Exhibit 13.0



Union Financial Bancshares, Inc.

2004 Supplemental Annual Report



Table of Contents



|                                                                                      |  |   
|------------------------------------------------------------------------------------- |  | --
|Business                                                                              |  | 1 
|Selected Financial and Other Data                                                     |  | 2 
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 4 
|Report of Independent Registered Public Accounting Firm                               |  | 15
|Consolidated Financial Statements                                                     |  | 16
|Notes to Consolidated Financial Statements                                            |  | 22
|Directors and Leadership Group                                                        |  | 41
|Corporate Information                                                                 |  | 42



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Business



Union Financial Bancshares, Inc.
(Union Financial) is the bank holding company for Provident Community Bank, N.A., (the Bank). Union Financial engages in no significant activity other than holding the stock of the Bank and engaging in certain passive
investment activities. Union Financial, and the Bank are collectively referred to as the Corporation in this annual report.



The Bank is a national bank headquartered in Union, South Carolina. The Bank, originally chartered in 1934, is a member of the Federal Home Loan Bank System
(FHLB). Its deposits are insured to the maximum limits allowable by the Federal Deposit Insurance Corporation (FDIC).



The business of the Bank consists primarily of attracting deposits from the general public and originating loans on properties located in South Carolina. The Bank
originates consumer and commercial loans, commercial real estate loans, construction loans, and residential mortgage loans, invests in federal government and agency obligations and purchases fixed and variable rate mortgage participation
certificates. The principal sources of funds for the Banks lending and investing activities include deposits received from the general public, advances from the FHLB and other borrowings. The Banks principal expenses are interest paid on
deposit accounts and other borrowings and expenses incurred in the operation of the Bank. The Banks operations are conducted through its main office and six full-service banking centers, all of which are located in the upstate area of South
Carolina.



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SELECTED FINANCIAL AND OTHER DATA



Operations Data:



|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | --------- | - | ---------------------------- | -- | --------- | ------------------------- |  | - | --------- | - |  | ---- | --------- | - | ---- | - | --------- | - |  | - | --------- | -
|                                                               |  | Year Ended December31,                              |           |   | ThreeMonthsEndedDecember 31, |    |           | Years Ended September 30, | 
|                                                               |  | 2004                                                |           |   | 2003                         |    |           | 2003                      |  |   | 2002      |   |  | 2001 |           |   | 2000 |  
|                                                               |  | (In Thousands - Except Share and Per Share Amounts) |          
|Interest income                                                |  | $                                                   | 16,952    |   |                              | $  | 3,787     |                           |  | $ | 16,924    |   |  | $    | 18,361    |   |      | $ | 19,018    |   |  | $ | 18,555    |  
|Interest expense                                               |  |                                                     | (7,246    | ) |                              |    | (2,305    | )                         |  |   | (8,702    | ) |  |      | (9,775    | ) |      |   | (11,613   | ) |  |   | (11,175   | )
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net interest income                                            |  |                                                     | 9,706     |   |                              |    | 1,482     |                           |  |   | 8,222     |   |  |      | 8,586     |   |      |   | 7,405     |   |  |   | 7,380     |  
|Provision for loan losses                                      |  |                                                     | (1,250    | ) |                              |    | (725      | )                         |  |   | (725      | ) |  |      | (990      | ) |      |   | (240      | ) |  |   | (225      | )
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net interest income after provision for loan losses            |  |                                                     | 8,456     |   |                              |    | 757       |                           |  |   | 7,497     |   |  |      | 7,596     |   |      |   | 7,165     |   |  |   | 7,155     |  
|Other income                                                   |  |                                                     | 2,583     |   |                              |    | (283      | )                         |  |   | 2,211     |   |  |      | 1,308     |   |      |   | 1,149     |   |  |   | 2,580     |  
|Other expense                                                  |  |                                                     | (8,162    | ) |                              |    | (2,326    | )                         |  |   | (7,278    | ) |  |      | (6,602    | ) |      |   | (6,250    | ) |  |   | (6,352    | )
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Income (loss) before income taxes                              |  |                                                     | 2,877     |   |                              |    | (1,852    | )                         |  |   | 2,430     |   |  |      | 2,302     |   |      |   | 2,064     |   |  |   | 3,383     |  
|Income tax (expense) benefit                                   |  |                                                     | (721      | ) |                              |    | 642       |                           |  |   | (571      | ) |  |      | (558      | ) |      |   | (721      | ) |  |   | 1,190     | )
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net income (loss)                                              |  | $                                                   | 2,156     |   |                              | ($ | 1,210     | )                         |  | $ | 1,859     |   |  | $    | 1,744     |   |      | $ | 1,343     |   |  | $ | 2,193     |  
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net income (loss) per common share (Basic)                     |  | $                                                   | 1.10      |   |                              | ($ | 0.62      | )                         |  | $ | 0.95      |   |  | $    | 0.90      |   |      | $ | 0.70      |   |  | $ | 1.18      |  
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net income (loss) per common share (Diluted)                   |  | $                                                   | 1.05      |   |                              | ($ | 0.62      | )                         |  | $ | 0.90      |   |  | $    | 0.86      |   |      | $ | 0.68      |   |  | $ | 1.16      |  
|                                                               |  |                                                     |           |   |                              |    |           |                           |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Dividends paid per common share                                |  | $                                                   | 0.40      |   |                              | $  | 0.10      |                           |  | $ | 0.40      |   |  | $    | 0.40      |   |      | $ | 0.40      |   |  | $ | 0.40      |  
|Weighted average number of common shares outstanding (Basic)   |  |                                                     | 1,957,760 |   |                              |    | 1,967,217 |                           |  |   | 1,963,775 |   |  |      | 1,939,084 |   |      |   | 1,918,431 |   |  |   | 1,855,706 |  
|Weighted average number of common shares outstanding (Diluted) |  |                                                     | 2,044,137 |   |                              |    | 1,967,217 |                           |  |   | 2,056,579 |   |  |      | 2,030,040 |   |      |   | 1,971,611 |   |  |   | 1,898,494 |  



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Financial Condition:



|                                                                 |  |                     |         |                  |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|---------------------------------------------------------------- |  | ------------------- | ------- | ---------------- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- |  | - | -------
|                                                                 |  | At December 31 ,    |         | At September 30,
|                                                                 |  | 2004                |         | 2003             |   | 2003    |  | 2002 |         | 2001 |   | 2000   
|                                                                 |  | (Dollars Thousands)
|Total amount of:                                                 |  |                     |         |                  |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|Assets                                                           |  | $                   | 351,598 |                  | $ | 331,884 |  | $    | 341,704 |      | $ | 310,968 |  | $ | 277,752 |  | $ | 260,564
|Cash and cash equivalents                                        |  |                     | 13,197  |                  |   | 28,702  |  |      | 3,290   |      |   | 7,385   |  |   | 5,694   |  |   | 4,500  
|Investment securities                                            |  |                     | 104,598 |                  |   | 77,183  |  |      | 78,790  |      |   | 28,913  |  |   | 24,170  |  |   | 19,432 
|Mortgage-backed securities                                       |  |                     | 38,896  |                  |   | 46,606  |  |      | 78,648  |      |   | 88,720  |  |   | 64,947  |  |   | 47,460 
|Loans (net)                                                      |  |                     | 171,094 |                  |   | 154,501 |  |      | 152,921 |      |   | 161,576 |  |   | 158,063 |  |   | 167,807
|Deposits                                                         |  |                     | 227,589 |                  |   | 223,131 |  |      | 220,232 |      |   | 200,303 |  |   | 194,079 |  |   | 187,974
|Advances from Federal Home Loan Bank and other borrowings        |  |                     | 63,500  |                  |   | 68,500  |  |      | 74,000  |      |   | 57,000  |  |   | 46,007  |  |   | 47,687 
|Securities sold under agreement to repurchase                    |  |                     | 24,000  |                  |   | 5,000   |  |      | 11,000  |      |   | 17,000  |  |   | 11,000  |  |   |       
|Floating rate junior subordinated deferrable interest debentures |  |                     | 8,247   |                  |   |        |  |      |        |      |   |        |  |   |        |  |   |       
|Corporate obligated floating rate capital securities             |  |                     |        |                  |   | 8,000   |  |      | 8,000   |      |   | 8,000   |  |   |        |  |   |       
|Shareholders equity                                             |  |                     | 26,019  |                  |   | 25,507  |  |      | 26,216  |      |   | 27,198  |  |   | 24,376  |  |   | 21,924 
|Number of:                                                       |  |                     |         |                  |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|Real estate loans outstanding                                    |  |                     | 898     |                  |   | 1,070   |  |      | 1,147   |      |   | 1,503   |  |   | 1,783   |  |   | 2,216  
|Deposit accounts                                                 |  |                     | 19,567  |                  |   | 19,449  |  |      | 19,557  |      |   | 19,506  |  |   | 20,499  |  |   | 22,418 
|Banking centers                                                  |  |                     | 7       |                  |   | 7       |  |      | 7       |      |   | 6       |  |   | 6       |  |   | 7      



Other Selected Data:



|                                                        |  |                             |      |  |                           |      |  |       |      |  |       |      |  |       |  
|------------------------------------------------------- |  | --------------------------- | ---- |  | ------------------------- | ---- |  | ----- | ---- |  | ----- | ---- |  | ----- | -
|                                                        |  | Year EndedDecember 31, 2004 |      |  | Years Ended September 30, |     
|                                                        |  |                             | 2003 |  |                           | 2002 |  |       | 2001 |  |       | 2000 | 
|Interest rate spread during the year                    |  | 2.94                        | %    |  | 2.56                      | %    |  | 2.97  | %    |  | 2.98  | %    |  | 3.02  | %
|Net yield on average interest- earning assets           |  | 2.96                        | %    |  | 2.63                      | %    |  | 3.08  | %    |  | 3.08  | %    |  | 3.10  | %
|Return on average assets                                |  | 0.61                        | %    |  | 0.55                      | %    |  | 0.59  | %    |  | 0.51  | %    |  | 0.85  | %
|Return on average shareholders equity                  |  | 8.40                        | %    |  | 6.64                      | %    |  | 7.06  | %    |  | 6.03  | %    |  | 10.92 | %
|Dividend payout ratio                                   |  | 36.32                       | %    |  | 42.29                     | %    |  | 44.55 | %    |  | 57.03 | %    |  | 26.13 | %
|Operating expense to average assets                     |  | 2.14                        | %    |  | 2.17                      | %    |  | 2.22  | %    |  | 2.39  | %    |  | 2.44  | %
|Ratio of average shareholders equity to average assets |  | 7.28                        | %    |  | 8.34                      | %    |  | 8.31  | %    |  | 8.50  | %    |  | 7.78  | %



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Managements Discussion and Analysis of Financial Condition and Results of Operations



Critical Accounting Policies



The Corporation has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the
preparation of financial statements. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements.



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



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



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



Forward-Looking Statements



Managements
Discussion and Analysis of Financial Condition and Results of Operations and other portions of this report contain certain forward-looking statements concerning the future operations of the Corporation. Management desires 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 the Annual Report. The Corporation has used forward-looking statements to describe future plans and strategies. Forward looking statements are generally preceded by such terms as
expects, believes, anticipates, intends and similar expressions. Managements ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could
affect actual results include interest rate trends, the general economic climate in the Corporations market area and the country as a whole, the ability of the Corporation to control costs and expenses, the products and pricing of its
competitors, loan delinquency rates, 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 and regulation, the Corporation does not undertake and specifically disclaims any obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.



Asset and Liability Management



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.



4



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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 Banks securities portfolio, FHLB advances and other borrowings as well as the Banks asset and liability policies.



At December 31, 2004, the Corporation had more interest-rate sensitive assets
than liabilities that would reprice over the next twelve months. For the year ended December 31, 2004, the average balance of the loan portfolio increased $3.8 million while the average balance of investment and mortgage-backed securities increased
$14.9 million. The higher amount of investment and mortgage-backed securities as a percentage of total assets, which carry a lower yield than loans, resulted in the average yield on interest-earning assets declining. However, due to the
Corporations focus on lower cost demand deposit accounts, overall funding costs decreased at a faster rate than the decline in yield on earning assets, resulting in a higher interest rate spread. The Corporation expects that its loan portfolio
will continue to increase in the future, resulting in a larger yield in a rising interest rate environment. The Corporation continues to work to shorten the average life of its assets through the origination of shorter-term variable-rate consumer
and commercial loans and the decline in originations of longer-term fixed-rate real estate loans and to extend the term on its liabilities in an effort to provide a better match of repricing for interest earning assets and interest bearing
liabilities. 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.



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, but places particular emphasis on the first year. At
December 31, 2004, approximately 64% of the Corporations interest-earning assets were scheduled to reprice or to mature within one year compared to approximately 50% of interest-bearing liabilities.



The following table shows the Corporations rate-sensitive position at December 31, 2004
as measured by gap analysis (the difference between the interest-earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods). Over the next twelve months approximately $49 million more
interest-earning assets than interest-bearing liabilities can be repriced to current market rates at least once. As a result, at December 31, 2004, the ratio of rate-sensitive assets to rate-sensitive liabilities within the one-year time frame was
130%, indicating an asset-sensitive position. Corporations in an asset sensitive position would expect rising interest rates to have a positive impact on net interest income and falling interest rates to have a negative impact.



5



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The following table sets forth the Corporations interest sensitivity position as of December 31, 2004.



Interest Sensitivity Analysis

(dollars in thousands)



|                                                                 |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|---------------------------------------------------------------- |  | --------------- | ------- | - | --------- | -- | ------- | ------------ |  | ----- | ------ |  | - | -------
|                                                                 |  | Within 12Months |         |   | 1-5 Years |    |         | Over 5 Years |  | Total
|INTEREST-EARNING ASSETS                                          |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|Investment Securities                                            |  | $               | 85,694  |   |           | $  | 28,731  |              |  | $     | 44,741 |  | $ | 159,166
|Loans                                                            |  |                 | 126,491 |   |           |    | 33,386  |              |  |       | 12,015 |  |   | 171,892
|                                                                 |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|Total interest-earning assets                                    |  |                 | 212,185 |   |           |    | 62,117  |              |  |       | 56,756 |  |   | 331,058
|                                                                 |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|                                                                 |  |                 |         |  
|INTEREST-BEARING LIABILITIES                                     |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|Deposits                                                         |  |                 | 130,148 |   |           |    | 85,364  |              |  |       | 12,077 |  |   | 227,589
|Other Borrowings                                                 |  |                 | 25,000  |   |           |    | 40,500  |              |  |       | 22,000 |  |   | 87,500 
|Floating rate junior subordinated deferrable interest debentures |  |                 | 8,247   |   |           |    |        |              |  |       |       |  |   | 8,247  
|                                                                 |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|Total interest-bearing liabilities                               |  | $               | 163,395 |   |           | $  | 125,864 |              |  | $     | 34,077 |  | $ | 323,036
|                                                                 |  |                 |         |   |           |    |         |              |  |       |        |  |   |        
|Interest sensitive gap                                           |  | $               | 48,590  |   |           | ($ | 63,747  | )            |  | $     | 22,679 |  |   |        
|Cumulative interest sensitive gap                                |  | $               | 48,590  |   |           | ($ | 15,157  | )            |  | $     | 7,522  |  |   |        
|RSA/RSL                                                          |  |                 | 130     | % |           |    |         |              |  |       |        |  |   |        



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



Yields Earned and Rates Paid



The Corporations pretax earnings depend primarily on its net interest income, the difference between the income it receives on its loan portfolio and other
investments and its cost of funds, consisting primarily of interest paid on savings deposits and borrowings. Net interest income is affected by the average yield on interest-earning assets, the average rate on interest-bearing liabilities, and the
ratio of interest-earning assets to interest-bearing liabilities.



The
following table sets forth, at or for the periods and dates indicated, the weighted average yields earned on the Corporations interest-earning assets, the weighted average interest rates paid on the Corporations deposit accounts and
borrowings, the interest rate spread and net yield on interest-earning assets.



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|                                             |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  
|-------------------------------------------- |  | -------------------- | - | ---- | ---------------------------- | - | ---- | ----------------------------- | - | ---- | ------------------------ | - |  | ---- | -
|                                             |  | At December 31, 2004 |   |      | Year Ended December 31, 2004 |   |      | ThreeMonths EndedDecember 31, |   |      | Years EndedSeptember 30, |  
|                                             |  |                      |   | 2003 |                              |   | 2003 |                               |   | 2002 |                         
|Average yield on earnings assets:            |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  
|Loans                                        |  | 6.54                 | % |      | 6.49                         | % |      | 6.36                          | % |      | 6.94                     | % |  | 7.58 | %
|Investments (1)                              |  | 3.88                 | % |      | 3.87                         | % |      | 3.10                          | % |      | 3.95                     | % |  | 5.47 | %
|Mortgage-backed securities                   |  | 4.23                 | % |      | 3.93                         | % |      | 3.56                          | % |      | 3.78                     | % |  | 4.52 | %
|Total interest-earning assets                |  | 5.30                 | % |      | 5.18                         | % |      | 4.83                          | % |      | 5.41                     | % |  | 6.58 | %
|                                             |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  
|Less:                                        |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  
|Average rate paid on deposits                |  | 1.87                 | % |      | 1.77                         | % |      | 1.86                          | % |      | 2.25                     | % |  | 3.06 | %
|Average rate paid on borrowings              |  | 3.07                 | % |      | 3.23                         | % |      | 5.84                          | % |      | 4.13                     | % |  | 5.04 | %
|Average Cost of Funds                        |  | 2.23                 | % |      | 2.24                         | % |      | 2.98                          | % |      | 2.85                     | % |  | 3.61 | %
|                                             |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  
|Average interest rate spread                 |  | 3.07                 | % |      | 2.94                         | % |      | 1.85                          | % |      | 2.56                     | % |  | 2.97 | %
|                                             |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  
|Net yield on average interest-earning assets |  | 3.16                 | % |      | 2.96                         | % |      | 1.89                          | % |      | 2.63                     | % |  | 3.08 | %
|                                             |  |                      |   |      |                              |   |      |                               |   |      |                          |   |  |      |  



|(1) | Includes investment securities, federal funds sold, interest-bearing time deposits, overnight interest-bearing deposits, Federal Home Loan Bank stock and Federal Reserve stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rate/Volume Analysis



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



7



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|                              |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|----------------------------- |  | --------------------------------------------------- | ------ | - | --------------------------------------- | -- | ------ | ----- |  | -- | ------ | - |  | ---- | ----- | - | ----- | -- | ------ | - |  | -- | ------ | -
|                              |  | Years Ended December 31 2004 vs. September 30, 2003 |        |   | Years Ended September 30, 2003 vs. 2002 |   
|                              |  | Volume                                              |        |   | Rate                                    |    |        | Total |  |    | Volume |   |  | Rate |       |   | Total |   
|                              |  | (Dollars in Thousands)                              |       
|Change in interest income:    |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|Loans                         |  | $                                                   | 199    |   |                                         | ($ | 714    | )     |  | ($ | 515    | ) |  | ($   | 593   | ) |       | ($ | 1,011  | ) |  | ($ | 1,604  | )
|Mortgage-backed securities    |  |                                                     | (1,168 | ) |                                         |    | 45     |       |  |    | (1,123 | ) |  |      | 312   |   |       |    | (1,334 | ) |  |    | (1,022 | )
|Investments                   |  |                                                     | 1,692  |   |                                         |    | (25    | )     |  |    | 1,667  |   |  |      | 1,617 |   |       |    | (428   | ) |  |    | 1,189  |  
|                              |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|Total interest income         |  |                                                     | 723    |   |                                         |    | (694   | )     |  |    | 29     |   |  |      | 1,336 |   |       |    | (2,773 | ) |  |    | (1,437 | )
|                              |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|Change in interest expense:   |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|Deposits                      |  |                                                     | 306    |   |                                         |    | (1,063 | )     |  |    | (757   | ) |  |      | 343   |   |       |    | (1,684 | ) |  |    | (1,341 | )
|Borrowings and other          |  |                                                     | 237    |   |                                         |    | (935   | )     |  |    | (698   | ) |  |      | 1,157 |   |       |    | (889   | ) |  |    | 268    |  
|                              |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|Total interest expense        |  |                                                     | 543    |   |                                         |    | (1,998 | )     |  |    | (1,455 | ) |  |      | 1,500 |   |       |    | (2,573 | ) |  |    | (1,073 | )
|                              |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  
|Change in net interest income |  | $                                                   | 180    |   |                                         | $  | 1,304  |       |  | $  | 1,484  |   |  | ($   | 164   | ) |       | ($ | 200    | ) |  | ($ | 364    | )
|                              |  |                                                     |        |   |                                         |    |        |       |  |    |        |   |  |      |       |   |       |    |        |   |  |    |        |  



Results of Operations



Comparison of Years Ended December 31, 2004 and September 30,
2003



Net income increased $297,000 or 15.98% from $1,859,000 for
the twelve months ended September 30, 2003 to $2,156,000 for the twelve months ended December 31, 2004. Earnings per share were $1.10 per share (basic) and $1.05 per share (diluted) for the year ended December 31, 2004 compared to $.95 per share
(basic) and $.90 per share (diluted) for the year ended September 30, 2003.



Interest Income



Total interest income
increased $28,000, or 0.17%, from $16,924,000 in fiscal 2003 to $16,952,000 in fiscal 2004. Interest income on loans decreased $515,000, or 4.72%, from $10,914,000 in year 2003 to $10,399,000 in year 2004 due primarily to declining market interest
rates along with higher loan originations in variable and prime-based loan products. The Corporations continued focus on variable and prime-based lending resulted in net growth in consumer/commercial loans of 20.55% while net residential
mortgage loans declined 3.76%. Interest income on investment and mortgage-backed securities increased $543,000, or 9.03%, from $6,010,000 in fiscal 2003 to $6,553,000 in fiscal 2004. The increase was due primarily to increased investments in
government agency securities, offset by lower volumes of mortgage-backed securities.



Interest Expense



Interest expense decreased 16.73% to $7,246,000 for fiscal 2004 from $8,702,000 for fiscal 2003. Interest expense decreased $757,000 for deposits and decreased $699,000
for other borrowings and floating rate junior subordinated deferrable interest debentures. Interest expense for deposits decreased due primarily to lower deposit rates from a declining interest rate environment. In addition, the Corporation
increased lower-cost transaction account balances by 29.0% while traditional higher-cost certificate of deposit account balances decreased 4.68%. The overall increase in deposits was primarily from the Rock Hill, South Carolina banking center that
was established in late 2003. Interest expense on other borrowings decreased due to lower interest rates during the year, offset by a higher level of borrowings that were utilized to fund growth.



Provision for Loan Loss



Provisions for loan losses are charges to earnings to bring the total allowance for loan
losses to a level considered by management as adequate to provide for estimated loan losses based on managements evaluation of the collectibility of the loan portfolio. The provision for loan loss calculation includes a segmentation of loan
categories subdivided by residential mortgage, commercial and consumer loans.



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Each category is risk rated for all loans including performing groups. The weight assigned to each performing group is developed from a three-year historical
average loan loss experience ratio and as the loss experience changes, the category weight is adjusted accordingly. In addition to loan loss experience, managements evaluation of the loan portfolio includes the market value of the underlying
collateral, growth and composition of the loan portfolio, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically, and the allowance for loan losses is adjusted accordingly. The increased provision
reflects the Corporations continued movement from longer term, fixed rate residential 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. The provision for loan losses increased from $725,000 in fiscal 2003 to $1,250,000 in fiscal 2004. The net allowance for loan losses increased $184,000 to $2,026,000 as of December 31, 2004 compared to
$1,842,000 as of September 30, 2003. Non-performing loans decreased $2,304,000 from $3,054,000 at September 30, 2003 to $750,000 at December 31, 2004. At December 31, 2004, impaired loans totaled $197,000 compared to $718,000 at September 30, 2003.



The Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $1,607,000 in the year ended December 31, 2004 compared to $254,000 for the year ended September 30, 2003. The bad debt charge-offs for the current year included approximately $1,306,000 from three commercial loans that were charged
off after the loans were determined to be uncollectible. The allowance for loan losses to total loans at December 31, 2004 was 1.18% compared to 1. 19% at September 30, 2003. The allowance for loan losses to non-performing loans at December 31, 2004
was 270.13% compared to 60.32% at September 30, 2003.



Non-Interest Income



Non-interest income increased 1.97% to
$2,583,000 for the year ended December 31, 2004 from $2,533,000 for the year ended September 30, 2003. Service charges and fees increased $305,000 to $2,399,000, primarily due to higher fees for financial services related to checking account
products along with the growth of the Rock Hill banking center that was opened in the third quarter of 2003. Loan servicing fee income increased $277,000 to $65,000 for the year ended December 31, 2004 from $(212,000) for the year ended September
30, 2003. The increase in loan servicing fees was due to the amortization of servicing expense with all costs being fully amortized in the previous year.



Mortgage banking fees from the gain on sale of loans for the year ended December 31, 2004 was $95,000 compared to $40,000 for the year ended September 30, 2003 as the
Corporation sold $10,215,000 in fixed rate mortgage loans during the year as part of its interest rate risk strategies. The sales represent loans funded and sold through a third party on a servicing released basis. Gain on sale of investments was
$24,000 for the year ended December 31, 2004 compared to $611,000 for the year ended September 30, 2003. The gain on sale of investments for the previous year was the result of the sale of investments with higher interest rate sensitivity, which
helped to improve the interest rate risk exposure for the Corporation.



Non-Interest Expense



Non-interest
expense increased 7.39% to $8,162,000 for the year ended December 31, 2004 from $7,600,000 for the year ended September 30, 2003. On June 16, 2003, the Corporation opened its York County regional banking center and, therefore, expense categories for
2004 reflect additions for the new banking center. Compensation and employee benefits increased 9.20%, or $317,000, from the year ended September 30, 2003 compared to the year ended December 31, 2004 due primarily to the staff additions for the new
branch. Occupancy and equipment expenses increased 6.17%, or $118,000, to $2,032,000 for the year ended December 31, 2004 from $1,914,000 for the year ended September 30, 2003 due to higher rent expense for the new branch. Professional services
expense decreased 18.57%, or $70,000, from the year ended September 30, 2003 to the year ended December 31, 2004 due to lower legal expense as a result of the previous year costs including expenses for the Corporations conversion to a national
bank charter. Advertising and public relations expense decreased 23.11%, or $49,000, from the year ended September 30, 2003 to the year ended December 31, 2004 due to the previous year promotional costs incurred related to the new banking center
opening. Real estate operations costs increased $77,000, or 132.76%, to $135,000 for the twelve months ended December 31, 2004 from $58,000 for the twelve months ended September 30, 2003, due to higher disposition costs associated with foreclosed
real estate properties. Items processing expense increased $28,000, or 12.56%, to $251,000 for the twelve months ended December 31, 2004 from $223,000 for the twelve months ended September 30, 2003, due to an increase in demand accounts. Telephone
expense increased $26,000, or 21.31%, to $148,000 for the twelve months ended December 31, 2004 from $122,000 for the year ending September 30, 2003 due primarily to the new branch opening. Other operating expense increased 20.38%, or $118,000, for
the year ended December 31, 2004 compared to the year ended September 30, 2004 due primarily to higher general expenses that resulted from the new branch opening in York County.



Income Tax Expense



The effective income tax rate for the Corporation was 25.06% for the twelve month period ended December 31, 2004 compared to 23.50% for the
year ended September 30, 2003. The increase was due to the higher level of taxable versus to non-taxable income for the year ended December 31, 2004 compared to the year ended September 30, 2003.



9



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Comparison of Three Months Ended December 31, 2003 and December 31, 2002



General



In conjunction with the change from a thrift to a commercial banking charter that was granted
on July 27, 2003, the Board of Directors of Union Financial Bancshares, Inc. on October 21, 2003, changed the fiscal year end of the Corporation from September 30 to December 31, effective December 31, 2003. Accordingly, the consolidated condensed
financial statements are presented for the transition period from October 1, 2003 to December 31, 2003.



During the three months ended December 31, 2003, the Corporation initiated a balance sheet restructuring that was designed to increase the net interest margin and enhance future earnings. The restructuring included
the sale of $31.3 million in low yielding mortgage backed securities that resulted in a pretax loss of $700,000 and the prepayment of a $5 million, 6.25% Federal Home Loan advance with two years remaining that carried a $381,000 penalty. The purpose
of the restructuring was to lessen exposure to interest rate risk. Primarily as a result of the Banks balance sheet restructuring, the Corporation recorded a net loss of $1,210,000 for the three months ended December 31, 2003.



Interest Income



Interest income decreased $540,000, or 12.48%, for the three months ended December 31, 2003
as compared to the same period in 2002. Interest income on loans decreased by 16.33%, or $475,000, due primarily to declining market interest rates along with a smaller average balance of loans. Interest and dividends on investment and
mortgage-backed securities decreased $80,000, or 5.66%, due primarily to the balance sheet restructuring during the period where approximately $31 million in mortgage-backed securities with a weighted average yield of 2.28% were sold at a pretax
loss of $700,000 and reinvested in mortgage-backed and agency securities with a weighted average yield of approximately 4%.



Interest Expense



Interest expense increased $22,000, or 0.96%, for the three months ended December 31, 2003 as compared to the three months ended December 31, 2002. As part of the balance
sheet restructuring that occurred during the three months ended December 31, 2003, the Corporation prepaid a Federal Home Loan Bank advance that carried a $381,000 penalty. Interest expense on deposit accounts decreased $198,000, or 16.11%, to
$1,031,000 for the three months ended December 31, 2003 as the Corporation continued to move toward lower cost demand deposit accounts from traditional thrift higher cost certificate of deposits. Interest expense on borrowings increased $233,000, or
24.76%, due primarily to the prepayment penalty of $381,000 partially offset by lowering borrowing costs.



Provision for Loan Loss



During the three months ended December 31, 2003, the provision for loan losses was $725,000 as compared to $180,000 for the same period in the previous year due to higher
non-accrual loans, an increase in classified assets and 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. Management believes the Corporations loan loss allowance is adequate to absorb probable loan losses inherent in the portfolio. The
Corporations loan loss allowance at December 31, 2003 was approximately 1.51% of the Corporations outstanding loan portfolio and 80.85% of non-performing loans compared to .93% of the Corporations outstanding loan portfolio and
68.32% of non-performing loans at December 31, 2002.



Non-Interest Income



Total non-interest income decreased
$859,000, or 195.23%, to ($419,000) for the three months ended December 31, 2003 compared to $440,000 for the three months ended December 31, 2002 due primarily to a loss on the sale of securities of $700,000. Fees from financial services decreased
$24,000, or 5.37%, due primarily to a reduction in service charge income for the quarter. Loan servicing costs increased $75,000, or 111.94%, for the three months ended December 31, 2003 due to higher loan prepayment speeds. In addition, the
Corporation expensed the remaining servicing rights during the period as part of its transition from a traditional thrift to a commercial bank. The loss on sale of investments of $700,000 for the three months ended December 31, 2003 was part of the
balance sheet restructuring that occurred during the period.



10



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Non-Interest Expense



For the three months ended December 31, 2003, total non-interest expense increased $495,000,
or 29.20% compared to the same period of the prior year. On June 16, 2003, the Corporation opened the new York County regional banking center and therefore, expense categories reflect additions for the new banking center. Compensation and employee
benefits increased $232,000, or 30.97%, for the three month period due primarily to staff additions resulting from the new branch opening. Occupancy and equipment expense increased $110,000, or 27.03%, for the three months ended December 31, 2003
due to higher depreciation and rent expense due to the new office. Professional services expense decreased $20,000, or 17.86%, due to lower legal expenses as a result of previous year costs incurred from the Banks charter change to a national
bank charter. Advertising expense increased $36,000, or 85.71%, for the three months ended December 31, 2003 due to ongoing promotional cost incurred related to the new banking center opening. Real estate operations costs increased $48,000, or
228.57%, for the three months ended December 31, 2003 due to higher disposition costs associated with foreclosed real estate properties. Other expense increased $92,000, or 46.94%, for the three months ended December 31, 2003 due primarily to higher
telephone, office supplies, and postage expense that resulted from the new office opening in York County.



Comparison of Years Ended September 30, 2003 and September 30, 2002



General



Net income increased $115,000 from $1,744,000 in fiscal 2002 to $1,859,000 in fiscal 2003. Earnings per share were $.95 per share (basic) and $.90 per share (diluted) for
the year ended September 30, 2003 compared to $.90 per share (basic) and $.86 per share (diluted) for the same period in 2002. The increase in net income was due to higher non interest income as a result of higher fees from financial services and
higher gain on sale of investments.



Interest Income



Total interest income decreased $1,437,000,
or 7.83%, from $18,361,000 in fiscal 2002 to $16,924,000 in fiscal 2003. Interest income on loans decreased $1,605,000, or 12.82%, from $12,519,000 in fiscal 2002 to $10,914,000 in fiscal 2003 due primarily to the reduction of loan rates as a result
of the declining interest rate environment that was experienced during the prior two fiscal years along with lower net loan growth. The Corporations continued focus on variable and primed-based lending resulted in net growth in
consumer/commercial loans of 37.38% while net residential mortgage loans declined 30.80%. Interest income on investment and mortgage-backed securities increased $168,000, or 2.88%, from $5,842,000 in fiscal 2002 to $6,010,000 in fiscal 2003. The
increase was due primarily to purchases of investment and mortgage-backed securities made during the current fiscal year, offset by lower rates due to a lower market interest rate environment.



Interest Expense



Interest expense decreased 10.98% to $8,702,000 for fiscal 2003 from $9,775,000 for fiscal
2002. Interest expense decreased $1,341,000 for deposits and increased $268,000 for other borrowings and trust preferred corporate obligations. Interest expense for deposits decreased due primarily to lower deposit rates from a declining interest
rate environment. In addition, the Corporation increased lower-cost transaction account balances by 9.6% while traditional higher-cost certificate of deposit account balances increased 10.4%. The growth in deposits was primarily due to a new branch
opening in Rock Hill, South Carolina. Interest expense on other borrowings increased due to a higher level of borrowings that were utilized to fund growth, offset by lower interest rates during the fiscal year.



Provision for Loan Loss



The provision for loan losses decreased from $990,000 in fiscal 2002 to $725,000 in fiscal
2003, which reflected in part the net decrease in the loan portfolio of $8,655,000, or 5.36%, from September 30, 2002 to September 30, 2003 and a reduction in net charge-offs. The allowance for loan losses, net, increased $471,000 to $1,842,000 at
September 30, 2003 compared to $1,371,000 at September 30, 2002. Non-performing loans increased $1,188,000 from $1,866,000 at September 30, 2002 to $3,054,000 at September 30, 2003. The net increase for fiscal 2003 included one loan of $1,087,000
that is well secured by commercial real estate and improvements. At September 30, 2003 and 2002, impaired loans totaled $718,246 and $809,293 respectively. See Note 3 of consolidated financial statements for an analysis of loans.



The Corporation experienced bad debt charge-offs, net of recoveries, of approximately
$254,000 in fiscal 2003 compared to $699,000 for fiscal 2002. The bad debt charge-offs from the previous year included approximately $500,000 from one commercial loan that was written down to the fair market value as a result of a reassessment of
underlying collateral. The allowance for loan losses to total loans at the end of fiscal 2003 was 1.19% compared to 0.83% at the end of fiscal 2002. The allowance for loan losses to non-performing loans at the end of fiscal 2003 was 60.32% compared
to 73.47% at the end of fiscal 2002.



11



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Non-Interest Income



Non-interest income increased 50.50% to $2,533,000 for the year ended September 30, 2003
from $1,683,000 for the year ended September 30, 2002. Service charges and fees increased $207,000 to $2,094,000, primarily due to the development of new fee income programs. Loan servicing fee costs increased $45,000 to $(212,000) for the year
ended September 30, 2003 from $(167,000) for the year ended September 30, 2002. Higher loan prepayments during fiscal years 2002 and 2003 resulted in servicing rights amortization expense exceeding service fee income. Loan servicing amortization
expense decreased $36,000 to $314,000 for the year ended September 30, 2003 from $350,000 for the year ended September 30, 2002 while loan servicing income decreased $81,000 to $102,000 for the year ended September 30, 2003 from $183,000 for the
year ended September 30, 2002. The amortization expense of mortgage servicing rights was higher than related servicing income due to the relatively small amount of loans serviced during the period and due to higher loan prepayments as a result of
the low interest rate environment. The higher prepayments were reflected in the increased amortization of mortgage servicing rights. The Corporation did not record any servicing rights impairment expense during fiscal years 2003 or 2002. Gain (loss)
on sale of investments increased $688,000 to $651,000 during the year ended September 30, 2003 from $(37,000) for the year ended September 30, 2002. The gain on sale of investments for the year was the result of the sale of investments with higher
interest rate sensitivity, which was expected to improve interest rate exposure for the Corporation.



Non-Interest Expense



Non-interest expense increased 8.93% to $7,600,000 in fiscal 2003 from $6,977,000 in fiscal 2002. The increase in non-interest expense reflected the startup costs for a
new branch opening in Rock Hill, South Carolina during the third quarter of fiscal 2003. Compensation and employee benefits increased 13.78% or $417,000 from fiscal 2002 to fiscal 2003 due primarily to the staff additions as a result of the new
branch opening. Occupancy and equipment expenses increased 13.39%, or $226,000, from fiscal 2002 to fiscal 2003 due to higher depreciation and equipment expense as a result of the new branch opening. Professional services expense increased 8.33%, or
$29,000, from fiscal 2002 to fiscal 2003 due to higher audit and legal expenses. Advertising and public relations expense increased 61.83%, or $81,000, from fiscal 2002 to fiscal 2003 due to higher expenses required for the new branch opening. Other
operating expense decreased 10.09%, or $65,000, from fiscal 2002 to fiscal 2003 due to reductions in general operating expenses.



Income Tax Expense



The overall effective income tax rate for the Corporation was 23.50% for the twelve month period ended September 30, 2003 compared to 24.24% for the same period in 2002.
The reduction was due to increased investments in government municipal securities totaling $21,780,000 at September 30, 2003 compared to $14,597,000 at September 30, 2002.



Financial Condition, Liquidity and Capital Resources



Financial Condition



Assets



At December 31, 2004, the Corporations assets totaled $351,598,000, an increase of $19,714,000, or 5.94%, as compared to $331,884,000 at December 31, 2003. Short
term interest earning deposits decreased $15,576,000 to $11,611,000 from $27,187,000 at December 31, 2003. The reduction in short term interest earning deposits was utilized to fund growth in investment securities and loans. Investment and
mortgage-backed securities increased $19,705,000 to $143,494,000 from $123,789,000 at December 31, 2003. All securities being purchased have adjustable features and will, therefore, have increasing interest rates in a rising market.



Total loans, net, increased $16,593,000, or 10.74%, to $171,094,000 from $154,501,000 at
December 31, 2003. The net change in the loan portfolio balance includes a reduction in residential mortgage loans that reflects the Corporations movement toward higher yielding consumer and commercial loans that are intended to provide
improvements in interest rate risk exposure. Consumer and commercial loans outstanding during this period increased $18,764,000, or 20.55%, while outstanding residential mortgage loans decreased $2,422,000 or 3.76%.



Liabilities



Total liabilities increased $19,202,000, or 6.27%, to $325,579,000 at December 31, 2004 from
$306,377,000 at December 31, 2003.



Total deposits increased $4,458,000, or
2.00%, from $223,131,000 at December 31, 2003 to $227,589,000 at December 31, 2004. The growth was primarily a result of a new branch opening in Rock Hill, South Carolina in the third quarter of fiscal 2003. Borrowings from the Federal



12



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Home Loan Bank (FHLB) decreased $5,000,000, or 7.30%, to $63,500,000 at December 31, 2004 from $68,500,000 at December 31, 2003. Securities sold under
agreements to repurchase were $24,000,000 at December 31, 2004 compared to $5,000,000 at December 31, 2003. During this period, securities sold under agreement to repurchase provided a lower cost funding alternative to Federal Home Loan Bank
advances. The increase in repurchase agreements funded the additional loan growth and security purchases for the year. Other liabilities increased $468,000, or 33.38%, to $1,870,000 at December 31, 2004 from $1,402,000 at December 31, 2003 due
primarily to an increase in accrued liabilities.



Shareholders Equity



Shareholders equity increased
$512,000, or 2.01%, to $26,019,000 at December 31, 2004 from $25,507,000 at December 31, 2003 due to net income of $2,156,000 and a $10,000 increase in unrealized gains on securities available for sale reduced by the payment of $0.40 per share
dividends and the cost to repurchase shares. During fiscal year 2003, the Corporation implemented a share repurchase program under which the Corporation may repurchase up to 5% of outstanding shares. The program was expanded by an additional 5% in
fiscal 2004. The shares will 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, enhance, in the long term, the market price per share of the
Corporations common stock and increase the liquidity of the Corporations common stock. During fiscal 2004, the Corporation repurchased a total of 62,699 shares at a weighted average cost of $17.13 per share for a total of $1,074,000
compared to a repurchased total of 20,286 shares at a weighted average cost of $18.04 per share for a total of $366,073 for fiscal 2003.



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 savings
deposits, loan sales and 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 year ended December 31, 2004, the Corporations loan originations totaled $73,521,000.
At December 31, 2004, the Corporations investment in investment and mortgage-backed securities totaled $143,494,000.



During the year ended December 31, 2004, total deposits increased $4,458,000. Deposit flows are affected by the overall level of interest rates, the interest rates and
products offered by the Corporation and its local competitors and other factors. The Corporation closely monitors its liquidity position on a daily basis. Certificates of deposit, which are scheduled to mature in one year or less from December 31,
2004, totaled $92,334,000. 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 competitive special products to
its customers to increase retention and to attract new deposits. Based upon the Corporations experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and
conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances and
securities sold under agreements to repurchase. At December 31, 2004, the Corporation had $63,500,000 of FHLB borrowings and $24,000,000 of securities sold under agreements to repurchase. At December 31, 2004, the Corporation had unused short-term
lines of credit to purchase federal funds from unrelated banks totaling $21,000,000. These lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have reserved the right to withdraw these
lines at their option.



See Note 14 to the consolidated financial statements
for further information about commitments and contingencies.



Capital
Resources



At December 31, 2004, the Bank exceeded the Comptroller of
the Currencys (the OCC) and the Federal Reserve Banks (the FRB) capital requirements. See Note 16 to the consolidated financial statements for further discussion of these capital requirements.



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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
$40,604,000 at December 31, 2004. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. Each customers credit worthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on the credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and
residential real estate. The credit risk on these commitments is managed by subjecting each customer to normal underwriting and risk management processes.



At December 31, 2004, the undisbursed portion of construction loans was $2,363,000 and the unused portion of credit lines was $33,479,000. Funding for these commitments
is expected to be provided from deposits, loan and mortgage-backed securities principal repayments, maturing investments and income generated from operations.



For the year ended December 31, 2004, the Corporation did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial
condition, results of operation and cash flows.



Impact of Inflation and Changing Prices



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



14



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders and Board of Directors

Union Financial Bancshares, Inc. and Subsidiaries

Union, South Carolina



We have audited the accompanying consolidated balance sheets of Union Financial Bancshares, Inc. and Subsidiaries (the Company)
as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders equity and comprehensive income, and cash flows for the year ended December 31, 2004, the three months ended December 31, 2003 and the years
ended September 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union
Financial Bancshares, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the results of their operations and their cash flows for the year ended December 31, 2004, the three months ended December 31, 2003 and the years ended
September 30, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.



/s/ Elliott Davis, LLC



Greenville, South Carolina

January 28, 2005



15



---

Union Financial Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                       |  | As of December 31, |        
|                                                                                                                                                                       |  | 2004               |         |   | 2003 |  
|                                                                                                                                                                       |  | (In Thousands)     |        
|Assets                                                                                                                                                                 |  |                    |         |   |      |   |         |  
|Cash                                                                                                                                                                   |  | $                  | 1,586   |   |      | $ | 1,515   |  
|Short term interest-earning deposits                                                                                                                                   |  |                    | 11,611  |   |      |   | 27,187  |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total cash and cash equivalents                                                                                                                                        |  |                    | 13,197  |   |      |   | 28,702  |  
|Investment and mortgage-backed securities                                                                                                                              |  |                    |         |   |      |   |         |  
|Held to maturity ($1,688,000 fair value)                                                                                                                               |  |                    | 1,630   |   |      |   |        |  
|Available for sale (at fair value)                                                                                                                                     |  |                    | 141,864 |   |      |   | 123,789 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total investment and mortgage-backed securities                                                                                                                        |  |                    | 143,494 |   |      |   | 123,789 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Loans, net                                                                                                                                                             |  |                    | 171,094 |   |      |   | 154,501 |  
|Federal Home Loan Bank Stock, at cost                                                                                                                                  |  |                    | 3,522   |   |      |   | 3,900   |  
|Federal Reserve Stock, at cost                                                                                                                                         |  |                    | 539     |   |      |   | 539     |  
|Office properties and equipment, net                                                                                                                                   |  |                    | 5,635   |   |      |   | 6,415   |  
|Accrued interest receivable                                                                                                                                            |  |                    | 2,068   |   |      |   | 1,655   |  
|Intangible assets                                                                                                                                                      |  |                    | 4,212   |   |      |   | 4,848   |  
|Cash surrender value of life insurance                                                                                                                                 |  |                    | 5,206   |   |      |   | 5,025   |  
|Other assets                                                                                                                                                           |  |                    | 2,631   |   |      |   | 2,510   |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total assets                                                                                                                                                           |  | $                  | 351,598 |   |      | $ | 331,884 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Liabilities                                                                                                                                                            |  |                    |         |   |      |   |         |  
|Deposits                                                                                                                                                               |  | $                  | 227,589 |   |      | $ | 223,131 |  
|Advances from the Federal Home Loan Bank and other borrowings                                                                                                          |  |                    | 63,500  |   |      |   | 68,500  |  
|Securities sold under agreements to repurchase                                                                                                                         |  |                    | 24,000  |   |      |   | 5,000   |  
|Floating rate junior subordinated deferrable interest debentures                                                                                                       |  |                    | 8,247   |   |      |   | 8,000   |  
|Accrued interest payable                                                                                                                                               |  |                    | 333     |   |      |   | 285     |  
|Other liabilities                                                                                                                                                      |  |                    | 1,910   |   |      |   | 1,461   |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total liabilities                                                                                                                                                      |  |                    | 325,579 |   |      |   | 306,377 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Commitments and contingencies - note 14                                                                                                                                |  |                    |         |   |      |   |         |  
|                                                                                                                                                                       |  |                   
|Shareholders equity                                                                                                                                                   |  |                    |         |   |      |   |         |  
|Serial preferred stock, no par value, authorized - 500,000 shares, issued and outstanding - None                                                                       |  |                    |         |   |      |   |         |  
|Common stock - $0.01 par value, authorized - 2,500,000 shares issued and outstanding - 1,957,989 shares at December 31, 2004 and 1,969,770
shares at December 31, 2003 |  |                    | 20      |   |      |   | 20      |  
|Additional paid-in capital                                                                                                                                             |  |                    | 12,109  |   |      |   | 11,906  |  
|Accumulated other comprehensive income                                                                                                                                 |  |                    | 109     |   |      |   | 99      |  
|Retained earnings, substantially restricted                                                                                                                            |  |                    | 15,221  |   |      |   | 13,848  |  
|Treasury stock, at cost                                                                                                                                                |  |                    | (1,440  | ) |      |   | (366    | )
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                             |  |                    | 26,019  |   |      |   | 25,507  |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                             |  | $                  | 351,598 |   |      | $ | 331,884 |  
|                                                                                                                                                                       |  |                    |         |   |      |   |         |  



See notes to consolidated financial
statements.



16



---

Union Financial Bancshares, Inc. And Subsidiaries

Consolidated Statements of Income



|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|---------------------------------------------------------------- |  | --------------------------------- | --------- | ---------------------------------- | -- | --------- | ------------------------- |  | - | --------- | - |  | - | --------- | -
|                                                                 |  | Year EndedDecember 31, 2004       |           | Three MonthsEndedDecember 31, 2003 |    |           | Years Ended September 30, | 
|                                                                 |  |                                   |           | 2003                               |    |           | 2002                      | 
|                                                                 |  | (In Thousands, Except Share Data) |          
|Interest Income:                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Loans                                                            |  | $                                 | 10,399    |                                    | $  | 2,433     |                           |  | $ | 10,914    |   |  | $ | 12,519    |  
|Deposits and federal funds sold                                  |  |                                   | 40        |                                    |    | 21        |                           |  |   | 23        |   |  |   | 85        |  
|Securities available for sale:                                   |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|State and municipal (non taxable)                                |  |                                   | 930       |                                    |    | 251       |                           |  |   | 881       |   |  |   | 731       |  
|Other investments (taxable)                                      |  |                                   | 5,400     |                                    |    | 1,052     |                           |  |   | 4,952     |   |  |   | 4,868     |  
|Securities held to maturity and FHLB/FRB stock dividends         |  |                                   | 183       |                                    |    | 30        |                           |  |   | 154       |   |  |   | 158       |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Total interest income                                            |  |                                   | 16,952    |                                    |    | 3,787     |                           |  |   | 16,924    |   |  |   | 18,361    |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Interest Expense:                                                |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Deposit accounts                                                 |  |                                   | 3,903     |                                    |    | 1,031     |                           |  |   | 4,660     |   |  |   | 6,001     |  
|Floating rate junior subordinated deferrable interest debentures |  |                                   | 426       |                                    |    | 100       |                           |  |   | 415       |   |  |   | 365       |  
|Advances from the FHLB and other                                 |  |                                   | 2,917     |                                    |    | 1,174     |                           |  |   | 3,627     |   |  |   | 3,409     |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Total interest expense                                           |  |                                   | 7,246     |                                    |    | 2,305     |                           |  |   | 8,702     |   |  |   | 9,775     |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Net-Interest Income                                              |  |                                   | 9,706     |                                    |    | 1,482     |                           |  |   | 8,222     |   |  |   | 8,586     |  
|Provision for loan losses                                        |  |                                   | 1,250     |                                    |    | 725       |                           |  |   | 725       |   |  |   | 990       |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses              |  |                                   | 8,456     |                                    |    | 757       |                           |  |   | 7,497     |   |  |   | 7,596     |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Non-Interest Income:                                             |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Fees for financial services                                      |  |                                   | 2,399     |                                    |    | 559       |                           |  |   | 2,094     |   |  |   | 1,887     |  
|Loan servicing fees, (costs) net of servicing amortization       |  |                                   | 65        |                                    |    | (142      | )                         |  |   | (212      | ) |  |   | (167      | )
|Net gain (loss) on sale of investment transactions               |  |                                   | 24        |                                    |    | (695      | )                         |  |   | 611       |   |  |   | (37       | )
|Net gain (loss) on sale of loans                                 |  |                                   | 95        |                                    |    | (5        | )                         |  |   | 40        |   |  |   |          |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Total non-interest income                                        |  |                                   | 2,583     |                                    |    | (283      | )                         |  |   | 2,533     |   |  |   | 1,683     |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Non-Interest Expense:                                            |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Compensation and employee benefits                               |  |                                   | 3,761     |                                    |    | 1,014     |                           |  |   | 3,444     |   |  |   | 3,027     |  
|Occupancy and equipment                                          |  |                                   | 2,032     |                                    |    | 550       |                           |  |   | 1,914     |   |  |   | 1,688     |  
|Deposit insurance premiums                                       |  |                                   | 32        |                                    |    | 6         |                           |  |   | 35        |   |  |   | 34        |  
|Professional services                                            |  |                                   | 307       |                                    |    | 92        |                           |  |   | 377       |   |  |   | 348       |  
|Advertising and public relations                                 |  |                                   | 163       |                                    |    | 78        |                           |  |   | 212       |   |  |   | 131       |  
|Real estate operations                                           |  |                                   | 135       |                                    |    | 69        |                           |  |   | 58        |   |  |   | 69        |  
|Telephone                                                        |  |                                   | 148       |                                    |    | 49        |                           |  |   | 122       |   |  |   | 137       |  
|Items Processing                                                 |  |                                   | 251       |                                    |    | 59        |                           |  |   | 223       |   |  |   | 240       |  
|Intangible amortization                                          |  |                                   | 636       |                                    |    | 159       |                           |  |   | 636       |   |  |   | 659       |  
|Other                                                            |  |                                   | 697       |                                    |    | 250       |                           |  |   | 579       |   |  |   | 644       |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Total non-interest expense                                       |  |                                   | 8,162     |                                    |    | 2,326     |                           |  |   | 7,600     |   |  |   | 6,977     |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Income (Loss) before income taxes                                |  |                                   | 2,877     |                                    |    | (1,852    | )                         |  |   | 2,430     |   |  |   | 2,302     |  
|Provision (benefit) for income taxes                             |  |                                   | 721       |                                    |    | (642      | )                         |  |   | 571       |   |  |   | 558       |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Net Income (Loss)                                                |  | $                                 | 2,156     |                                    | ($ | 1,210     | )                         |  | $ | 1,859     |   |  | $ | 1,744     |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Net Income (Loss) per common share (Basic)                       |  | $                                 | 1.10      |                                    | ($ | 0.62      | )                         |  | $ | 0.95      |   |  | $ | 0.90      |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Net Income (Loss) per common share (Diluted)                     |  | $                                 | 1.05      |                                    | ($ | 0.62      | )                         |  | $ | 0.90      |   |  | $ | 0.86      |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Cash dividends per common share                                  |  | $                                 | 0.40      |                                    | $  | 0.10      |                           |  | $ | 0.40      |   |  | $ | 0.40      |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Weighted average number of common shares outstanding (Basic)     |  |                                   | 1,957,760 |                                    |    | 1,967,217 |                           |  |   | 1,963,775 |   |  |   | 1,939,084 |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  
|Weighted average number of common shares outstanding (Diluted)   |  |                                   | 2,044,137 |                                    |    | 1,967,217 |                           |  |   | 2,056,579 |   |  |   | 2,030,040 |  
|                                                                 |  |                                   |           |                                    |    |           |                           |  |   |           |   |  |   |           |  



See notes to consolidated financial
statements.



17



---

Union Financial Bancshares, Inc. And Subsidiaries

Consolidated Statements of Shareholders equity and Comprehensive Income



|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | --------------------------------- | - | -------------------------- | ------ | ------------------------------------------ |  | - | --------------------------------------------- |  | - | ---------------------- | - |  | -------------------------- | ------ | - |  | -- | ---- | - |  | - | ------ | -
|                                                                                       |  | Common Stock                      |   | Additional Paid-In Capital |        | Retained Earnings Substantially Restricted |  |   | Accumulated Other Comprehensive Income (Loss) |  |   | Treasury Stock At Cost |   |  | Total Shareholders Equity |       
|                                                                                       |  |                                   |   |                            |        |                                           
|                                                                                       |  | Shares                            |   |                            | Amount |                                            |  |   |                                               | 
|                                                                                       |  | (In Thousands, Except Share Data) |  
|Balance at September 30, 2001                                                          |  | 1,924,478                         |   |                            | $      | 20                                         |  | $ | 11,321                                        |  | $ | 13,217                 |   |  | ($                         | 182    | ) |  | $  |     |   |  | $ | 24,376 |  
|Net income                                                                             |  |                                  |   |                            |        |                                           |  |   |                                              |  |   | 1,744                  |   |  |                            |       |   |  |    |     |   |  |   | 1,744  |  
|Unrealized holding gains arising                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|during period                                                                          |  |                                  |   |                            |        |                                           |  |   |                                              |  |   |                       |   |  |                            | 1,621  |   |  |    |     |   |  |   | 1,621  |  
|Less reclassification adjustment for                                                   |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|losses included in net income                                                          |  |                                  |   |                            |        |                                           |  |   |                                              |  |   |                       |   |  |                            | (18    | ) |  |    |     |   |  |   | (18    | )
|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|Comprehensive income                                                                   |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   | 3,347  |  
|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|Stock option activity                                                                  |  | 23,605                            |   |                            |        |                                           |  |   | 141                                           |  |   |                       |   |  |                            |       |   |  |    |     |   |  |   | 141    |  
|Dividend reinvestment plan contributions                                               |  | 9,986                             |   |                            |        |                                           |  |   | 111                                           |  |   |                       |   |  |                            |       |   |  |    |     |   |  |   | 111    |  
|Cash dividend ($.40 per share)                                                         |  |                                  |   |                            |        |                                           |  |   |                                              |  |   | (777                   | ) |  |                            |       |   |  |    |     |   |  |   | (777   | )
|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|Balance at September 30, 2002                                                          |  | 1,958,069                         |   |                            | $      | 20                                         |  | $ | 11,573                                        |  | $ | 14,184                 |   |  | $                          | 1,421  |   |  | $  |     |   |  | $ | 27,198 |  
|Net income                                                                             |  |                                  |   |                            |        |                                           |  |   |                                              |  |   | 1,859                  |   |  |                            |       |   |  |    |     |   |  |   | 1,859  |  
|Other comprehensive income, net of tax Unrealized holding losses arising during period |  |                                  |   |                            |        |                                           |  |   |                                              |  |   |                       |   |  |                            | (2,443 | ) |  |    |     |   |  |   | (2,443 | )
|Less reclassification adjustment for gains included in net income                      |  |                                  |   |                            |        |                                           |  |   |                                              |  |   |                       |   |  |                            | 467    |   |  |    |     |   |  |   | 467    |  
|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|Comprehensive loss                                                                     |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   | (117   | )
|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|Stock option activity                                                                  |  | 19,889                            |   |                            |        |                                           |  |   | 179                                           |  |   |                       |   |  |                            |       |   |  |    |     |   |  |   | 179    |  
|Dividend reinvestment plan contributions                                               |  | 7,431                             |   |                            |        |                                           |  |   | 110                                           |  |   |                       |   |  |                            |       |   |  |    |     |   |  |   | 110    |  
|Share repurchase program                                                               |  | (20,286                           | ) |                            |        |                                           |  |   |                                              |  |   |                       |   |  |                            |       |   |  |    | (366 | ) |  |   | (366   | )
|Cash dividend ($.40 per share)                                                         |  |                                  |   |                            |        |                                           |  |   |                                              |  |   | (788                   | ) |  |                            |       |   |  |    |     |   |  |   | (788   | )
|                                                                                       |  |                                   |   |                            |        |                                            |  |   |                                               |  |   |                        |   |  |                            |        |   |  |    |      |   |  |   |        |  
|Balance at September 30, 2003                                                          |  | 1,965,103                         |   |                            | $      | 20                                         |  | $ | 11,862                                        |  | $ | 15,255                 |   |  | ($                         | 555    | ) |  | ($ | 366  | ) |  | $ | 26,216 |  



18



---

Union Financial Bancshares, Inc. And Subsidiaries

Consolidated Statements of Shareholders equity and Comprehensive Income (continued)



|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|----------------------------------------------------------------- |  | --------------------------------- | - | -------------------------- | ------ | --------------------------------- |  | - | --------------------------------- |  | - | ------------------------------- | - |  | -------------------------------------- | ----- | - |  | -- | ------ | - |  | - | ------ | -
|                                                                  |  | Common Stock                      |   | Additional Paid-In Capital |        | Earnings Substantially Restricted |  |   | Other Comprehensive Income (Loss) |  |   | Retained Treasury Stock At Cost |   |  | Accumulated Total Shareholders Equity |      
|                                                                  |  | Shares                            |   |                            | Amount |                                   |  |   |                                   | 
|                                                                  |  | (In Thousands, Except Share Data) |  
|Balance at September 30, 2003                                     |  | 1,965,103                         |   |                            | $      | 20                                |  | $ | 11,862                            |  | $ | 15,255                          |   |  | ($                                     | 555   | ) |  | ($ | 366    | ) |  | $ | 26,216 |  
|Net loss                                                          |  |                                  |   |                            |        |                                  |  |   |                                  |  |   | (1,210                          | ) |  |                                        |      |   |  |    |       |   |  |   | (1,210 | )
|Other comprehensive income, net of tax                            |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Unrealized holding gains arising                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|during period                                                     |  |                                  |   |                            |        |                                  |  |   |                                  |  |   |                                |   |  |                                        | 1,108 |   |  |    |       |   |  |   | 1,108  |  
|Less reclassification adjustment for                              |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|losses included in net income                                     |  |                                  |   |                            |        |                                  |  |   |                                  |  |   |                                |   |  |                                        | (454  | ) |  |    |       |   |  |   | (454   | )
|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Comprehensive loss                                                |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   | (556   | )
|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Stock option activity                                             |  | 3,006                             |   |                            |        |                                  |  |   | 17                                |  |   |                                |   |  |                                        |      |   |  |    |       |   |  |   | 17     |  
|Dividend reinvestment plan contributions                          |  | 1,661                             |   |                            |        |                                  |  |   | 27                                |  |   |                                |   |  |                                        |      |   |  |    |       |   |  |   | 27     |  
|Cash dividend ($.10 per share)                                    |  |                                  |   |                            |        |                                  |  |   |                                  |  |   | (197                            | ) |  |                                        |      |   |  |    |       |   |  |   | (197   | )
|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Balance at December 31, 2003                                      |  | 1,969,770                         |   |                            | $      | 20                                |  | $ | 11,906                            |  | $ | 13,848                          |   |  | $                                      | 99    |   |  | ($ | 366    | ) |  | $ | 25,507 |  
|                                                                  |  |                                   |   |                            |        |                                   | 
|Net income                                                        |  |                                  |   |                            |        |                                  |  |   |                                  |  |   | 2,156                           |   |  |                                        |      |   |  |    |       |   |  |   | 2,156  |  
|Other comprehensive income, net of tax                            |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Unrealized holding losses arising during period                   |  |                                  |   |                            |        |                                  |  |   |                                  |  |   |                                |   |  |                                        | (8    | ) |  |    |       |   |  |   | (8     | )
|Less reclassification adjustment for gains included in net income |  |                                  |   |                            |        |                                  |  |   |                                  |  |   |                                |   |  |                                        | 18    |   |  |    |       |   |  |   | 18     |  
|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Comprehensive income                                              |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   | 2,166  |  
|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  
|Stock option activity,net                                         |  | 44,174                            |   |                            |        |                                  |  |   | 93                                |  |   |                                |   |  |                                        |      |   |  |    |       |   |  |   | 93     |  
|Dividend reinvestment plan contributions                          |  | 6,744                             |   |                            |        |                                  |  |   | 110                               |  |   |                                |   |  |                                        |      |   |  |    |       |   |  |   | 110    |  
|Share repurchase program                                          |  | (62,699                           | ) |                            |        |                                  |  |   |                                  |  |   |                                |   |  |                                        |      |   |  |    | (1,074 | ) |  |   | (1,074 | )
|Cash dividend ($.40 per share)                                    |  |                                  |   |                            |        |                                  |  |   |                                  |  |   | (783                            | ) |  |                                        |      |   |  |    |       |   |  |   | (783   | )
|Balance at December 31, 2004                                      |  | 1,957,989                         |   |                            | $      | 20                                |  | $ | 12,109                            |  | $ | 15,221                          |   |  | $                                      | 109   |   |  | ($ | 1,440  | ) |  | $ | 26,019 |  
|                                                                  |  |                                   |   |                            |        |                                   |  |   |                                   |  |   |                                 |   |  |                                        |       |   |  |    |        |   |  |   |        |  



See notes to consolidated financial
statements.



19



---

Union Financial Bancshares, Inc. And Subsidiaries

Consolidated Statements of Cash Flows



|                                                   |  |                            |       |      |                                      |   |          |                           |  |   |        |   |  |   |       |  
|-------------------------------------------------- |  | -------------------------- | ----- | ---- | ------------------------------------ | - | -------- | ------------------------- |  | - | ------ | - |  | - | ----- | -
|                                                   |  | Year EndedDecember 31,2004 |       |      | Three Months Ended December 31, 2003 |   |          | Years Ended September 30, | 
|                                                   |  |                            |       | 2003 |                                      |   | 2002     |                          
|Operating activities:                              |  |                            |       |      |                                      |   |          |                           |  |   |        |   |  |   |       |  
|Net income(loss)                                   |  | $                          | 2,156 |      |                                      |   | ($1,210) |                           |  | $ | 1,859  |   |  | $ | 1,744 |  
|Adjustments to reconcile net income(loss) to       |  |                            |       |      |                                      |   |          |                           |  |   |        |   |  |   |       |  
|net cash provided by operating activities:         |  |                            |       |      |                                      |   |          |                           |  |   |        |   |  |   |       |  
|Provision for loan losses                          |  |                            | 1,250 |      |                                      |   | 725      |                           |  |   | 725    |   |  |   | 990   |  
|Amortization expense                               |  |                            | 636   |      |                                      |   | 159      |                           |  |   | 1,176  |   |  |   | 1,008 |  
|Depreciation expense                               |  |                            | 979   |      |                                      |   | 264      |                           |  |   | 1,048  |   |  |   | 895   |  
|Recognition of deferred income, net of costs       |  |                            | (345  | )    |                                      |   | (37      | )                         |  |   | (137   | ) |  |   | (115  | )
|Deferral of fee income, net of costs               |  |                            | 348   |      |                                      |   | 22       |                           |  |   | 152    |   |  |   | 195   |  
|(Gain) loss on investment transactions             |  |                            | (119  | )    |                                      |   | 700      |                           |  |   | (652   | ) |  |   | 37    |  
|(Increase) decrease in accrued interest receivable |  |                            | (413  | )    |                                      |   | 272      |                           |  |   | (199   | ) |  |   | 99    |  
|(Increase) decrease in other assets                |  |                            | (55   | )    |                                      |   | 1,267    |                           |  |   | (2,496 | ) |  |   | (91   | )
|(Decrease) increase in accrued interest payable    |  |                            | 48    |      |                                      |   | (79      | )                         |  |   | (63    | ) |  |   | 23    |  
|(Decrease) increase in other liabilities           |  |                            | 449   |      |                                      |   | (1,251   | )                         |  |   | 453    |   |  |   | (846  | )
|                                                   |  |                            |       |      |                                      |   |          |                           |  |   |        |   |  |   |       |  
|Net cash provided by operating activities          |  | $                          | 4,934 |      |                                      | $ | 832      |                           |  | $ | 1,866  |   |  | $ | 3,939 |  
|                                                   |  |                            |       |      |                                      |   |          |                           |  |   |        |   |  |   |       |  



20



---

Union Financial Bancshares, Inc. And Subsidiaries

Consolidated Statements of Cash Flows (continued)



|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ---------------------------- | -------- | ------------- | ----------------------------- | - | ------- | ----- |  | - | -------- | - |  | - | ------- | -
|                                                                                           |  | Year Ended December 31, 2004 |          |               | ThreeMonths December 31, 2003 |   |         | Ended | 
|                                                                                           |  |                              |          | September 30, |                              
|                                                                                           |  |                              |          | 2003          |                               |   | 2002    |      
|Investing activities:                                                                      |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Purchase of investment and mortgage-backed securities:                                     |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Held to maturity                                                                           |  | ($                           | 1,630    | )             |                               | $ |        |       |  | $ |         |   |  | $ |        |  
|Available for sale                                                                         |  |                              | (109,482 | )             |                               |   | (5,654  | )     |  |   | (165,521 | ) |  |   | (89,841 | )
|Proceeds from maturity of investment and mortgage-backed securities:                       |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Available for sale                                                                         |  |                              | 70,594   |               |                               |   | 91      |       |  |   | 47,071   |   |  |   | 6,304   |  
|Proceeds from sale of investment and mortgage-backed securities:                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Held to maturity                                                                           |  |                              |         |               |                               |   |        |       |  |   |         |   |  |   | 18,000  |  
|Available for sale                                                                         |  |                              | 4,702    |               |                               |   | 30,187  |       |  |   | 33,672   |   |  |   | 21,806  |  
|Principal repayments on mortgage-backed securities:                                        |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Held to maturity                                                                           |  |                              |         |               |                               |   |        |       |  |   |         |   |  |   | 605     |  
|Available for sale                                                                         |  |                              | 16,240   |               |                               |   | 9,025   |       |  |   | 42,997   |   |  |   | 14,610  |  
|Net (increase) decrease in loans                                                           |  |                              | (17,846  | )             |                               |   | (1,726  | )     |  |   | 8,566    |   |  |   | (3,513  | )
|(Purchase) Redemption of FHLB/FRB stock                                                    |  |                              | 378      |               |                               |   |        |       |  |   | (1,539   | ) |  |   | (275    | )
|Purchase of office properties and equipment                                                |  |                              | (199     | )             |                               |   | (316    | )     |  |   | (890     | ) |  |   | (204    | )
|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Net cash provided by (used in) investing activities                                        |  |                              | (37,243  | )             |                               |   | 31,607  |       |  |   | (35,644  | ) |  |   | (32,508 | )
|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Financing activities:                                                                      |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Proceeds from the exercise of stock options                                                |  |                              | 93       |               |                               |   | 17      |       |  |   | 179      |   |  |   | 141     |  
|Proceeds from dividend reinvestment plan                                                   |  |                              | 110      |               |                               |   | 27      |       |  |   | 110      |   |  |   | 111     |  
|Dividends paid in cash                                                                     |  |                              | (783     | )             |                               |   | (197    | )     |  |   | (788     | ) |  |   | (777    | )
|Proceeds (repayment) of term borrowings, net                                               |  |                              | 14,000   |               |                               |   | (11,500 | )     |  |   | 11,000   |   |  |   | 16,993  |  
|Proceeds from issuance of floating rate junior subordinated deferrable interest debentures |  |                              |         |               |                               |   |        |       |  |   |         |   |  |   | 8,000   |  
|Share repurchase program                                                                   |  |                              | (1,074   | )             |                               |   |        |       |  |   | (366     | ) |  |   |        |  
|Increase in deposit accounts                                                               |  |                              | 4,458    |               |                               |   | 2,899   |       |  |   | 19,929   |   |  |   | 6,224   |  
|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Net cash provided by (used in) financing activities                                        |  |                              | 16,804   |               |                               |   | (8,754  | )     |  |   | 30,064   |   |  |   | 30,692  |  
|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                       |  |                              | (15,505  | )             |                               |   | 23,685  |       |  |   | (3,714   | ) |  |   | 2,123   |  
|Cash and cash equivalents at beginning of year                                             |  |                              | 28,702   |               |                               |   | 5,017   |       |  |   | 8,731    |   |  |   | 6,608   |  
|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  
|Cash and cash equivalents at end of year                                                   |  | $                            | 13,197   |               |                               | $ | 28,702  |       |  | $ | 5,017    |   |  | $ | 8,731   |  
|                                                                                           |  |                              |          |               |                               |   |         |       |  |   |          |   |  |   |         |  



See notes to consolidated financial
statements.



21



---

Union Financial Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Organization - Union Financial Bancshares, Inc. (Union Financial) is the bank holding company for Provident Community Bank, N.A., a national bank
(the Bank), (the Corporation). The Bank, founded in 1934, offers a complete array of financial services through seven full service banking centers in four counties in South Carolina, including checking, savings, time
deposits, individual retirement accounts (IRAs), investment services, and secured and unsecured consumer loans. The Bank originates and services home loans and provides financing for small businesses and affordable housing. Provident Financial
Services (PFS) is a wholly-owned subsidiary of the Bank that provides investment brokerage services. In conjunction with the change from a savings bank charter regulated by the Office of Thrift Supervision (OTS) to a commercial
banking charter regulated by the Comptroller of the Currency (OCC) that was granted on July 27, 2003, the Board of Directors of Union Financial Bancshares, Inc. on October 21, 2003, changed the fiscal year end of the Corporation from
September 30 to December 31, effective December 31, 2003. Accordingly, the consolidated condensed financial statements are presented for the transition period from October 1, 2003 to December 31, 2003.



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



Basis of Consolidation - The accompanying consolidated financial statements include
the accounts of Union Financial and its wholly owned subsidiaries, the Bank, and the Banks wholly owned subsidiary, PFS. All intercompany amounts and balances have been eliminated in consolidation.



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



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



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



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



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



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



22



---

|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



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



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



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



Allowances for Estimated Losses - The Corporation maintains allowances for estimated loan losses and losses on real estate acquired in settlement of loans. Loss provisions are charged to income when, in the
opinion of management, such losses for which no provision has been made are probable.



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



The allowance is
an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility
of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers ability to pay. The allowance for loan loss calculation includes a segmentation of loan categories by residential mortgage, commercial and consumer loans. Each category is rated for all loans. The
weights assigned to each performing group are developed from previous loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition, as the loan categories increase and decrease in balance, the
provision for loan loss calculation will adjust accordingly. The evaluation also includes the effects of factor reserves for expected losses on groups of loans that are related to future events or expected changes in economic conditions. While
management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Corporations allowance for loan losses, and may require the Corporation to make additions to the allowance based on their judgement about information available to them at the time of their
examinations.



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



A loan is impaired when it is probable, based on current information, the Corporation will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are
measured on an individual basis for commercial and construction loans based on the present value of expected future cash flows discounted at the loans effective interest rate or, as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Large groups of smaller balance homogenous loans are
collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual residential loans for impairment disclosures.



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



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



23



---

|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



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



At December 31 2004 and 2003, impaired loans totaled $197,000 and $448,000 respectively, and the Corporation had recognized no interest
income from impaired loans. The average balance in impaired loans was $322,000 for 2004 and $789,000 for 2003.



Office Properties and Equipment - Office properties and equipment are presented at cost less accumulated depreciation. Depreciation is provided on the
straight-line basis over the estimated useful lives of the assets. Estimated useful lives are 20-39 years for buildings and improvements and generally five to ten years for furniture, fixtures and equipment.



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



Securities
Sold Under Agreements to Repurchase - The Corporation enters into sales of securities under agreements to repurchase. Fixed-coupon reverse repurchase agreements are treated as financings, with the obligations to repurchase securities sold being
reflected as a liability and the securities underlying the agreements remaining as an asset. The securities are delivered by appropriate

entry by the
Corporations safekeeping agent to the counterparties accounts. The dealers may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the
Corporation substantially identical securities at the maturities of the agreements.



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



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



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



Income Taxes - The Corporation accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established for deferred
tax assets that may not be realized. Also, SFAS No. 109 eliminates, on a prospective basis, the exception from the requirement to record deferred taxes on tax basis bad debt reserves in excess of the base year amounts. The tax basis bad debt reserve
that arose prior to the fiscal year 1988 (the base year amount) is frozen, and the book reserves at that date and all subsequent changes in book and tax basis reserves are included in the determination of deferred taxes.



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



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



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



Loans - For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to four-family residential),
credit-card loans, and other consumer loans are based on quoted market prices.



24



---

|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real
estate and commercial loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where applicable.



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



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



Advances from the Federal Home Loan Bank 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.



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.



Per-Share Data - SFAS No. 128, Earnings Per Share, requires
the dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Diluted earnings per
share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The
dilutive effect of options outstanding under Union Financials stock option plan is reflected in diluted earnings per share by the application of the treasury stock method. Common stock equivalents included in the diluted earnings per share
calculation at December 31, 2004 were 69,747 compared to 109,965 at September 30, 2003.



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



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



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



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



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



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



25



---

|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



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



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



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



Stock-Based Compensation - The Corporation has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). The statement permits the
Corporation to continue accounting for stock-based compensation as set forth in Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, provided the Corporation discloses the pro forma effect on net income
and earnings per share of adopting the full provisions of SFAS 123. Accordingly, the Corporation continues to account for stock based compensation under APB Opinion 25 and has provided the required pro forma disclosures.



The Corporation has a stock option plan through which the Board of Directors may grant stock
options to officers and employees to purchase common stock of the Corporation at prices not less than 100 % of the fair market value on the date of grant. The outstanding options expire ten years from the date of grant. The Corporation has elected
the disclosure-only provision of SFAS No. 123, (Accounting for Stock-Based Compensation). Accordingly, no compensation cost has been charged to operations. Had compensation cost for the plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the accounting method available under SFAS No. 123, the Corporations net income and net income per common share would have been reduced to the pro forma amounts indicated below:



|                                                                                                                          |  |                             |       |      |                                   |          |      |                          |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | --------------------------------- | -------- | ---- | ------------------------ | - | ----- | - |  | - | ----- | -
|                                                                                                                          |  | Year EndedDecember 31, 2004 |       |      | Three MonthsEndedDecember 31,2003 |          |      | Years EndedSeptember 30, |  
|                                                                                                                          |  |                             |       | 2003 |                                   |          | 2002 |                         
|Net income(loss)(in thousands)                                                                                            |  |                             |       |      |                                   |          |      |                          |   |       |   |  |   |       |  
|As reported                                                                                                               |  | $                           | 2,156 |      |                                   | ($1,210) |      |                          | $ | 1,859 |   |  | $ | 1,744 |  
|Deduct: total stock based employee compensation cost determined under fair value based method, net of related tax effects |  |                             | (77   | )    |                                   | (19      | )    |                          |   | (54   | ) |  |   | (46   | )
|Pro forma net income(loss)                                                                                                |  | $                           | 2,079 |      |                                   | ($1,229) |      |                          | $ | 1,805 |   |  | $ | 1,698 |  
|                                                                                                                          |  |                             |       |      |                                   |          |      |                          |   |       |   |  |   |       |  
|Basic net income(loss)per common share                                                                                    |  |                             |       |      |                                   |          |      |                          |   |       |   |  |   |       |  
|As reported                                                                                                               |  | $                           | 1.10  |      |                                   | ($0.62)  |      |                          | $ | 0.95  |   |  | $ | 0.90  |  
|Pro forma                                                                                                                 |  | $                           | 1.06  |      |                                   | ($0.62)  |      |                          | $ | 0.92  |   |  | $ | 0.88  |  
|Diluted net income(loss)per common share                                                                                  |  |                             |       |      |                                   |          |      |                          |   |       |   |  |   |       |  
|As reported                                                                                                               |  | $                           | 1.05  |      |                                   | ($0.62)  |      |                          | $ | 0.90  |   |  | $ | 0.86  |  
|Pro forma                                                                                                                 |  | $                           | 1.02  |      |                                   | ($0.62)  |      |                          | $ | 0.87  |   |  | $ | 0.84  |  



26



---

|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for
grants:



|                                               |  |                              |   |                           |                                     |   |          |   |  |   |          |   |  |   |          |  
|---------------------------------------------- |  | ---------------------------- | - | ------------------------- | ----------------------------------- | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                               |  | Year Ended December 31, 2004 |   |                           | ThreeMonths Ended December 31, 2003 |   |          |   |  |   |          |  
|                                               |  |                              |   | Years Ended September 30, |                                    
|                                               |  |                              |   | 2003                      |                                     |   | 2002     |  
|Weighted average fair value of options granted |  | $                            |  |                           |                                     | $ | 5.26     |   |  | $ | 3.69     |   |  | $ | 2.95     |  
|Dividend yield                                 |  |                              |  | %                         |                                     |   | 2        | % |  |   | 4        | % |  |   | 3        | %
|Expected volatility                            |  |                              |  | %                         |                                     |   | 25       | % |  |   | 25       | % |  |   | 25       | %
|Risk-free interest rate                        |  |                              |  | %                         |                                     |   | 5        | % |  |   | 5        | % |  |   | 5        | %
|Expected lives                                 |  |                              |  |                           |                                     |   | 10 years |   |  |   | 10 years |   |  |   | 10 years |  



|2. | Investment And Mortgage-backed Securities
|-- | -----------------------------------------



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



|                       |  |                        |       |                 |   |           |  |   |   |  |   |      
|---------------------- |  | ---------------------- | ----- | --------------- | - | --------- |  | - | - |  | - | -----
|                       |  | As of December 31,2004
|                       |  | Amortized              |       | GrossUnrealized |   | FairValue
|                       |  | Cost                   |       | Gains           |   | Losses    | 
|Investment Securities: |  |                        |       |                 |   |           |  |   |   |  |   |      
|Municipal Securities   |  | $                      | 1,630 |                 | $ | 58        |  | $ |  |  | $ | 1,688
|                       |  |                        |       |                 |   |           |  |   |   |  |   |      
|Total held to maturity |  | $                      | 1,630 |                 | $ | 58        |  | $ |  |  | $ | 1,688
|                       |  |                        |       |                 |   |           |  |   |   |  |   |      



The Corporation had no held to
maturity securities at December 31, 2003.



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



|                                    |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|----------------------------------- |  | ---------------------- | ------- | ---------------- | - | ------ | ---------- | -- | ----- | - |  | - | -------
|                                    |  | As of December 31,2004
|                                    |  | Amortized              |         | Gross Unrealized |   |        | Fair Value
|                                    |  |                        |        
|                                    |  | Cost                   |         | Gains            |   | Losses |            |   
|Investment Securities:              |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|U.S. Agency Obligations             |  | $                      | 72,202  |                  | $ | 97     |            | ($ | 751   | ) |  | $ | 71,548 
|Municipal Securities                |  |                        | 19,471  |                  |   | 1,073  |            |    |      |   |  |   | 20,544 
|Other                               |  |                        | 10,964  |                  |   | 152    |            |    | (240  | ) |  |   | 10,876 
|                                    |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|Total Investment Securities         |  |                        | 102,637 |                  |   | 1,322  |            |    | (991  | ) |  |   | 102,968
|                                    |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|Mortgage-backed Securities:         |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|Fannie Mae                          |  |                        | 24,408  |                  |   | 117    |            |    | (313  | ) |  |   | 24,212 
|Ginnie Mae                          |  |                        | 99      |                  |   | 5      |            |    |      |   |  |   | 104    
|Freddie Mac                         |  |                        | 7,295   |                  |   | 95     |            |    | (8    | ) |  |   | 7,382  
|Collateralized Mortgage Obligations |  |                        | 7,257   |                  |   |       |            |    | (59   | ) |  |   | 7,198  
|                                    |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|Total Mortgage-backed Securities    |  |                        | 39,059  |                  |   | 217    |            |    | (380  | ) |  |   | 38,896 
|                                    |  |                        |         |                  |   |        |            |    |       |   |  |   |        
|Total available for sale            |  | $                      | 141,696 |                  | $ | 1,539  |            | ($ | 1,371 | ) |  | $ | 141,864
|                                    |  |                        |         |                  |   |        |            |    |       |   |  |   |        



27



---

|2. | Investment And Mortgage-backed Securities (continued)
|-- | -----------------------------------------------------



|                                    |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|----------------------------------- |  | ----------------------- | ------- | ---------------- | - | ------ |  | -- | ---------- | - |  | - | -------
|                                    |  | As of December 31, 2003
|                                    |  |                         |         | Gross Unrealized |   |        | 
|                                    |  | AmortizedCost           |         | Gains            |   | Losses |  |    | Fair Value
|Investment Securities:              |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|U.S. Agency Obligations             |  | $                       | 49,891  |                  | $ |       |  | ($ | 1,151      | ) |  | $ | 48,740 
|Municipal Securities                |  |                         | 19,474  |                  |   | 1,183  |  |    |           |   |  |   | 20,657 
|Other                               |  |                         | 7,726   |                  |   | 60     |  |    |           |   |  |   | 7,786  
|                                    |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|Total Investment Securities         |  |                         | 77,091  |                  |   | 1,243  |  |    | (1,151     | ) |  |   | 77,183 
|                                    |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|Mortgage-backed Securities:         |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|Fannie Mae                          |  |                         | 21,403  |                  |   |       |  |    | (44        | ) |  |   | 21,359 
|Ginnie Mae                          |  |                         | 1,343   |                  |   | 72     |  |    |           |   |  |   | 1,415  
|Freddie Mac                         |  |                         | 12,711  |                  |   | 128    |  |    |           |   |  |   | 12,839 
|Collateralized Mortgage Obligations |  |                         | 11,089  |                  |   |       |  |    | (96        | ) |  |   | 10,993 
|                                    |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|Total Mortgage-backed Securities    |  |                         | 46,546  |                  |   | 200    |  |    | (140       | ) |  |   | 46,606 
|                                    |  |                         |         |                  |   |        |  |    |            |   |  |   |        
|Total available for sale            |  | $                       | 123,637 |                  | $ | 1,443  |  | ($ | 1,291      | ) |  | $ | 123,789
|                                    |  |                         |         |                  |   |        |  |    |            |   |  |   |        



The following table shows gross
unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2004 (in thousands).



|                              |           |                     |                  |                   |           |       |                  |   |           |  |                  |       |  |   |        |  |   |      
|----------------------------- | --------- | ------------------- | ---------------- | ----------------- | --------- | ----- | ---------------- | - | --------- |  | ---------------- | ----- |  | - | ------ |  | - | -----
|Securities Available for Sale |           | Less than 12 Months |                  | 12 Months or More |           | Total
|                              | FairValue |                     | UnrealizedLosses |                   | FairValue |       | UnrealizedLosses |   | FairValue |  | UnrealizedLosses
|U.S. Agency Obligations       |           | $                   | 21,600           |                   | $         | 140   |                  | $ | 16,399    |  | $                | 611   |  | $ | 37,999 |  | $ | 751  
|Other                         |           |                     | 2,978            |                   |           | 21    |                  |   | 3,726     |  |                  | 219   |  |   | 6,704  |  |   | 240  
|Mortgage-backed Securities    |           |                     | 17,578           |                   |           | 210   |                  |   | 14,135    |  |                  | 170   |  |   | 31,713 |  |   | 380  
|                              |           |                     |                  |                   |           |       |                  |   |           |  |                  |       |  |   |        |  |   |      
|Total                         |           | $                   | 42,156           |                   | $         | 371   |                  | $ | 34,260    |  | $                | 1,000 |  | $ | 76,417 |  | $ | 1,371
|                              |           |                     |                  |                   |           |       |                  |   |           |  |                  |       |  |   |        |  |   |      



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



|                                           |  |                            |       |   |                                  |    |        |                          |  |   |        |  |    |        |  
|------------------------------------------ |  | -------------------------- | ----- | - | -------------------------------- | -- | ------ | ------------------------ |  | - | ------ |  | -- | ------ | -
|                                           |  | Year EndedDecember 31,2004 |       |   | ThreeMonthsEndedDecember 31,2003 |    |        | Years EndedSeptember 30, | 
|                                           |  |                            | 2003  |   | 2002                             |   
|Proceeds                                   |  | $                          | 4,702 |   |                                  | $  | 30,187 |                          |  | $ | 80,743 |  | $  | 46,110 |  
|                                           |  |                            |       |   |                                  |    |        |                          |  |   |        |  |    |        |  
|Gross gains                                |  | $                          | 32    |   |                                  | $  |       |                          |  | $ | 652    |  | $  |       |  
|Gross losses                               |  |                            | (8    | ) |                                  |    | (695   | )                        |  |   |       |  |    | (37    | )
|                                           |  |                            |       |   |                                  |    |        |                          |  |   |        |  |    |        |  
|Net gain (loss) on investment transactions |  | $                          | 24    |   |                                  | ($ | 695    | )                        |  | $ | 652    |  | ($ | 37     | )
|                                           |  |                            |       |   |                                  |    |        |                          |  |   |        |  |    |        |  



The maturities of
available for sale securities at December 31, 2004 are as follows (in thousands):



|                                                |  |                  |       |                    |   |               |  |           |         |  |   |        
|----------------------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------- |  | --------- | ------- |  | - | -------
|                                                |  | Held to Maturity |       | Available for Sale
|                                                |  | AmortizedCost    |       | FairValue          |   | AmortizedCost |  | FairValue
|Due in one year or less                         |  | $                |      |                    | $ |              |  | $         | 100     |  | $ | 103    
|Due after one year through five years           |  |                  |      |                    |   |              |  |           | 6,564   |  |   | 6,599  
|Due after five years through ten years          |  |                  |      |                    |   |              |  |           | 56,777  |  |   | 56,587 
|Due after ten years                             |  |                  | 1,630 |                    |   | 1,688         |  |           | 78,255  |  |   | 78,575 
|                                                |  |                  |       |                    |   |               |  |           |         |  |   |        
|Total investment and mortgage-backed securities |  | $                | 1,630 |                    | $ | 1,688         |  | $         | 141,696 |  | $ | 141,864
|                                                |  |                  |       |                    |   |               |  |           |         |  |   |        



28



---

|2. | Investment And Mortgage-backed Securities (continued)
|-- | -----------------------------------------------------



The mortgage-backed securities held at December 31, 2004 mature between one and thirty years. The actual lives of those securities may be significantly shorter as a
result of principal payments and prepayments.



At December 31, 2004 and 2003,
$62,396,000 and $63,692,000, respectively, of securities were pledged as collateral for certain deposits and borrowings.



At December 31, 2004, approximately $16,331,000 of mortgage-backed securities were adjustable rate securities. The adjustment periods range from monthly to annually and
rates are adjusted based on the movement of a variety of indices.



Investments
in collateralized mortgage obligations (CMOs) represent securities issued by agencies of the federal government. At December 31, 2004 and December 31, 2003, approximately $7,198,000 and $10,993,000 were invested in CMOs.



|3. | Loans, Net
|-- | ----------



Loans receivable consisted of the following (in thousands):



|                                                  |  |                    |         |   |      |   |         |  
|------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                                  |  | As of December 31, |        
|                                                  |  | 2004               |         |   | 2003 |  
|Mortgage loans:                                   |  |                    |         |   |      |   |         |  
|Fixed rate residential                            |  | $                  | 28,007  |   |      | $ | 35,461  |  
|Adjustable rate residential                       |  |                    | 15,549  |   |      |   | 15,234  |  
|Commercial                                        |  |                    | 43,351  |   |      |   | 40,795  |  
|Construction                                      |  |                    | 3,823   |   |      |   | 2,412   |  
|                                                  |  |                    |         |   |      |   |         |  
|Total mortgage loans                              |  |                    | 90,730  |   |      |   | 93,902  |  
|                                                  |  |                    |         |   |      |   |         |  
|Commercial loans:                                 |  |                    |         |   |      |   |         |  
|Commercial non real estate                        |  |                    | 31,168  |   |      |   | 19,949  |  
|Commercial lines of credit                        |  |                    | 23,628  |   |      |   | 19,853  |  
|                                                  |  |                    |         |   |      |   |         |  
|Total commercial loans                            |  |                    | 54,796  |   |      |   | 39,802  |  
|                                                  |  |                    |         |   |      |   |         |  
|Consumer loans:                                   |  |                    |         |   |      |   |         |  
|Home equity                                       |  |                    | 14,541  |   |      |   | 11,235  |  
|Consumer and installment                          |  |                    | 15,879  |   |      |   | 13,885  |  
|Consumer lines of credit                          |  |                    | 406     |   |      |   | 440     |  
|                                                  |  |                    |         |   |      |   |         |  
|Total consumer loans                              |  |                    | 30,826  |   |      |   | 25,560  |  
|                                                  |  |                    |         |   |      |   |         |  
|Total loans                                       |  |                    | 176,352 |   |      |   | 159,264 |  
|                                                  |  |                    |         |   |      |   |         |  
|Less:                                             |  |                    |         |   |      |   |         |  
|Undisbursed portion of interim construction loans |  |                    | (2,363  | ) |      |   | (1,105  | )
|Loan discount unamortized                         |  |                    | (993    | ) |      |   | (1,403  | )
|Allowance for loan losses                         |  |                    | (2,026  | ) |      |   | (2,383  | )
|Net deferred loan origination costs               |  |                    | 124     |   |      |   | 128     |  
|                                                  |  |                    |         |   |      |   |         |  
|Total, net                                        |  | $                  | 171,094 |   |      | $ | 154,501 |  
|                                                  |  |                    |         |   |      |   |         |  
|Weighted-average interest rate of loans           |  |                    | 6.54    | % |      |   | 5.88    | %



Under OCC regulations, the Bank may
not make loans to one borrower in excess of 15% of unimpaired capital. This limitation does not apply to loans made before August 9, 1989. At December 31, 2004, the Bank had loans outstanding to one borrower ranging up to $3,200,000.



Servicing loans for others consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees received from the investors as well as certain charges collected from the borrowers, such as
late payment fees. Loans sold and serviced by the Corporation at December 31, 2004 and 2003 were approximately $20,654,000 and $22,467,000, respectively. In connection with these loans serviced for others, the Corporation held borrowers escrow
balances of $40,000 at December 31, 2004 and $59,000 at December 31, 2003.



Adjustable rate residential real estate loans (approximately $15,549,000 and $15,234,000 at December 31, 2004 and 2003, respectively) are subject to rate adjustments annually and generally are adjusted based on movement of the Federal Home
Loan Bank National Monthly Median Cost of Funds rate or the Constant Maturity Treasury index. The maximum loan rates can be adjusted is 200 basis points in any one year with a lifetime cap of 600 basis points.



29



---

3. Loans, Net (continued)



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



Until 2002, the Bank originated both fixed rate and adjustable rate mortgage loans with terms generally ranging from 15 to 30 years and generally sold the loans while retaining servicing on loans originated. The Bank discontinued the
origination of loans held for sale in 2002. The underlying value of loans serviced were $20,654,000 and $22,467,000 at December 31, 2004 and 2003, respectively.



At December 31, 2004 and 2003, loans which are accounted for on a non-accrual basis or contractually past due ninety days or more totaled approximately $750,000 and
$2,829,000, respectively. The amount the Corporation will ultimately realize from these loans could differ materially from their carrying value because of future developments affecting the underlying collateral or the borrowers ability to
repay the loans. During the year ended December 31, 2004, the three months ended December 31, 2003 and the years ended September 30, 2003 and 2002, the Corporation recognized no interest income on loans past due 90 days or more, whereas, under the
original terms of these loans, the Corporation would have recognized additional interest income of approximately $44,800, $32,393, $160,600, and $111,500, respectively.



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



|                               |  |                            |        |      |                                  |   |       |                          |  |   |       |   |  |   |       |  
|------------------------------ |  | -------------------------- | ------ | ---- | -------------------------------- | - | ----- | ------------------------ |  | - | ----- | - |  | - | ----- | -
|                               |  | Year EndedDecember 31,2004 |        |      | ThreeMonthsEndedDecember 31,2003 |   |       | Years EndedSeptember 30, | 
|                               |  |                            |        | 2003 |                                  |   | 2002  |                         
|Balance at beginning of period |  | $                          | 2,383  |      |                                  | $ | 1,842 |                          |  | $ | 1,371 |   |  | $ | 1,080 |  
|Provision for loan losses      |  |                            | 1,250  |      |                                  |   | 725   |                          |  |   | 725   |   |  |   | 990   |  
|(Charge-offs) recoveries, net  |  |                            | (1,607 | )    |                                  |   | (184  | )                        |  |   | (254  | ) |  |   | (699  | )
|                               |  |                            |        |      |                                  |   |       |                          |  |   |       |   |  |   |       |  
|Balance at end of period       |  | $                          | 2,026  |      |                                  | $ | 2,383 |                          |  | $ | 1,842 |   |  | $ | 1,371 |  
|                               |  |                            |        |      |                                  |   |       |                          |  |   |       |   |  |   |       |  



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



|                                   |  |                            |      |      |                                  |   |      |                          |  |   |       |   |  |   |       |  
|---------------------------------- |  | -------------------------- | ---- | ---- | -------------------------------- | - | ---- | ------------------------ |  | - | ----- | - |  | - | ----- | -
|                                   |  | Year EndedDecember 31,2004 |      |      | ThreeMonthsEndedDecember 31,2003 |   |      | Years EndedSeptember 30, | 
|                                   |  |                            |      | 2003 |                                  |   | 2002 |                         
|Balance at beginning of period     |  | $                          | 644  |      |                                  | $ | 704  |                          |  | $ | 1,301 |   |  | $ | 1,132 |  
|Loans originated during the period |  |                            | 250  |      |                                  |   | 1    |                          |  |   | 38    |   |  |   | 404   |  
|Loan repayments during the period  |  |                            | (203 | )    |                                  |   | (61  | )                        |  |   | (635  | ) |  |   | (235  | )
|                                   |  |                            |      |      |                                  |   |      |                          |  |   |       |   |  |   |       |  
|Balance at end of period           |  | $                          | 691  |      |                                  | $ | 644  |                          |  | $ | 704   |   |  | $ | 1,301 |  
|                                   |  |                            |      |      |                                  |   |      |                          |  |   |       |   |  |   |       |  



|4. | Office Properties And Equipment
|-- | -------------------------------



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



|                                         |  |                    |        |   |      |   |        |  
|---------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                         |  | As of December 31, |       
|                                         |  | 2004               |        |   | 2003 |  
|Land                                     |  | $                  | 766    |   |      | $ | 766    |  
|Building and improvements                |  |                    | 5,015  |   |      |   | 4,994  |  
|Office furniture, fixtures and equipment |  |                    | 5,113  |   |      |   | 4,978  |  
|                                         |  |                    |        |   |      |   |        |  
|Total                                    |  |                    | 10,894 |   |      |   | 10,738 |  
|Less accumulated depreciation            |  |                    | (5,259 | ) |      |   | (4,323 | )
|                                         |  |                    |        |   |      |   |        |  
|Office properties and equipment, net     |  | $                  | 5,635  |   |      | $ | 6,415  |  
|                                         |  |                    |        |   |      |   |        |  



Depreciation expense was $979,000,
$264,000, $1,048,000, and $895,000 for the year ended December 31, 2004, the three months ended December 31, 2003 and the years ended September 30, 2003, and 2002.



30



---

|5. | Intangible Assets
|-- | -----------------



The changes in intangible assets consisted of the following (in thousands):



|                                        |  |                            |       |      |                                  |   |       |                         |  |   |       |   |  |   |       |  
|--------------------------------------- |  | -------------------------- | ----- | ---- | -------------------------------- | - | ----- | ----------------------- |  | - | ----- | - |  | - | ----- | -
|                                        |  | Year EndedDecember 31,2004 |       |      | ThreeMonthsEndedDecember 31,2003 |   |       | Year EndedSeptember 30, | 
|                                        |  |                            |       | 2003 |                                  |   | 2002  |                        
|Intangible balance at beginning of year |  | $                          | 3,320 |      |                                  | $ | 3,479 |                         |  | $ | 4,115 |   |  | $ | 4,771 |  
|Amortization/other                      |  |                            | (636  | )    |                                  |   | (159  | )                       |  |   | (636  | ) |  |   | (656  | )
|                                        |  |                            |       |      |                                  |   |       |                         |  |   |       |   |  |   |       |  
|Intangible balance at end of year       |  | $                          | 2,684 |      |                                  | $ | 3,320 |                         |  | $ | 3,479 |   |  | $ | 4,115 |  
|                                        |  |                            |       |      |                                  |   |       |                         |  |   |       |   |  |   |       |  
|Goodwill intangible                     |  | $                          | 1,528 |      |                                  | $ | 1,528 |                         |  | $ | 1,528 |   |  | $ | 1,528 |  
|                                        |  |                            |       |      |                                  |   |       |                         |  |   |       |   |  |   |       |  



6. Deposit Accounts



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



|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|--------------------------------- |  | ---- | - |  | ------- | ------- | - | ------ | - | ---- | ----- | - | ------- | - | ------- |  | ------ | -
|                                  |  | 2004 |   |  | 2003    |        
|                                  |  | Rate |   |  | Balance |         | % |        |   | Rate |       |   | Balance |   | %       | 
|Account Type                      |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         | 
|NOW accounts:                     |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Commercial non interest-bearing   |  |      |   |  | $       | 13,574  |   | 5.96   | % |      |       |   |         | $ | 9,905   |  | 4.44   | %
|Noncommercial                     |  | 0.33 | % |  |         | 22,146  |   | 9.73   | % |      | 1.45  | % |         |   | 22,036  |  | 9.88   | %
|Money market checking accounts    |  | 1.81 | % |  |         | 26,603  |   | 11.69  | % |      | 1.05  | % |         |   | 13,308  |  | 5.96   | %
|Regular savings                   |  | 0.41 | % |  |         | 17,808  |   | 7.83   | % |      | 0.70  | % |         |   | 16,866  |  | 7.56   | %
|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Total demand and savings deposits |  | 0.71 | % |  |         | 80,131  |   | 35.21  | % |      | 1.01% |   |         |   | 62,115  |  | 27.84  | %
|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Savings certificates:             |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Up to 3.00%                       |  |      |   |  |         | 102,454 |   | 45.02  | % |      |       |   |         |   | 111,071 |  | 49.78  | %
|3.01 %- 4.00%                     |  |      |   |  |         | 24,522  |   | 10.77  | % |      |       |   |         |   | 16,645  |  | 7.46   | %
|4.01 %- 5.00%                     |  |      |   |  |         | 12,934  |   | 5.68   | % |      |       |   |         |   | 16,730  |  | 7.49   | %
|5.01 %- 6.00%                     |  |      |   |  |         | 3,155   |   | 1.39   | % |      |       |   |         |   | 5,468   |  | 2.45   | %
|6.01 %- 7.00%                     |  |      |   |  |         | 307     |   | 0.14   | % |      |       |   |         |   | 505     |  | 0.23   | %
|7.01 %- 8.00%                     |  |      |   |  |         | 188     |   | 0.08   | % |      |       |   |         |   | 182     |  | 0.08   | %
|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Total savings certificates        |  | 2.32 | % |  |         | 143,560 |   | 63.08  | % |      | 2.80% |   |         |   | 150,601 |  | 67.49  | %
|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Sweep accounts                    |  | 1.23 | % |  |         | 3,898   |   | 1.71   | % |      | 0.95% |   |         |   | 10,415  |  | 4.67   | %
|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  
|Total deposit accounts            |  | 1.87 | % |  | $       | 227,589 |   | 100.00 | % |      | 2.17% |   |         | $ | 223,131 |  | 100.00 | %
|                                  |  |      |   |  |         |         |   |        |   |      |       |   |         |   |         |  |        |  



As of December 31, 2004 and 2003,
total deposit accounts include approximately $1,737,000 and $1,960,000, respectively, of deposits from the Corporations officers, directors, employees or parties related to them.



At December 31, 2004 and 2003, deposit accounts with balances of $100,000 and over totaled approximately $51,655,000 and $57,763,000,
respectively.



Savings certificates by maturity were as follows (in thousands):



|                           |  |                    |         |      |   |        
|-------------------------- |  | ------------------ | ------- | ---- | - | -------
|                           |  | As of December 31,
|                           |  | 2004               |         | 2003
|Maturity Date              |  |                    |         |      |   |        
|Within 1 year              |  | $                  | 92,334  |      | $ | 101,688
|After 1 but within 2 years |  |                    | 42,036  |      |   | 32,043 
|After 2 but within 3 years |  |                    | 6,508   |      |   | 12,020 
|After 3 but within 4 years |  |                    | 1,733   |      |   | 2,822  
|Thereafter                 |  |                    | 949     |      |   | 2,028  
|                           |  |                    |         |      |   |        
|Total savings certificates |  | $                  | 143,560 |      | $ | 150,601
|                           |  |                    |         |      |   |        



31



---

|6. | Deposit Accounts (continued)
|-- | ----------------------------



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



|                                               |  |                            |       |      |                                  |   |       |                          |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | -------------------------- | ----- | ---- | -------------------------------- | - | ----- | ------------------------ |  | - | ----- | - |  | - | ----- | -
|                                               |  | Year EndedDecember 31,2004 |       |      | ThreeMonthsEndedDecember 31,2003 |   |       | Years EndedSeptember 30, | 
|                                               |  |                            |       | 2003 |                                  |   | 2002  |                         
|Account Type                                   |  |                            |       |      |                                  |   |       |                          |  |   |       |   |  |   |       |  
|NOW accounts and money market deposit accounts |  | $                          | 435   |      |                                  | $ | 71    |                          |  | $ | 277   |   |  | $ | 426   |  
|Passbook and statement savings accounts        |  |                            | 72    |      |                                  |   | 26    |                          |  |   | 116   |   |  |   | 146   |  
|Certificate accounts                           |  |                            | 3,410 |      |                                  |   | 939   |                          |  |   | 4,281 |   |  |   | 5,453 |  
|Early withdrawal penalties                     |  |                            | (14   | )    |                                  |   | (5    | )                        |  |   | (14   | ) |  |   | (24   | )
|                                               |  |                            |       |      |                                  |   |       |                          |  |   |       |   |  |   |       |  
|Total                                          |  | $                          | 3,903 |      |                                  | $ | 1,031 |                          |  | $ | 4,660 |   |  | $ | 6,001 |  
|                                               |  |                            |       |      |                                  |   |       |                          |  |   |       |   |  |   |       |  



|7. | Advances From The Federal Home Loan Bank And Other Borrowings
|-- | -------------------------------------------------------------



At December 31, 2004 and 2003, the Bank had $63,500,000 and $68,500,000, respectively, of advances outstanding from the FHLB. The maturity of the advances from the FHLB
is as follows (in thousands):



|                                                    |  |                    |        |            |      |   |      |   |            |  |      |  
|--------------------------------------------------- |  | ------------------ | ------ | ---------- | ---- | - | ---- | - | ---------- |  | ---- | -
|                                                    |  | As of December 31, |       
|                                                    |  | 2004               |        | Wtd Avg Rt |      |   | 2003 |   | Wtd Avg Rt | 
|Contractual Maturity:                               |  |                    |        |            |      |   |      |   |            |  |      |  
|Within one year - fixed rate                        |  | $                  | 5,000  |            | 2.96 | % |      | $ | 5,000      |  | 4.14 | %
|Within one year - adjustable rate                   |  |                    |       |            |     |   |      |   | 8,000      |  | 1.17 | %
|After one but within three years - fixed rate       |  |                    | 13,000 |            | 2.58 | % |      |   | 10,000     |  | 2.80 | %
|After three but within five years - adjustable rate |  |                    | 23,500 |            | 3.04 | % |      |   | 16000      |  | 1.98 | %
|Greater than five years - adjustable rate           |  |                    | 22,000 |            | 4.44 | % |      |   | 29,500     |  | 4.66 | %
|                                                    |  |                    |        |            |      |   |      |   |            |  |      |  
|Total Advances                                      |  | $                  | 63,500 |            | 3.42 | % |      | $ | 68,500     |  | 3.32 | %
|                                                    |  |                    |        |            |      |   |      |   |            |  |      |  



The Bank pledges as collateral to the
advances their FHLB Stock, and has entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying mortgages (as defined) with unpaid principal balances equal to, when discounted at 50% to
80% of the unpaid principal balances, 100% of total advances. The amount of qualifying loans was $37,934,000 and $54,564,000, respectively, at December 31, 2004 and 2003.



|8. | Securities Sold Under Agreements to Repurchase
|-- | ----------------------------------------------



The Company had $24,000,000 and $5,000,000 borrowed under agreements to repurchase at December 31, 2004 and 2003, respectively. The amortized cost of the securities
underlying the agreements to repurchase at December 31, 2004 was $28,016,000 and $7,103,000 at December 31, 2003. The maximum amount outstanding at any month end during 2004 was $29,000,000 and $17,000,000 for 2003. The average amount of outstanding
agreements for 2004 was $21,333,000 and $14,500,000 for 2003 and the approximate weighted average interest rate was 2.82% in 2004 and 4.67% in 2003.



|9. | Floating Rate Junior Subordinated Deferrable Interest Debentures
|-- | ----------------------------------------------------------------



On November 14, 2001, the Corporation sponsored the creation of the Trust. The Corporation is the owner of all of the common securities of the Trust. On December 18,
2001, the Trust issued $8,000,000 in the form of floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporations $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 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, with an initial rate of 5.60%. 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 Debenture, taken together, fully irrevocably and unconditionally guaranteed all of the Trusts
obligations under the capital securities.



The stated maturity of the
Debentures is 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. Upon repayment of the Debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common securities.



32



---

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



The Corporation has the right, at one or more times, to defer interest payments on the Debentures for up to twenty consecutive quarterly
periods. All deferrals will end on an interest payment date and will not extend beyond December 18, 2031, the stated maturity date of the Debentures. If the Corporation defers interest payments on the Debentures, the Trust will also defer
distributions on the capital securities. During any deferral period, each installment of interest that would otherwise have been due and payable will bear additional interest at the applicable distribution rate, compounded quarterly. The Corporation
paid $426,000, $100,000, $415,000 and $365,000 in interest for the year ended December 31, 2004, the three months ended December 31, 2003, and the years ended September 30, 2003 and 2002.



|10. | Income Taxes
|--- | ------------



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



|                                  |  |                            |     |                                  |        |   |                           |   |      |   |  |   |      |  
|--------------------------------- |  | -------------------------- | --- | -------------------------------- | ------ | - | ------------------------- | - | ---- | - |  | - | ---- | -
|                                  |  | Year EndedDecember 31,2004 |     | ThreeMonthsEndedDecember 31,2004 |        |   | Years Ended September 30, |  
|                                  |  |                            |     | 2003                             |        |   | 2002                      |  
|Current                           |  | $                          | 225 |                                  | ($127) |   |                           | $ | 912  |   |  | $ | 747  |  
|Deferred                          |  |                            | 496 |                                  | (515   | ) |                           |   | (341 | ) |  |   | (189 | )
|                                  |  |                            |     |                                  |        |   |                           |   |      |   |  |   |      |  
|Total income tax expense(benefit) |  | $                          | 721 |                                  | ($642) |   |                           | $ | 571  |   |  | $ | 558  |  
|                                  |  |                            |     |                                  |        |   |                           |   |      |   |  |   |      |  



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



|                                           |  |                            |      |      |                                  |    |      |                          |  |   |      |   |  |   |      |  
|------------------------------------------ |  | -------------------------- | ---- | ---- | -------------------------------- | -- | ---- | ------------------------ |  | - | ---- | - |  | - | ---- | -
|                                           |  | Year EndedDecember 31,2004 |      |      | ThreeMonthsEndedDecember 31,2004 |    |      | Years EndedSeptember 30, | 
|                                           |  |                            |      | 2003 |                                  |    | 2002 |                         
|Tax at federal income tax rate             |  | $                          | 978  |      |                                  | ($ | 584  | )                        |  | $ | 826  |   |  | $ | 783  |  
|Increase (decrease) resulting from:        |  |                            |      |      |                                  |    |      |                          |  |   |      |   |  |   |      |  
|State income taxes, net of federal benefit |  |                            | 81   |      |                                  |    |     |                          |  |   | 110  |   |  |   | 54   |  
|Interest on municipal bonds                |  |                            | (327 | )    |                                  |    | (85  | )                        |  |   | (300 | ) |  |   | (232 | )
|Non-taxable life insurance income          |  |                            | (62  | )    |                                  |    |     |                          |  |   | (84  | ) |  |   | (88  | )
|Other, net                                 |  |                            | 51   |      |                                  |    | 27   |                          |  |   | 19   |   |  |   | 41   |  
|                                           |  |                            |      |      |                                  |    |      |                          |  |   |      |   |  |   |      |  
|Total                                      |  | $                          | 721  |      |                                  | ($ | 642  | )                        |  | $ | 571  |   |  | $ | 558  |  
|                                           |  |                            |      |      |                                  |    |      |                          |  |   |      |   |  |   |      |  



The tax effects of significant items
comprising the Corporations deferred taxes as of December 31, 2004 and 2003 are as follows (in thousands):



|                                                                                        |  |              |       |      |   |       |  
|--------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | -
|                                                                                        |  | December 31, |      
|                                                                                        |  | 2004         |       | 2003 |  
|Deferred tax assets:                                                                    |  |              |       |      |   |       |  
|Book reserves in excess of tax basis bad debt reserves arising after September 30, 1988 |  | $            | 689   |      | $ | 962   |  
|Difference between book and deposit premium basis                                       |  |              | 117   |      |   | (28   | )
|Deferred Compensation                                                                   |  |              | 154   |      |   | 129   |  
|Net operating loss                                                                      |  |              |      |      |   | 479   |  
|Other                                                                                   |  |              | 57    |      |   | 82    |  
|                                                                                        |  |              |       |      |   |       |  
|Total deferred tax asset                                                                |  |              | 1,017 |      |   | 1,624 |  
|                                                                                        |  |              |       |      |   |       |  
|Deferred tax liabilities:                                                               |  |              |       |      |   |       |  
|SFAS No. 115 mark to market adjustment                                                  |  |              | 59    |      |   | 53    |  
|Difference between book and tax property basis                                          |  |              | 264   |      |   | 283   |  
|Difference between book and tax Federal Home Loan Bank stock basis                      |  |              | 85    |      |   | 100   |  
|Deferred loan fees                                                                      |  |              | 42    |      |   | 51    |  
|Tax mark to market adjustment on securities                                             |  |              |      |      |   | 27    |  
|Other                                                                                   |  |              |      |      |   | 41    |  
|                                                                                        |  |              |       |      |   |       |  
|Total deferred tax liability                                                            |  |              | 450   |      |   | 555   |  
|                                                                                        |  |              |       |      |   |       |  
|Net deferred tax asset                                                                  |  | $            | 567   |      | $ | 1,069 |  
|                                                                                        |  |              |       |      |   |       |  



33



---

|10. | Income Taxes (continued)
|--- | ------------------------



The deferred tax assets of $567,000 and $1,069,000 at December 31, 2004 and 2003 are included in other assets in the balance sheet. A deferred tax asset of $893,000 at
September 30, 2003 is included in other assets in the balance sheet.



Retained
earnings at December 31, 2004 includes approximately $1,636,000 representing pre-1988 tax bad debt base year reserve amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse until
indefinite future periods and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, dividend payments in excess of
current year or accumulated tax earnings and profits, or other distributions in dissolutions, liquidations or redemption of the Banks stock.



The Corporation has been permitted under the Internal Revenue Code to deduct an annual addition to the tax reserve for bad debts in determining taxable income, subject to
certain limitations. This addition may differ significantly from the bad debt expense for financial reporting purposes and was based on either 8% of taxable income (the Percentage of Taxable Income) or actual loan loss experience (the
Experience Method) for the years prior to 1997. As a result of recent tax legislation, the Corporation will be required to recapture tax bad debt reserves in excess of pre-1988 based year amounts over a period of approximately six to
eight years.



|11. | Employee Benefits
|--- | -----------------



The Corporation has a contributory profit-sharing plan which is available to all eligible employees. Annual employer contributions to the plan consist of an amount which matches participant contributions up to a
maximum of 5% of a participants compensation and a discretionary amount determined annually by the Corporations Board of Directors. The annual contributions to the pension plan will be 5% of a participants compensation. Employer
expensed contributions to the plans were $240,000, $31,000, $183,000, and $187,000 for the year ended December 31, 2004, for the three months ended December 31, 2003, and the years ended September 30, 2003 and 2002.



|12. | Financial Instruments
|--- | ---------------------



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



The Corporations exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.



Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the
Corporation upon extension of credit, is based on managements credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and income-producing commercial
properties.



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



|                                                                                                 |  |                    |        |      |   |       
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---- | - | ------
|                                                                                                 |  | As of December 31,
|                                                                                                 |  | 2004               |        | 2003
|Fixed/variable interest rate commitments to fund residential credit                              |  | $                  | 2,399  |      | $ | 3,640 
|Commitments to fund commercial and construction loans                                            |  |                    | 2,363  |      |   | 1,105 
|Unused portion of credit lines (principally variable-rate consumer lines secured by real estate) |  |                    | 35,842 |      |   | 23,247
|                                                                                                 |  |                    |        |      |   |       
|Total                                                                                            |  | $                  | 40,604 |      | $ | 27,992
|                                                                                                 |  |                    |        |      |   |       



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



The Corporation did not
incurred any losses on its commitments in fiscal 2004, the three months ended December 31, 2003, fiscal 2003 or 2002.



34



---

|12. | Financial Instruments (continued)
|--- | ---------------------------------



The estimated fair values of the Corporations financial instruments were as follows at December 31, 2004 (in thousands):



|                                                                 |  |                   |           |            |   |          
|---------------------------------------------------------------- |  | ----------------- | --------- | ---------- | - | ---------
|                                                                 |  | December 31, 2004
|                                                                 |  | Carrying Amount   |           | Fair Value
|Financial assets                                                 |  |                   |           |            |   |          
|Cash and cash equivalents                                        |  | $                 | 13,197    |            | $ | 13,197   
|Securities available for sale                                    |  |                   | 141,864   |            |   | 141,864  
|Securities held to maturity                                      |  |                   | 1,630     |            |   | 1,688    
|Federal Home Loan Bank Stock, at cost                            |  |                   | 3,522     |            |   | 3,522    
|Federal Reserve Stock, at cost                                   |  |                   | 539       |            |   | 539      
|Loans, net                                                       |  |                   | 171,094   |            |   | 171,632  
|Accrued interest receivable                                      |  |                   | 2,068     |            |   | 2,068    
|Cash surrender value of life insurance                           |  |                   | 5,206     |            |   | 5,206    
|                                                                 |  |                  
|Financial liabilities                                            |  |                   |           |            |   |          
|Deposits                                                         |  | $                 | 227,589   |            | $ | 228,415  
|Advances from FHLB and other borrowings                          |  |                   | 63,500    |            |   | 64,122   
|Securities sold under agreement to repurchase                    |  |                   | 24,000    |            |   | 24,235   
|Floating rate junior subordinated deferrable interest debentures |  |                   | 8,247     |            |   | 8,328    
|Accrued interest payable                                         |  |                   | 333       |            |   | 333      
|                                                                 |  |                  
|Off-balance-sheet assets (liabilities)                           |  |                   |           |            |   |          
|Commitments to extend credit                                     |  |                   | ($40,604) |            |   | ($40,604)



The estimated fair values of the
Corporations financial instruments were as follows at December 31, 2003 (in thousands):



|                                                                 |  |                   |           |            |   |          
|---------------------------------------------------------------- |  | ----------------- | --------- | ---------- | - | ---------
|                                                                 |  | December 31, 2003
|                                                                 |  | Carrying Amount   |           | Fair Value
|Financial assets                                                 |  |                   |           |            |   |          
|Cash and cash equivalents                                        |  | $                 | 28,702    |            | $ | 28,702   
|Securities available for sale                                    |  |                   | 123,789   |            |   | 123,789  
|Federal Home Loan Bank Stock, at cost                            |  |                   | 3,900     |            |   | 3,900    
|Federal Reserve Stock, at cost                                   |  |                   | 539       |            |   | 539      
|Loans                                                            |  |                   | 154,501   |            |   | 155,690  
|Accrued interest receivable                                      |  |                   | 1,655     |            |   | 1,655    
|Cash surrender value of life insurance                           |  |                   | 5,025     |            |   | 5,025    
|                                                                 |  |                  
|Financial liabilities                                            |  |                   |           |            |   |          
|Deposits                                                         |  | $                 | 223,131   |            | $ | 219,315  
|Advances from FHLB and other borrowings                          |  |                   | 68,500    |            |   | 66,273   
|Securities sold under agreement to repurchase                    |  |                   | 5,000     |            |   | 5,000    
|Floating rate junior subordinated deferrable interest debentures |  |                   | 8,000     |            |   | 7,997    
|Accrued interest payable                                         |  |                   | 285       |            |   | 285      
|                                                                 |  |                  
|Off-balance-sheet asset (liabilities)                            |  |                   |           |            |   |          
|Commitments to extend credit                                     |  |                   | ($27,992) |            |   | ($27,992)



35



---

|13. | Supplemental Cash Flow Disclosures
|--- | ----------------------------------



|                                                        |  |                            |       |                                  |   |                          |      |    |       |   |  |   |      
|------------------------------------------------------- |  | -------------------------- | ----- | -------------------------------- | - | ------------------------ | ---- | -- | ----- | - |  | - | -----
|                                                        |  | Year EndedDecember 31,2004 |       | ThreeMonthsEndedDecember 31,2003 |   | Years EndedSeptember 30,
|                                                        |  |                            |       | 2003                             |   |                          | 2002
|Cash paid for:                                          |  |                            |       |                                  |   |                          |      |    |       |   |  |   |      
|Income taxes                                            |  | $                          | 120   |                                  | $ | 59                       |      | $  | 488   |   |  | $ | 2,593
|Interest                                                |  |                            | 7,198 |                                  |   | 2,384                    |      |    | 8,702 |   |  |   | 9,775
|Non-cash transactions:                                  |  |                            |       |                                  |   |                          |      |    |       |   |  |   |      
|Loans foreclosed                                        |  |                            | 757   |                                  |   | 295                      |      |    | 296   |   |  |   | 366  
|Unrealized gain (loss) on securities available for sale |  | $                          | 227   |                                  | $ | 152                      |      | ($ | 853   | ) |  | $ | 2,179



|14. | Commitments And Contingencies
|--- | -----------------------------



Lease commitments - The Corporation leases certain Bank facilities under rental agreements that expires in 2018. Future minimum rental payments due under these
leases are as follows:



|            |  |   |          
|----------- |  | - | ---------
|Years Ended |  |  
|2005        |  |   | 163,344  
|2006        |  |   | 163,344  
|2007        |  |   | 163,344  
|2008        |  |   | 163,344  
|2009        |  |   | 163,344  
|Thereafter  |  | $ | 1,388,424



Total rent expense for the year ended
December 31, 2004, for the three months ended December 31, 2003, and the years ended September 30, 2003 and 2002 were $186,000, $41,000, $34,000 and $0, respectively.



Concentrations of Credit Risk - The Corporations business activity is principally with customers located in South Carolina.
Except for residential loans in the Corporations market area, the Corporation has no other significant concentrations of credit risk.



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



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



|15. | Stock Option Plans
|--- | ------------------



A summary of the status of the plans as of December 31, 2004 and 2003, and changes during the years ending on the dates presented below (all shares have been adjusted for the 3:2 stock split in February 1998 and the
5% stock dividend in February 1999):



|                     |  |               |  |                               |  |                 |  |                         
|-------------------- |  | ------------- |  | ----------------------------- |  | --------------- |  | ------------------------
|Grant Date           |  | SharesGranted |  | AverageExercisePricePer Share |  | Expiration Date |  | Earliest DateExercisable
|October, 1995        |  | 50,504        |  | 5.79                          |  | October, 2005   |  | October, 1995           
|January, 1996        |  | 945           |  | 5.79                          |  | January, 2006   |  | January, 1996           
|April, 1996          |  | 1,725         |  | 6.67                          |  | April, 2006     |  | April, 1997             
|May, 1998            |  | 24,570        |  | 15.83                         |  | May, 2008       |  | May, 1998               
|October, 2000        |  | 5,300         |  | 8.75                          |  | October, 2010   |  | October, 2000           
|January, 2001        |  | 27,365        |  | 9.06                          |  | January, 2011   |  | January, 2001           
|January, 2002        |  | 22,887        |  | 10.36                         |  | January, 2012   |  | January, 2002           
|April, 2002          |  | 5,000         |  | 13.00                         |  | April, 2012     |  | April, 2002             
|November, 2002       |  | 1,500         |  | 13.25                         |  | November, 2012  |  | November, 2002          
|December, 2003       |  | 43,000        |  | 16.75                         |  | December, 2013  |  | December, 2003          
|                     |  |               |  |                               |  |                 |  |                         
|Total Shares Granted |  | 182,796       |  |                               |  |                 |  |                         
|                     |  |               |  |                               |  |                 |  |                         



36



---

|15. | Stock Option Plans (continued)
|--- | ------------------------------



At December 31, 2004, the Corporation had the following options exercisable:



|           |  |                        |              |                                            |           |                          |         |                      |   |      
|---------- |  | ---------------------- | ------------ | ------------------------------------------ | --------- | ------------------------ | ------- | -------------------- | - | -----
|FiscalYear |  | Rangeof exercise price |              | Weighted AverageRemaining Contractual Life |           | NumberOptionsExercisable |         | AverageExercisePrice
|1995       |  | $                      | 5.79         |                                            | 1 years   |                          | 50,504  |                      | $ | 5.79 
|1996       |  | $                      | 5.79 - $6.67 |                                            | 2.3 years |                          | 2,670   |                      |   | 6.36 
|1998       |  | $                      | 15.83        |                                            | 5.3 years |                          | 24,574  |                      |   | 15.83
|2000       |  | $                      | 8.75         |                                            | 5.8 years |                          | 5,300   |                      |   | 8.75 
|2001       |  | $                      | 9.06         |                                            | 7 years   |                          | 27,365  |                      |   | 9.06 
|2002       |  | $                      | 10.36-$13.25 |                                            | 7.6 years |                          | 29,103  |                      |   | 10.96
|2003       |  | $                      | 16.75        |                                            | 9 years   |                          | 17,200  |                      |   | 16.75
|           |  |                        |              |                                            |           |                          |         |                      |   |      
|           |  | $                      | 5.79 -$16.75 |                                            | 5.4 years |                          | 156,716 |                      | $ | 10.20
|           |  |                        |              |                                            |           |                          |         |                      |   |      



Options for the three previous fiscal
years were exercised as follows (adjusted for stock splits and dividends):



|                    |  |                  |  |                                 |     
|------------------- |  | ---------------- |  | ------------------------------- | ----
|For the Years Ended |  | Shares Exercised |  | Average ExercisePrice Per Share
|December 31, 2004   |  | 60,635           |  | $                               | 6.18
|September 30, 2003  |  | 19,994           |  | $                               | 8.95
|September 30, 2002  |  | 23,605           |  | $                               | 5.97



Stock options for 500 shares at an
average price of $9.06 were forfeited during the year ended December 31, 2004. Stock options for 6,087 shares at an average price of $11.54 were forfeited during the year ended September 30, 2003. Stock options for 14,023 shares at an average price
of $11.75 were forfeited during the year ended September 30, 2002. At December 31, 2004, 33,623 shares were available for grant and 156,716 options at an average price of $8.35 were outstanding.



|16. | Liquidation Account, Dividend Restrictions And Regulatory Matters
|--- | -----------------------------------------------------------------



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



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



The Bank and the Corporation are subject to various regulatory capital requirements
administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the
Corporations 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 Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors.



Quantitative measures established by regulations to ensure
capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of
December 31, 2004, that the Bank and the Corporation meet the capital adequacy requirements to which they are subject.



As of December 31, 2004 and 2003, the Bank was well capitalized under the regulatory framework for prompt corrective action based on its capital ratio
calculations. In order to be well capitalized, the bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2004
that management believes have changed the banks classification.



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



37



---

|16. | Liquidation Account, Dividend Restrictions And Regulatory Matters (continued)
|--- | -----------------------------------------------------------------------------



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



|                               |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|------------------------------ |  | ----------------- | ------ | ----------- | ----- | - | ---------------- | - | ------------ |  | - | ----------- |  | ----------------- | ------ |  | --- | -
|                               |  | December 31, 2004 |       
|                               |  | Amount            |        | ActualRatio |       |   | RegulatoryAmount |   | MinimumRatio |  |   | WellAmount |  | CapitalizedRatio |       
|Leverage ratio                 |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|Corporation                    |  | $                 | 29,510 |             | 8.42  | % |                  | $ | 14,012       |  | 4 | %           |  |                   | n/a    |  | n/a |  
|Bank                           |  |                   | 28,958 |             | 8.27  | % |                  |   | 14,012       |  | 4 | %           |  | $                 | 17,516 |  | 5   | %
|Tier 1 capital ratio           |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|Corporation                    |  |                   | 29,510 |             | 14.61 | % |                  |   | 8,078        |  | 4 | %           |  |                   | n/a    |  | n/a |  
|Bank                           |  |                   | 28,958 |             | 14.33 | % |                  |   | 8,083        |  | 4 | %           |  |                   | 12,124 |  | 6   | %
|Total risk-based capital ratio |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|Corporation                    |  |                   | 31,536 |             | 15.62 | % |                  |   | 16,156       |  | 8 | %           |  |                   | n/a    |  | n/a |  
|Bank                           |  |                   | 30,984 |             | 15.33 | % |                  |   | 16,165       |  | 8 | %           |  |                   | 20,207 |  | 10  | %



|                               |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|------------------------------ |  | ----------------- | ------ | ----------- | ----- | - | ---------------- | - | ------------ |  | - | ----------- |  | ----------------- | ------ |  | --- | -
|                               |  | December 31, 2003 |       
|                               |  | Amount            |        | ActualRatio |       |   | RegulatoryAmount |   | MinimumRatio |  |   | WellAmount |  | CapitalizedRatio |       
|Leverage ratio                 |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|Corporation                    |  | $                 | 28,518 |             | 8.40  | % |                  | $ | 13,584       |  | 4 | %           |  |                   | n/a    |  | n/a |  
|Bank                           |  |                   | 27,753 |             | 8.17  | % |                  |   | 13,584       |  | 4 | %           |  | $                 | 16,980 |  | 5   | %
|Tier 1 capital ratio           |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|Corporation                    |  |                   | 28,518 |             | 16.18 | % |                  |   | 7,048        |  | 4 | %           |  |                   | n/a    |  | n/a |  
|Bank                           |  |                   | 27,753 |             | 15.74 | % |                  |   | 7,051        |  | 4 | %           |  |                   | 10,576 |  | 6   | %
|Total risk-based capital ratio |  |                   |        |             |       |   |                  |   |              |  |   |             |  |                   |        |  |     |  
|Corporation                    |  |                   | 30,723 |             | 17.44 | % |                  |   | 14,097       |  | 8 | %           |  |                   | n/a    |  | n/a |  
|Bank                           |  |                   | 29,958 |             | 17.00 | % |                  |   | 14,102       |  | 8 | %           |  |                   | 17,627 |  | 10  | %



Under current Federal Reserve
guidelines, the Corporation includes trust preferred securities in Tier 1 capital. As noted in Recent Accounting Pronouncements in the Summary of Significant Accounting Policies section, FASB Interpretation No. 46 the Corporation is
required to deconsolidate its investment in its subsidiary trusts.



The Bank is
required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against its deposit liabilities. The amounts of such reserves totaled $858,000 at December 31, 2004 and $807,000 at December 31, 2003.



|17. | 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, 2005. 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 November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees and warranties that it has issued. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the
guarantee. The initial recognition requirements of FIN No. 45 were effective for guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements for periods ending after December 15, 2002.
The adoption of FIN No. 45 did not have a material impact on the Corporations financial position or results of operations.



In December 2003, the FASB issued FIN No. 46 (revised), Consolidation of Variable Interest Entities (FIN No. 46(R)), which addresses consolidation
by business enterprises of variable interest entities. FIN No. 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities
or entitled to receive a majority of the entitys residual returns, or both. FIN No. 46(R) also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable
interest. FIN No. 46(R) provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity or its equity.



38



---

|17. | Recently Issued Accounting Standards (continued)
|--- | ------------------------------------------------



holders lack adequate decision-making ability. The consolidation requirements of FIN No. 46(R) applied immediately to variable interest entities created after January 31,
2003. The consolidation requirements applied to the Corporations existing variable interest entities in the first reporting period ending after December 15, 2004. Certain of the disclosure requirements applied to all financial statements
issued after December 31, 2003, regardless of when the variable interest entity was established. In accordance with these rules, the Corporation deconsolidated the Trust as of December 31, 2004, which was formed to raise capital by issuing trust
preferred securities. The full and unconditional guarantee by the Corporation for the trust preferred securities remains in effect.



In November 2003, the Emerging Issues Task Force (EITF) reached a consensus that certain quantitative and qualitative disclosures should be required for debt
and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which other-than-temporary impairment has not been recognized. Accordingly
the EITF issued EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This issue addresses the meaning of other-than-temporary impairment and its application to investments classified
as either available for sale or held to maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures. The disclosure requirements of EITF No. 03-1 are effective for annual financial statements for fiscal years ending
after June 15, 2004. The effective date for the measurement and recognition guidance of EITF No. 03-1 has been delayed. The FASB staff has issued a proposed Board-directed FASB Staff Position (FSP), FSP EITF 03-1-a, Implementation
Guidance for the Application of Paragraph 16 of Issue No. 03-1. The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under the measurement and recognition requirements of EITF No. 03-1. The delay of the effective date for the measurement and recognition requirements of EITF No. 03-1 will be superseded concurrent with the final
issuance of FSP EITF 03-1-a. Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the Corporations financial position or results of operations.



In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 105,
Application of Accounting Principles to Loan commitments, to inform registrants of the Staffs view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated
servicing of the future loan. The provisions of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to
loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The Corporation adopted the provisions of SAB No. 105 on April 1, 2004. The adoption of SAB No. 105 did not have a
material impact on the Corporations financial condition or results of operations.



Other 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.



|18. | Union Financial Bancshares, Inc. Financial Information
|--- | ------------------------------------------------------

| | (Parent Corporation Only)
| | -------------------------



Condensed financial information for Union Financial is presented as follows (in thousands):



|                                                                 |  |                    |        |      |   |       
|---------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------
|Condensed Balance Sheets                                         |  | As of December 31,
|                                                                 |  | 2004               |        | 2003
|Assets:                                                          |  |                    |        |      |   |       
|Cash and cash equivalents                                        |  | $                  | 468    |      | $ | 624   
|Investment in subsidiary                                         |  |                    | 33,467 |      |   | 32,743
|Other                                                            |  |                    | 351    |      |   | 403   
|                                                                 |  |                    |        |      |   |       
|Total Assets                                                     |  | $                  | 34,286 |      | $ | 33,770
|                                                                 |  |                    |        |      |   |       
|Liabilities and Shareholders Equity:                            |  |                    |        |      |   |       
|Accrued interest payable                                         |  | $                  | 20     |      | $ | 16    
|Floating rate junior subordinated deferrable interest debentures |  |                    | 8,247  |      |   | 8,247 
|Shareholders Equity                                             |  |                    | 26,019 |      |   | 25,507
|                                                                 |  |                    |        |      |   |       
|Total Liabilities and Shareholders Equity                       |  | $                  | 34,286 |      | $ | 33,770
|                                                                 |  |                    |        |      |   |       



39



---

|18. | Union Financial Bancshares, Inc. Financial Information (continued)
|--- | ------------------------------------------------------------------

| | (Parent Corporation Only)
| | -------------------------



|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | -------------------------- | ------ | ---- | ------------------------------------ | -- | -------- | ------------------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                           |  | Year EndedDecember 31,2004 |        |      | Three Months Ended December 31, 2003 |    |          | Years Ended September 30, | 
|                                                                                           |  |                            |        | 2003 |                                      |    | 2002     |                          
|Condensed Statements of Income                                                             |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Equity in undistributed earnings(loss)of subsidiary                                        |  | $                          | 2,714  |      |                                      |    | ($1,077) |                           |  | $ | 2,399  |   |  | $ | 2,210  |  
|Interest expense                                                                           |  |                            | (426   | )    |                                      |    | (100     | )                         |  |   | (415   | ) |  |   | (365   | )
|Other expense, net                                                                         |  |                            | (132   | )    |                                      |    | (33      | )                         |  |   | (125   | ) |  |   | (101   | )
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Net income(loss)                                                                           |  | $                          | 2,156  |      |                                      | ($ | 1,210    | )                         |  | $ | 1,859  |   |  | $ | 1,744  |  
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Condensed Statements of Cash Flows                                                         |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Operating Activities:                                                                      |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Net income(loss)                                                                           |  | $                          | 2,156  |      |                                      |    | ($1,210) |                           |  | $ | 1,859  |   |  | $ | 1,744  |  
|Adjustments to reconcile net income(loss) to net cash used in operating activities:        |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Equity in undistributed earnings(loss) of subsidiary                                       |  |                            | (2,714 | )    |                                      |    | 1,077    |                           |  |   | (2,399 | ) |  |   | (2,210 | )
|(Increase) decrease in other assets                                                        |  |                            | 56     |      |                                      |    | 26       |                           |  |   | 54     |   |  |   | (134   | )
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Net cash used in operating activities                                                      |  |                            | (502   | )    |                                      |    | (107     | )                         |  |   | (486   | ) |  |   | (600   | )
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Financing Activities:                                                                      |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Proceeds from issuance of floating rate junior subordinated deferrable interest debentures |  |                            |       |      |                                      |    |         |                           |  |   |       |   |  |   | 8,000  |  
|Capital contribution to subsidiary                                                         |  |                            |       |      |                                      |    |         |                           |  |   |       |   |  |   | (5,000 | )
|Dividends received from subsidiary                                                         |  |                            | 2,000  |      |                                      |    |         |                           |  |   |       |   |  |   |       |  
|Dividend reinvestment plan contributions                                                   |  |                            | 110    |      |                                      |    | 27       |                           |  |   | 110    |   |  |   | 111    |  
|Dividends paid                                                                             |  |                            | (783   | )    |                                      |    | (197     | )                         |  |   | (788   | ) |  |   | (777   | )
|Share repurchase program                                                                   |  |                            | (1,074 | )    |                                      |    |         |                           |  |   | (366   | ) |  |   |       |  
|Proceeds from the exercise of stock options                                                |  |                            | 93     |      |                                      |    | 17       |                           |  |   | 179    |   |  |   | 141    |  
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Net cash provided by (used in) financing activities                                        |  |                            | 346    |      |                                      |    | (153     | )                         |  |   | (865   | ) |  |   | 2,475  |  
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                       |  |                            | (156   | )    |                                      |    | (260     | )                         |  |   | (1,351 | ) |  |   | 1,875  |  
|Cash and cash equivalents at beginning of period                                           |  |                            | 624    |      |                                      |    | 884      |                           |  |   | 2,235  |   |  |   | 360    |  
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  
|Cash and cash equivalents at end of period                                                 |  | $                          | 468    |      |                                      | $  | 624      |                           |  | $ | 884    |   |  | $ | 2,235  |  
|                                                                                           |  |                            |        |      |                                      |    |          |                           |  |   |        |   |  |   |        |  



40



---



Board of Directors

Union Financial Bancshares And Subsidiaries



|                                                                                                                                                                                |  |                                                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Robert H. Breakfield Attorney  James W. Edwards Dean of Academics, USC-Union  William M. Graham Owner, Grahams Flowers  Louis M. Jordan President, Jordans Ace Hardware, Inc. |  | Carl L. Mason Chairman
Retired  Dwight V. Neese President and Chief Executive Officer Provident Community Bank  Philip C. Wilkins, DMD Dentist





Leadership Group

Provident Community Bank



|                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Henry G. Alexander, Jr. Vice
President Union Region Commercial Relationship Manager  Carolyn H. Belue Vice President Operations Administration Manager  Brenda T. Billardello Vice President Marketing Director  Edward A. Brock Senior Vice President York Market Executive  Richard H. Flake Executive Vice President Chief Financial Officer  Lisa G.
Morris Vice President Human Resource
Manager  Dwight V. Neese President Chief Executive Officer |  | Mark F. Pack Senior Vice
President Business Manager Program Director 
Lori H. Patrick Vice President Union Market Executive  Susan D. Taylor Vice President Fairfield Market Executive  Jeffrey M. Thompson Vice President Laurens Market Executive  Lud W. Vaughn Executive Vice President Chief Credit Officer  Wanda J. Wells Senior Vice President & Corporate
Secretary Shareholder Relations Officer
|                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                           



41



---

Corporate Information



Common Stock
Information



Union Financial Bancshares, Inc.s common stock is
quoted on the Nasdaq National Market under the symbol UFBS. As of December 31, 2004, there were 757 shareholders of record and 1,957,989 shares of common stock issued and outstanding. The following table contains the range of high and low bid
information of Union Financials common stock as reported by the Nasdaq Stock Market and per share dividend as declared during each quarter of the last two calendar years. See Note 16 to the financial statements for information regarding
certain limitations imposed on the Banks ability to pay cash dividends to the holding company.



|                   |  |      |       |     |   |          |  |   |     
|------------------ |  | ---- | ----- | --- | - | -------- |  | - | ----
|Calendar Year 2004 |  | High |       | Low |   | Dividend
|Fourth Quarter     |  | $    | 18.13 |     | $ | 16.40    |  | $ | .100
|Third Quarter      |  | $    | 17.12 |     | $ | 15.46    |  | $ | .100
|Second Quarter     |  | $    | 17.55 |     | $ | 16.74    |  | $ | .100
|First Quarter      |  | $    | 17.26 |     | $ | 16.68    |  | $ | .100



|                   |  |      |       |     |   |          |  |   |     
|------------------ |  | ---- | ----- | --- | - | -------- |  | - | ----
|Calendar Year 2003 |  | High |       | Low |   | Dividend
|Fourth Quarter     |  | $    | 18.29 |     | $ | 16.83    |  | $ | .100
|Third Quarter      |  | $    | 18.45 |     | $ | 16.75    |  | $ | .100
|Second Quarter     |  | $    | 17.19 |     | $ | 14.44    |  | $ | .100
|First Quarter      |  | $    | 15.85 |     | $ | 13.51    |  | $ | .100



Dividend Reinvestment Plan



The Corporation has a dividend reinvestment program that allows
shareholders to purchase additional shares with corporate dividends. Details of the program are outlined in the dividend reinvestment prospectus. To receive more information, please contact the Shareholder Relations Officer at the corporate address.



10-KSB Information



A copy of the Form 10-KSB filed with the Securities and Exchange Commission, will be
furnished to shareholders, without charge, upon written request to the Corporate Secretary, Union Financial Bancshares, Inc., 203 West Main Street, Union, South Carolina 29379.



Annual Meeting of Shareholders



The Annual Meeting of Shareholders will convene at the Main Street Auditorium of the University of South Carolina, Union Campus, Union, South Carolina on April 20, 2005
at 2:00 p.m.



Additional Information



If you are receiving duplicate mailings of shareholder reports due to multiple accounts, we
can consolidate the mailings without affecting your account registration. To do this, or for additional information, contact our Shareholder Relations Officer at the corporate address shown below.



Corporate Offices



203 West Main Street

Union, South Carolina 29379

(888) 427-9002



Transfer Agent



Registrar & Transfer Company

10 Commerce
Drive

Cranford, New Jersey 07016

(800) 456-0596



Independent Registered Public Accounting Firm



Elliott Davis, LLC

200 East Broad Street

Greenville, SC 29601



Special Counsel



Muldoon Murphy & Aguggia LLP

5101
Wisconsin Avenue, N.W.

Washington, D.C. 20016



General Counsel



Nelson Mullins Riley & Scarborough

104 South Main Street, Suite 900

Greenville, South Carolina 29601



Shareholder Relations Officer



Wanda J. Wells

Union Financial Bancshares, Inc.

203 West Main Street

Union, SC 29379

(864) 429-1861



Website



www.providentonline.com



42