consumer loan
     originations.  Interest on deposits and federal  funds sold,  combined with
     interest  and  dividends  on  investment  and  mortgage-backed   securities
     increased $21,000,  or 1.28%, for the three months ended September 30, 2005
     to $1,661,000 from $1,640,000  during the same period in 2004 due to higher
     yields,  due to higher  market  interest  rates,  offset  by lower  average
     balances.

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

     Interest expense increased $512,000, or 28.22%, to $2,326,000 for the three
     months  ended  September  30, 2005 as compared  to the three  months  ended
     September  30,  2004.   Interest  expense  on  deposit  accounts  increased
     $389,000, or 40.52%, to $1,349,000 for the three months ended September 30,
     2005 from  $960,000  during the same  period in 2004 due to higher  cost of
     deposits  as a result  of  higher  market  rates  offset by growth in lower
     costing  transaction  accounts.  The Corporation  continues to target lower
     cost demand deposit accounts versus traditional higher cost certificates of
     deposits.  Interest expense on borrowings increased $82,000, or 11.01%, for
     the three months ended September 30, 2005 as compared to the same period in
     the previous  year due to lower  borrowing  levels  offset by higher market
     interest  rates.  Interest  expense on floating  rate  junior  subordinated
     deferrable  interest  debentures  increased $41,000, or 37.61%, to $150,000
     for the three months ended September 30, 2005 from $109,000 during the same
     period in 2004 due to higher market interest rates.

                                       16

<PAGE>

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

     During the three months ended  September  30, 2005,  the provision for loan
     losses was  $220,000 as  compared  to  $390,000  for the same period in the
     previous year, due to lower  charge-offs and non-accrual  loans,  offset by
     the  growth  in the loan  portfolio  and the  increase  in  commercial  and
     consumer loans with greater risk.  Commercial and consumer loans  accounted
     for 67.18% of the loan  portfolio at September  30, 2005 compared to 63.00%
     for the same period in 2004.  During the three months ended  September  30,
     2005, bad debt charge-offs,  net of recoveries, were $89,000 as compared to
     $178,000 in net bad debt  charge-offs  for the same period in the  previous
     year.  During the three months ended September 30, 2005,  non-accrual loans
     decreased  $2,516,000  from  $4,001,000  at June 30, 2005 to  $1,485,000 at
     September  30, 2005.  This compares to  non-accrual  loans at September 30,
     2004 of  $1,286,000.  The  decrease  in  non-accrual  loans for the quarter
     ending  September  30, 2005 included one  commercial  loan for $2.4 million
     that  was  paid  off.  Management  believes  the  Corporation's  loan  loss
     allowance  is  adequate  to absorb  possible  loan  losses  inherent in the
     portfolio.

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

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

     Total non-interest  income increased $53,000, or 8.29%, to $692,000 for the
     three months ended  September 30, 2005 from $639,000 for the same period in
     the previous  year.  Fees from financial  services  increased  $66,000,  or
     10.98%,  to $667,000  for the three months  ended  September  30, 2005 from
     $601,000 for the same period in the previous year. The increase was from an
     increase in  transaction  accounts that was offset by lower fees  generated
     from third party investment  brokerage and financing  receivables  programs
     due to a reduction in product volumes.  Gain on sale of loans for the three
     months  ended  September  30, 2005 was $11,000  compared to $30,000 for the
     same period in the previous year due to lower residential loan originations
     as a  result  of the  rising  interest  rate  environment  along  with  the
     Corporation's  shift in  focus  to  consumer/commercial  loans.  The  sales
     represent  loans  funded  and sold  through  a third  party on a  servicing
     released basis.

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

     For the three months ended September 30, 2005, total  non-interest  expense
     increased  $119,000,  or 5.80%,  to $2,170,000 from $2,051,000 for the same
     period in 2004.  Compensation and employee benefits increased $105,000,  or
     11.58%,  to $1,012,000  for the three months ended  September 30, 2005 from
     $907,000 for the same period in 2004 due  primarily to higher  amortization
     expense  for  deferred  compensation  contracts.  Occupancy  and  equipment
     expense decreased $48,000, or 8.89%, to $492,000 for the three months ended
     September  30,  2005  from  $540,000  for the  same  period  in 2004 due to
     primarily to lower  depreciation  expense.  Professional  services  expense

                                       17

<PAGE>

     increased  $19,000,  or  28.36%,  to  $86,000  for the three  months  ended
     September  30, 2005 from  $67,000 for the same period in 2004 due to higher
     consultant  expense  utilized  to  implement  improved  loan  documentation
     policies and procedures.  Loan operations  expense  increased  $53,000,  or
     110.42%,  to $101,000 for the three months  ended  September  30, 2005 from
     $48,000 for the same period in 2004,  due to higher costs  associated  with
     foreclosures.  Items processing  expense decreased  $18,000,  or 26.87%, to
     $49,000 for the three months ended  September 30, 2005 from $67,000 for the
     same period in 2004. The  Corporation  entered into a new items  processing
     contract  that was  effective  January 1, 2005 that  reduced  the long term
     expense  for demand  accounts.  Telephone  expense  increased  $16,000,  or
     47.06%,  to $50,000  for the three  months  ended  September  30, 2005 from
     $34,000  for the same  period  in 2004 due to prior  year  expense  credits
     received with the purchase of a new system.

     Results of operations for the nine months ended September 30, 2005 and 2004
     ---------------------------------------------------------------------------

     General
     -------

     Net income increased $161,000, or 10.29%, to $1,726,000 for the nine months
     ended  September  30,  2005 as  compared  to the same  period in 2004 as an
     increase  in net  interest  income was  partially  offset by an increase in
     non-interest expense.

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

     Interest income  increased  $1,498,000,  or 11.96%,  to $14,023,000 for the
     nine  months  ended  September  30,  2005 as compared to the same period in
     2004.  Interest  income on loans  increased by 19.86%,  or  $1,509,000,  to
     $9,108,000 for the nine months ended September 30, 2005 from $7,599,000 for
     the nine months ended  September  30,  2004,  due  primarily to  increasing
     market  interest rates along with a higher average  balance of loans with a
     higher  average  rate  due to our  increased  emphasis  on  commercial  and
     consumer  loan  originations.  Interest on deposits and federal funds sold,
     combined  with interest and  dividends on  investment  and  mortgage-backed
     securities decreased $11,000, or 0.22%, for the nine months ended September
     30, 2005 to $4,915,000 from  $4,926,000  during the same period in 2004 due
     to lower  average  balances,  offset by higher  yields.  Proceeds  from the
     maturity and sale of investment  securities were utilized to fund growth in
     higher yielding loans.

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

     Interest expense  increased  $1,115,000,  or 20.72%,  to $6,495,000 for the
     nine months ended  September  30, 2005 as compared to the nine months ended
     September  30,  2004.   Interest  expense  on  deposit  accounts  increased
     $889,000,  or 30.86%, to $3,770,000 for the nine months ended September 30,
     2005 from  $2,881,000  during the same period in 2004 due to higher cost of
     deposits  as a result  of  higher  market  rates  offset by growth in lower
     costing  transaction  accounts.  The Corporation  continues to target lower
     cost demand deposit accounts versus traditional higher cost certificates of
     deposits.  Interest expense on borrowings increased $117,000, or 5.34%, for
     the nine months ended  September 30, 2005 as compared to the same period in
     the previous  year due to lower  borrowing  levels  offset by higher market
     interest  rates.  Interest  expense on floating  rate  junior  subordinated
     deferrable interest debentures  increased $109,000,  or 35.39%, to $417,000
     for the nine months ended  September 30, 2005 from $308,000 during the same
     period in 2004 due to higher market interest rates.

                                       18

<PAGE>

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

     During the nine months ended  September  30, 2005,  the  provision for loan
     losses was  $768,000 as  compared  to  $775,000  for the same period in the
     previous  year,  which  reflected  loan  growth  along with an  increase in
     non-accrual loans,  offset by a decrease in net charge-offs.  The provision
     also reflects the Corporation's  continued movement from longer term, fixed
     rate residential mortgage loans to shorter term, floating rate consumer and
     commercial loans.  Consumer and commercial loans carry higher risk weighted
     rates in the reserve calculation as compared to residential mortgage loans.
     Non-performing  loans increased $735,000 from $750,000 at December 31, 2004
     to $1,485,000 at September 30, 2005. The increase in non-accrual  loans for
     the nine months ending  September 30, 2005 includes one commercial loan for
     $380,000 that was  downgraded as a result of an analysis of the  underlying
     collateral.  Loans 30-89 days past due and still accruing was $3,442,000 at
     September  30,  2005  compared to  $7,214,000  at December  31,  2004.  The
     reduction in delinquent  loans is a result of increased  emphasis and focus
     from the Credit Administration area of the Bank that was developed with the
     utilization  of outside  loan  consultants.  During the nine  months  ended
     September 30, 2005, bad debt charge-offs,  net of recoveries,  was $197,000
     as compared to  $1,058,000  for the same period in the previous  year.  The
     previous year bad debt charge-offs included approximately $737,000 from two
     commercial  loans that were  written  down due to a reduction in the market
     value of the  supporting  loan  collateral.  The  Corporation's  loan  loss
     allowance  at   September   30,  2005  was   approximately   1.44%  of  the
     Corporation's  outstanding  loan  portfolio  and 174.88% of  non-performing
     loans compared to 1.18% of the Corporation's outstanding loan portfolio and
     270.13% of non-performing loans at December 31, 2004.

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

         Balance at beginning of year                                  $2,026
         Provision for loan losses                                        768
         Charge-offs, net                                                (197)
                                                               --------------
         Balance at end of quarter                                     $2,597
                                                               ===============

                                       19


<PAGE>


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

                                                             September 30, 2005   December 31, 2004
                                                             ------------------   -----------------
        Non-accruing loans which are
         contractually past due 90 days
         or more:

        Real estate                                               $  406                $  217
        Commercial                                                   802                   142
        Consumer                                                     277                   391
                                                                  ------                ------
        Total                                                     $1,485                $  750
                                                                  ======                ======
        Percentage of loans receivable, net                         0.81%                 0.44%
                                                                  ======                ======
        Percentage of allowance for loan losses
         to total loans outstanding                                 1.44%                 1.18%
                                                                  ======                ======
        Allowance for loan losses                                 $2,597                $2,026
                                                                  ======                ======
        Real estate acquired through
         foreclosure and repossessed
         assets                                                   $  223                $  373
                                                                  ======                ======
</TABLE>

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

     Total non-interest  income increased  $18,000,  or 0.94%, to $1,942,000 for
     the nine  months  ended  September  30, 2005 from  $1,924,000  for the same
     period  in the  previous  year.  Fees  from  financial  services  increased
     $45,000,  or 2.48%,  to $1,856,000 for the nine months ended  September 30,
     2005 from $1,811,000 for the same period in the previous year. The increase
     was due primarily to higher fees for  financial  services as a result of an
     increase in demand  deposit  accounts  offset by lower fees  generated from
     third party investment brokerage and financing  receivables programs due to
     a reduction in product  volumes.  Gain on sale of loans for the nine months
     ended  September  30,  2005 was  $37,000  compared  to $72,000 for the same
     period in the previous year due to lower sales of fixed-rate mortgage loans
     because of lower  residential  loan  originations as a result of the rising
     interest rate environment  along with the  Corporation's  shift in focus to
     consumer/commercial  loans.  The  sales  represent  loans  funded  and sold
     through a third party on a servicing released basis.

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

     For the nine months ended September 30, 2005,  total  non-interest  expense
     increased  $144,000,  or 2.32%,  to $6,363,000 from $6,219,000 for the same
     period in 2004.  Compensation and employee benefits increased $128,000,  or
     4.44% to $3,010,000 for the nine month period ended September 30, 2005 from
     $2,882,000  for the  same  period  in  2004,  due to  normal  merit  salary
     increases along with higher amortization expense for deferred  compensation
     contracts.  Occupancy and equipment expense decreased $39,000, or 2.50%, to
     $1,523,000 for the nine months ended September 30, 2005 from $1,562,000 for

                                       20

<PAGE>

     the same  period  in 2004 due  primarily  to  lower  depreciation  expense.
     Professional services expense increased $50,000, or 22.12%, to $276,000 for
     the nine months ended  September 30, 2005 from $226,000 for the same period
     in 2004 due to higher  consultant  expense  utilized to implement  improved
     loan documentation  procedures and higher audit fees.  Advertising  expense
     decreased  $15,000,  or  12.40%,  to  $106,000  for the nine  months  ended
     September  30,  2005 from  $121,000  for the same  period  in 2004,  due to
     reductions in media  advertising in slower growth markets.  Loan operations
     costs increased  $68,000,  or 61.26%, to $179,000 for the nine months ended
     September 30, 2005 from $111,000 for the same period in 2004, due to higher
     costs  associated with  foreclosures.  Items processing  expense  decreased
     $80,000,  or 42.11%,  to $110,000 for the nine months ended  September  30,
     2005 from  $190,000 for the same period in 2004.  The  Corporation  entered
     into a new items  processing  contract that was  effective  January 1, 2005
     that reduced the long term expense for demand accounts.  Telephone  expense
     increased  $24,000,  or  21.62%,  to  $135,000  for the nine  months  ended
     September  30,  2005 from  $111,000  for the same  period  in 2004,  due to
     installation  charges incurred for two new banking center systems and prior
     year expense credits received on the purchase of new equipment.



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

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

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

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

                                       21

<PAGE>


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

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

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

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

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

     The following table reflects  changes in estimated net interest income from
     rate shocks of (+) or (-) 1% and 2% in a rising and falling  interest  rate
     environment  for the  Corporation.  Management  did not include a 200 basis
     points  decrease in the  simulation  model at  December  31, 2004 as such a
     change in interest rates at that time was a highly remote scenario.

                                       22
<PAGE>
<TABLE>
<CAPTION>
<S>                                                  <C>             <C>
                                                     At               At
                                                 September 30,    December 31,
                                                    2005             2004
                                                    ----             ----
--------------------------------------------------------------------------------
200 basis point increase in rates
                                                    6.26%            5.75%
--------------------------------------------------------------------------------
100 basis point increase in rates
                                                    3.41%            3.12%
--------------------------------------------------------------------------------
100 basis point decrease in rates
                                                   (4.50%)          (3.22%)
--------------------------------------------------------------------------------
200 basis point decrease in rates
                                                  (11.79%)            N/A
--------------------------------------------------------------------------------
</TABLE>
The 200 and 100 basis  point  change in rates in the above  table is  assumed to
occur evenly over the following twelve months.  Based on the scenario above, net
interest  income would be  positively  affected in the  twelve-month  periods if
rates rose by 100 and 200 basis points, but would be adversely affected if rates
declined by 100 and 200 basis points.



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

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

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

                                       23

<PAGE>

     PART II - OTHER INFORMATION

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

     The  Corporation is involved in various claims and legal actions arising in
     the normal course of business.  Management  believes that these proceedings
     are  immaterial  to the  Corporation's  financial  condition and results of
     operations.

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

The  following  table  provides  certain   information  with  regard  to  shares
repurchased by the Corporation during the second quarter of 2005.
<TABLE>
<CAPTION>
<S>                                  <C>                 <C>                  <C>                 <C>
                                                                              (c)
                                                                       Total Number of            (d)
                                    (a)                  (b)          Shares Purchased     Maximum Number of
                                Total Number           Average       as part of Publicly   Shares that may be
                                 of Shares           Price Paid          Announced         purchased under
     Period                      Purchased            per share          Programs             Program
-------------------------------------------------------------------------------------------------------------
July 1, 2005 through
July 31, 2005                       3,000             $18.01               3,000               141,422
-------------------------------------------------------------------------------------------------------------
August 1, 2005 through
August 31, 2005                     4,140             $18.02               4,140               137,282
-------------------------------------------------------------------------------------------------------------
September 1, 2005 through
September 30, 2005                 10,000             $18.04              10,000               127,282
-------------------------------------------------------------------------------------------------------------
        Total                      17,140             $18.03              17,140                 N/A
-------------------------------------------------------------------------------------------------------------
</TABLE>

     In November 2004, the Corporation  implemented a share  repurchase  program
     under which the  Corporation  may  repurchase  up to 5% of the  outstanding
     shares or 98,000  shares.  In May 2005,  the  program  was  expanded  by an
     additional 5% or 95,000 shares.  The repurchase program will continue until
     it is completed or terminated by the Board of Directors.

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

               Not applicable.

                                       24

<PAGE>

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

               None

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

               None

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

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

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

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

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

                                       25

<PAGE>

                                   SIGNATURES
                                   ----------

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


                        UNION FINANCIAL BANCSHARES, INC.
                        --------------------------------
                                  (Registrant)



        Date: November 7, 2005                    By: /s/ Dwight V. Neese
              ----------------                        --------------------
                                                      Dwight V. Neese, CEO


        Date: November 7, 2005                    By: /s/ Richard H. Flake
              ----------------                        ----------------------
                                                      Richard H. Flake, CFO



                                       26