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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-KSB



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



OR



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



Commission File Number 1-5735



Union Financial Bancshares, Inc.

(Name of small business issuer in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 57-1001177                         
|(State or other jurisdiction of incorporationor organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|203 West Main Street, Union, South Carolina                   |  | 29379                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



Issuers
telephone number: (864) 429-1864



Securities registered
pursuant to Section 12(b) of the Exchange Act: None



|                                                                     |  |                                       
|-------------------------------------------------------------------- |  | --------------------------------------
|Securities registered pursuant to Section 12(g) of the Exchange Act: |  | Common stock, par value $.01 per share
|                                                                     |  | (Title of Class)                      



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



Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrants knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB.   x



The issuers revenues for the fiscal year ended December 31, 2004 were approximately $19,535,000.



As of February 25, 2005, there were 1,915,827 shares of the registrants common stock issued and outstanding. The aggregate market value of the
voting stock held by non-affiliates, computed by reference to the average bid and asked price on March 4, 2005, was approximately $30,876,963 (1,724,970 shares at $17.90 per share). Solely for the purposes of this calculation it is assumed that
directors and executive officers are affiliates of the registrant.



DOCUMENTS INCORPORATED BY REFERENCE



|1. | Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 2004 (Part II).
|-- | ----------------------------------------------------------------------------------------------------



|2. | Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders (Part III).
|-- | ---------------------------------------------------------------------------------------



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INDEX



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | Page
|Part I   |  |                                                                                                                
|         |  |                                                                                                                
|Item 1.  |  | Description of Business                                                                                         |  | 1   
|Item 2.  |  | Description of Property                                                                                         |  | 23  
|Item 3.  |  | Legal Proceedings                                                                                               |  | 24  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 24  
|         | 
|Part II  |  |                                                                                                                
|         |  |                                                                                                                
|Item 5.  |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities  |  | 24  
|Item 6.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 24  
|Item 7.  |  | Financial Statements                                                                                            |  | 24  
|Item 8.  |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 25  
|Item 8A. |  | Controls and Procedures                                                                                         |  | 25  
|Item 8B. |  | Other Information                                                                                               |  | 25  
|         | 
|Part III |  |                                                                                                                
|         |  |                                                                                                                
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 25  
|Item 10. |  | Executive Compensation                                                                                          |  | 26  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 27  
|Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 27  
|Item 13. |  | Exhibits                                                                                                        |  | 27  
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 28  





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##### Table of Contents

PART I



|Item 1. | Business
|------- | --------



General



Union
Financial Bancshares, Inc. (Union Financial) is the bank holding company for Provident Community Bank, N.A. (the Bank). Union Financial has no material assets or liabilities other than its investment in the Bank. Union
Financials business activity consists primarily of directing the activities of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank. Union Financial and
the Bank are collectively referred to as the Corporation herein.



The Bank converted from a federal savings bank to a national bank charter in July 2003. The Banks operations are conducted through its main office in Union, South Carolina and six full-service banking centers,
all of which are located in the upstate area of South Carolina. The Bank is regulated by the Office of the Comptroller of the Currency (the OCC), is a member of the Federal Home Loan Bank of Atlanta (the FHLB) and its
deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (the FDIC). In addition, Union Financial is a bank holding company, subject to regulation by the Federal Reserve Board (the FRB).



On October 21, 2003, the Board of Directors of Union Financial
changed the fiscal year end of the Corporation from September 30 to December 31, effective December 31, 2003.



The business of the Bank consists primarily of attracting deposits from the general public and originating loans to consumers and businesses. The Bank
also maintains a portfolio of investment securities. The principal sources of funds for the Banks lending activities include deposits received from the general public, interest and principal repayments on loans and, to a lesser extent,
borrowings from the FHLB. The Banks primary source of income is interest earned on loans and investments. The Banks principal expense is interest paid on deposit accounts and borrowings and expenses incurred in operating the Bank.



This annual report contains certain forward-looking
statements within the meaning of the federal securities laws. These forward-looking statements are generally identified by use of the words believe, expect, intend, anticipate,
estimate, project or similar expressions. These forward-looking statements include, but are not limited to, estimates and expectations of future performance with respect to the financial condition and results of operations of
the Corporation and other factors. These forward-looking statements are not guarantees of future performance and are subject to various factors that could cause actual results to differ materially from these forward-looking statements. These factors
include, but are not limited to: changes in general economic and market conditions and the legal and regulatory environment in which the Corporation operates; the development of an interest rate environment that adversely affects the
Corporations interest rate spread or other income anticipated from the Corporations operations; changes in consumer spending, borrowing and savings habits; adverse changes in the securities markets; changes in accounting policies and
practices; and increased competitive pressures among financial services companies. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The
Corporation does not undertakeand specifically disclaims any obligationto publicly release the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.



Competition



The Bank faces competition in
both the attraction of deposit accounts and in the origination of mortgage, commercial and consumer loans. Its most direct competition for savings deposits has historically been derived from other thrift institutions and commercial banks located in
and around Union, Laurens, Fairfield and York Counties, South Carolina. As of June 30, 2004, according to information presented on the Federal Deposit Insurance Corporations website, the Corporation held 44% of the deposits in Union County,
which was the largest share of deposits out of four financial institutions in the county. Additionally, the Corporation held 24% of the deposits in Fairfield County, which was the second largest out of four financial institutions in the county and
8% of the deposits in Laurens County, which was the sixth largest share of deposits out of eight financial institutions in the county.



1



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However, the Corporation competes with super-regional banks, such as Wachovia Bank and National Bank of Commerce, and large regional banks, such as
First-Citizens Bank and Trust Company of South Carolina and Carolina First Bank. These competitors have substantially greater resources and lending limits than the Corporation does and offers services that the Corporation does not provide. The Bank
faces additional significant competition for investor funds from money market instruments and mutual funds. It competes for savings by offering depositors a variety of savings accounts, convenient office locations and other services.



The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of the services it provides borrowers, real estate brokers and home builders. The Banks competition for real estate loans comes principally from other thrift institutions, commercial banks and
mortgage banking companies.



Competition has increased and is
likely to continue to increase as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry,
allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act,
which permits affiliation among banks, securities firms and insurance companies, also has changed and may continue to change the competitive environment in which the Bank conducts business.



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Average Balances, Interest and Average Yields/Cost



The following table sets forth certain information for the periods indicated regarding: (1) average balances of assets and
liabilities; (2) the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities; and (3) average yields and costs. Such yields and costs for the periods indicated are
derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented.



|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|-------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ------------------------ | - | ------ | ------------------ |  | ---- | --------------- |  | - | -------- | - |  | ------------------ | ------ | - | --------------- | ---- | - | -------- | - | ------- | ------------------ |  | - | ------ | - |  | ---- | -
|                                                                                 |  | Year Ended December 31, |         |   | Year Ended September 30, |  
|                                                                                 |  | 2004                    |         |   | 2003                     |   |        | 2002               | 
|                                                                                 |  | Average Balance         |         |   | Interest                 |   |        | Average Yield/Cost |  |      | Average Balance |  |   | Interest |   |  | Average Yield/Cost |        |   | Average Balance |      |   | Interest |   |         | Average Yield/Cost | 
|                                                                                 |  | (Dollars in thousands)  |        
|Interest-earning assets:                                                         |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Loans receivable, net (1)                                                        |  | $                       | 160,131 |   |                          | $ | 10,399 |                    |  | 6.49 | %               |  | $ | 157,265  |   |  | $                  | 10,914 |   |                 | 6.94 | % |          | $ | 165,085 |                    |  | $ | 12,519 |   |  | 7.58 | %
|Mortgage-backed securities                                                       |  |                         | 48,216  |   |                          |   | 1,868  |                    |  | 3.93 |                 |  |   | 79,104   |   |  |                    | 2,991  |   |                 | 3.78 |   |          |   | 73,397  |                    |  |   | 4,012  |   |  | 5.47 |  
|Investment securities:                                                           |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Taxable                                                                          |  |                         | 91,630  |   |                          |   | 3,715  |                    |  | 4.02 |                 |  |   | 52,459   |   |  |                    | 2,115  |   |                 | 4.03 |   |          |   | 14,606  |                    |  |   | 1,015  |   |  | 6.95 |  
|Nontaxable                                                                       |  |                         | 21,063  |   |                          |   | 930    |                    |  | 4.57 |                 |  |   | 18,490   |   |  |                    | 881    |   |                 | 4.77 |   |          |   | 17,648  |                    |  |   | 731    |   |  | 4.14 |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Total investment securities                                                      |  |                         | 112,693 |   |                          |   | 4,645  |                    |  | 4.12 |                 |  |   | 70,949   |   |  |                    | 2,996  |   |                 | 4.22 |   |          |   | 32,254  |                    |  |   | 1,746  |   |  | 5.41 |  
|Overnight deposits                                                               |  |                         | 6,434   |   |                          |   | 40     |                    |  | 0.62 |                 |  |   | 5,396    |   |  |                    | 23     |   |                 | 0.42 |   |          |   | 8,246   |                    |  |   | 86     |   |  | 1.03 |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Total interest-earning assets                                                    |  |                         | 327,474 |   |                          |   | 16,952 |                    |  | 5.18 |                 |  |   | 312,714  |   |  |                    | 16,924 |   |                 | 5.41 |   |          |   | 278,982 |                    |  |   | 18,362 |   |  | 6.58 |  
|Non-interest-earning assets                                                      |  |                         | 24,803  |   |                          |   |        |                    |  |      |                 |  |   | 22,630   |   |  |                    |        |   |                 |      |   |          |   | 18,365  |                    |  |   |        |   |  |      |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Total assets                                                                     |  | $                       | 352,277 |   |                          |   |        |                    |  |      |                 |  | $ | 335,344  |   |  |                    |        |   |                 |      |   |          | $ | 297,347 |                    |  |   |        |   |  |      |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Interest-bearing liabilities:                                                    |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Savings accounts                                                                 |  |                         | 17,966  |   |                          |   | 72     |                    |  | 0.40 |                 |  |   | 15,639   |   |  |                    | 116    |   |                 | 0.75 |   |          |   | 15,336  |                    |  |   | 146    |   |  | 0.95 |  
|Negotiable order of withdrawal accounts                                          |  |                         | 58,060  |   |                          |   | 436    |                    |  | 0.75 |                 |  |   | 42,348   |   |  |                    | 277    |   |                 | 0.65 |   |          |   | 37,862  |                    |  |   | 425    |   |  | 1.12 |  
|3 Certificate accounts                                                           |  |                         | 144,930 |   |                          |   | 3,395  |                    |  | 2.34 |                 |  |   | 149,355  |   |  |                    | 4,267  |   |                 | 2.86 |   |          |   | 142,953 |                    |  |   | 5,430  |   |  | 3.80 |  
|FHLB advances and other borrowings                                               |  |                         | 103,639 |   |                          |   | 3,343  |                    |  | 3.23 |                 |  |   | 97,900   |   |  |                    | 4,042  |   |                 | 4.13 |   |          |   | 74,918  |                    |  |   | 3,774  |   |  | 5.04 |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Total interest-bearing liabilities                                               |  |                         | 324,595 |   |                          |   | 7,246  |                    |  | 2.23 |                 |  |   | 305,242  |   |  |                    | 8,702  |   |                 | 2.85 |   |          |   | 271,069 |                    |  |   | 9,775  |   |  | 3.61 |  
|Non-interest-bearing liabilities                                                 |  |                         | 2,077   |   |                          |   |        |                    |  |      |                 |  |   | 5,400    |   |  |                    |        |   |                 |      |   |          |   | 1,576   |                    |  |   |        |   |  |      |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Total liabilities                                                                |  |                         | 326,672 |   |                          |   |        |                    |  |      |                 |  |   | 310,642  |   |  |                    |        |   |                 |      |   |          |   | 272,645 |                    |  |   |        |   |  |      |  
|Shareholders equity                                                             |  |                         | 25,605  |   |                          |   |        |                    |  |      |                 |  |   | 24,702   |   |  |                    |        |   |                 |      |   |          |   | 24,702  |                    |  |   |        |   |  |      |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Total liabilities and shareholders equity                                       |  | $                       | 352,277 |   |                          |   |        |                    |  |      |                 |  | $ | 335,344  |   |  |                    |        |   |                 |      |   |          | $ | 297,347 |                    |  |   |        |   |  |      |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Net interest income                                                              |  |                         |         |   |                          | $ | 9,706  |                    |  |      |                 |  |   |          |   |  | $                  | 8,222  |   |                 |      |   |          |   |         |                    |  | $ | 8,587  |   |  |      |  
|                                                                                 |  |                         |         |   |                          |   |        |                    |  |      |                 |  |   |          |   |  |                    |        |   |                 |      |   |          |   |         |                    |  |   |        |   |  |      |  
|Interest rate spread (2)                                                         |  |                         |         |   |                          |   |        |                    |  | 2.94 | %               |  |   |          |   |  |                    |        |   |                 | 2.56 | % |          |   |         |                    |  |   |        |   |  | 2.97 | %
|Net interest margin (3)                                                          |  |                         |         |   |                          |   | 2.96   | %                  |  |      |                 |  |   |          |   |  |                    | 2.63   | % |                 |      |   |          |   |         |                    |  |   | 3.08   | % |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                         | 1.01    | x |                          |   |        |                    |  |      |                 |  |   | 1.02     | x |  |                    |        |   |                 |      |   |          |   | 1.03    | x                  |  |   |        |   |  |      |  

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|(1) | Average loans receivable includes nonaccruing loans. Interest income does not include interest on loans 90 days or more past due.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.
|--- | -------------------------------------------------------------------------------------------------------------------



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Lending Activities



General. Set forth below is selected data relating to the composition of the Banks loan portfolio on the dates indicated (dollars in
thousands).



|                                    |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|----------------------------------- |  | --------------- | ------- | - | ---------------- | ------ | - | ------ | - | ------- | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------- | - | ------ | ------ | - | ------- | - | ------- | - |  | ------ | -
|                                    |  | At December 31, |         |   | At September 30, |       
|                                    |  | 2004            |         |   | 2003             |        |   | 2002   |   |         | 2001    |  |        | 2000   | 
|                                    |  | Amount          |         |   | Percent          |        |   | Amount |   |         | Percent |  |        | Amount |  |   | Percent |   |  | Amount |   |  | Percent |         |   | Amount |        |   | Percent |  
|First mortgage loans:               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Conventional                        |  | $               | 43,556  |   |                  | 25.46  | % |        | $ | 55,647  |         |  | 36.39  | %      |  | $ | 88,746  |   |  | 54.92  | % |  | $       | 110,109 |   |        | 69.66  | % |         | $ | 126,949 |   |  | 75.65  | %
|Commercial                          |  |                 | 43,351  |   |                  | 25.34  |   |        |   | 40,372  |         |  | 26.40  |        |  |   | 31,465  |   |  | 19.48  |   |  |         | 16,299  |   |        | 10.31  |   |         |   | 13,036  |   |  | 7.77   |  
|Multi-family and construction loans |  |                 | 3,823   |   |                  | 2.23   |   |        |   | 2,170   |         |  | 1.42   |        |  |   | 5,514   |   |  | 3.41   |   |  |         | 12,259  |   |        | 7.76   |   |         |   | 12,335  |   |  | 7.35   |  
|                                    |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total mortgage loans                |  |                 | 90,730  |   |                  | 53.03  |   |        |   | 98,189  |         |  | 64.21  |        |  |   | 125,725 |   |  | 77.81  |   |  |         | 138,667 |   |        | 87.73  |   |         |   | 152,320 |   |  | 90.77  |  
|Consumer and installment loans      |  |                 | 30,826  |   |                  | 18.02  |   |        |   | 25,445  |         |  | 16.64  |        |  |   | 25,884  |   |  | 16.02  |   |  |         | 22,662  |   |        | 14.33  |   |         |   | 22,307  |   |  | 13.29  |  
|Commercial loans                    |  |                 | 54,796  |   |                  | 32.02  |   |        |   | 33,859  |         |  | 22.14  |        |  |   | 16,100  |   |  | 9.96   |   |  |         | 5,593   |   |        | 3.54   |   |         |   | 2,527   |   |  | 1.51   |  
|                                    |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total loans                         |  |                 | 176,352 |   |                  | 103.07 |   |        |   | 157,493 |         |  | 102.99 |        |  |   | 167,709 |   |  | 103.79 |   |  |         | 166,922 |   |        | 105.60 |   |         |   | 177,154 |   |  | 105.57 |  
|                                    |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Less:                               |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Undisbursed loans in process        |  |                 | (2,363  | ) |                  | (1.38  | ) |        |   | (1,392  | )       |  | (0.91  | )      |  |   | (3,204  | ) |  | (1.97  | ) |  |         | (6,108  | ) |        | (3.86  | ) |         |   | (5,445  | ) |  | (3.24  | )
|Loan discount unamortized           |  |                 | (993    | ) |                  | (0.58  | ) |        |   | (1,448  | )       |  | (0.95  | )      |  |   | (1,685  | ) |  | (1.04  | ) |  |         | (1,922  | ) |        | (1.22  | ) |         |   | (2,718  | ) |  | (1.62  | )
|Allowance for loan losses           |  |                 | (2,026  | ) |                  | (1.18  | ) |        |   | (1,842  | )       |  | (1.20  | )      |  |   | (1,371  | ) |  | (0.85  | ) |  |         | (1,080  | ) |        | (0.68  | ) |         |   | (1,360  | ) |  | (0.81  | )
|Deferred loan fees                  |  |                 | 124     |   |                  | 0.07   |   |        |   | 110     |         |  | 0.07   |        |  |   | 127     |   |  | 0.07   |   |  |         | 251     |   |        | 0.16   |   |         |   | 176     |   |  | 0.10   |  
|                                    |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Net loans receivable                |  | $               | 171,094 |   |                  | 100.00 | % |        | $ | 152,921 |         |  | 100.00 | %      |  | $ | 161,576 |   |  | 100.00 | % |  | $       | 158,063 |   |        | 100.00 | % |         | $ | 167,807 |   |  | 100.00 | %
|                                    |  |                 |         |   |                  |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  



The following table
sets forth, at December 31, 2004, certain information regarding the dollar amount of principal repayments for loans becoming due during the periods indicated (in thousands). Demand loans (loans having no stated schedule of repayments and no stated
maturity) and overdrafts are reported as due in one year or less.



|                                        |  |                    |        |                                 |   |                  |  |       |        |  |   |        
|--------------------------------------- |  | ------------------ | ------ | ------------------------------- | - | ---------------- |  | ----- | ------ |  | - | -------
|                                        |  | Due Within OneYear |        | DueAfter 1 Year Through 5 Years |   | DueAfter 5 Years |  | Total
|First mortgage loans:                   |  |                    |        |                                 |   |                  |  |       |        |  |   |        
|Conventional loans                      |  | $                  | 207    |                                 | $ | 2,257            |  | $     | 41,092 |  | $ | 43,556 
|Commercial loans                        |  |                    | 10,300 |                                 |   | 29,168           |  |       | 3,883  |  |   | 43,351 
|Multi-family and construction loans (1) |  |                    | 3,823  |                                 |   |                 |  |       |       |  |   | 3,823  
|Consumer and installment loans          |  |                    | 3,129  |                                 |   | 9,875            |  |       | 17,822 |  |   | 30,826 
|Commercial loans                        |  |                    | 19,696 |                                 |   | 26,057           |  |       | 9,043  |  |   | 54,796 
|                                        |  |                    |        |                                 |   |                  |  |       |        |  |   |        
|Total                                   |  | $                  | 37,155 |                                 | $ | 67,357           |  | $     | 71,840 |  | $ | 176,352
|                                        |  |                    |        |                                 |   |                  |  |       |        |  |   |        

---

|(1) | Includes construction/permanent loans.
|--- | --------------------------------------



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The actual average life of mortgage loans is substantially less than their contractual term because of
loan repayments and because of enforcement of due-on-sale clauses that give the Bank the right to declare a loan immediately due and payable if, among other things, the borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans.



The following table sets forth, at December 31, 2004, the dollar amount of loans due after December 31, 2005 which have fixed rates of interest and
which have adjustable rates of interest (in thousands).



|                               |  |       |        |            |   |        |  |   |        
|------------------------------ |  | ----- | ------ | ---------- | - | ------ |  | - | -------
|                               |  | Fixed |        | Adjustable |   | Total 
|First mortgage loans:          |  |       |        |            |   |        |  |   |        
|Conventional loans             |  | $     | 27,800 |            | $ | 15,549 |  | $ | 43,349 
|Commercial loans               |  |       | 9,688  |            |   | 23,363 |  |   | 33,051 
|Consumer and installment loans |  |       | 12,559 |            |   | 15,138 |  |   | 27,697 
|Commercial loans               |  |       | 6,218  |            |   | 28,882 |  |   | 35,100 
|                               |  |       |        |            |   |        |  |   |        
|Total                          |  | $     | 56,265 |            | $ | 82,932 |  | $ | 139,197
|                               |  |       |        |            |   |        |  |   |        



Real Estate
Loans. The Bank originates conventional mortgage loans to enable borrowers to purchase existing single family homes or to construct new homes. The Banks residential real estate loan portfolio also includes loans on multi-family dwellings
(more than five units) and commercial real estate. At December 31, 2004, approximately $43.5 million, or 25.5% of the Corporations net loan portfolio consisted of loans secured by residential real estate (net of undisbursed principal,
excluding construction loans).



Office of the Comptroller of
the Currency regulations limit the amount that national banks may lend in relationship to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Federal regulations permit a maximum
loan-to-value ratio of 100% for one-to four-family dwellings and 85% for all other real estate loans. The Banks lending policies, however, limit the maximum loan-to-value ratio on one-to-four-family real estate mortgage loans to 80% of the
lesser of the appraised value or the purchase price. Any single-family loan made in excess of an 80% loan-to-value ratio and any commercial real estate loan in excess of a 75% loan-to-value ratio is required to have private mortgage insurance or
additional collateral. In the past, the Bank has originated some commercial real estate loans in excess of a 75% loan-to-value ratio without private mortgage insurance or additional collateral.



The loan-to-value ratio, maturity and other provisions of the loans made by
the Bank have generally reflected a policy of making less than the maximum loan permissible under applicable regulations, market conditions, and underwriting standards established by the Bank. Mortgage loans made by the Bank are generally long-term
loans (15-30 years), amortized on a monthly basis, with principal and interest due each month. In the Banks experience, real estate loans remain outstanding for significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans, at their option, with no prepayment penalty.



The Bank offers a full complement of mortgage lending products with both fixed and adjustable rates. Due to the nature of the Banks marketplace, only a small percentage of local loans are adjustable-rate mortgage loans
(ARMs). The majority of adjustable-rate loans in the portfolio are originated outside of the Banks market area by third party originators. These loans are originated and underwritten using the same terms and conditions as loans
originated by the Bank. The Bank offers ARMs tied to U.S. Treasury Bills with a maximum interest rate adjustment



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of 2% annually and 6% over the life of the loan. At December 31, 2004, the Bank had approximately $15.5 million of ARMs, or 9.1% of the Banks total
loans receivable. At December 31, 2004, 16.4% of the Banks loan portfolio consisted of long-term, fixed-rate real estate loans.



Net interest income depends to a large extent on how successful the Corporation is in matching interest-earning assets and interest-bearing
liabilities. The Corporation has taken steps to reduce its exposure to rising interest rates. For a discussion of these steps, see Managements Discussion and Analysis of Financial Condition and Results of Operations in the Annual
Report.



Commercial real estate loans constituted approximately
$43.4 million, or 25.3%, of the Banks net loan portfolio at December 31, 2004. Commercial real estate loans consist of permanent loans secured by multi-family loans, generally apartment houses, as well as commercial and industrial properties,
including office buildings, warehouses, shopping centers, hotels, motels and other special purpose properties. Commercial real estate loans are originated and purchased for inclusion in the Banks portfolio. These loans generally have 20- to
30-year amortization schedules and are callable or have balloon payments after five years. Typically, the loan documents provide for adjustment of the interest rate every one to three years. Fixed-rate loans secured by multi-family residential and
commercial properties have terms ranging from 20 to 25 years.



Loans secured by multi-family and commercial real estate properties may involve greater risk than single-family residential loans. Such loans generally are substantially larger than single-family residential loans. Further, the payment
experience on loans secured by commercial properties typically depends on the successful operation of the properties, and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally.



Construction Loans. The Bank engages in construction
lending that is primarily secured by single family residential real estate and, to a much lesser extent, commercial real estate. The Bank grants construction loans to individuals with a takeout for permanent financing from another financial
institution, and to approved builders on both presold and unsold properties.



Loan brokers are the Banks primary source for construction loans. The loan broker sends the Bank both individuals seeking construction financing for their personal dwelling or builders seeking lines of credit
for the construction of single family residences on both presold and unsold properties. Construction loans to individuals are originated for a term of one year or less or are originated to convert to permanent loans at the end of the construction
period. Construction loans are originated to builders for a term not to exceed 12 months. Generally, draw inspections are handled by the appraiser who initially appraised the property; however, in some instances the draw inspections are performed by
the originating brokerage firm.



Construction financing affords
the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than do single-family permanent mortgage loans. However, construction loans are generally considered to involve a higher degree of risk than
single-family permanent mortgage lending due to: (1) the concentration of principal among relatively few borrowers and development projects; (2) the increased difficulty at the time the loan is made of estimating the building costs and the selling
price of the property to be built; (3) the increased difficulty and costs of monitoring the loan; (4) the higher degree of sensitivity to increases in market rates of interest; and (5) the increased difficulty of working out loan problems.



At December 31, 2004, the Bank had approximately $3.8 million
outstanding in construction loans, including approximately $2.4 million in undisbursed proceeds. Substantially all of these loans were secured by one- to four-family residences.



Consumer Loans. The Banks consumer loan portfolio consists primarily of automobile loans on new and used
vehicles, mobile home loans, boat loans, second mortgage loans, loans secured by savings accounts and unsecured loans. The Bank makes consumer loans to serve the needs of its customers and as a way to improve the interest-rate sensitivity of the
Banks loan portfolio.



Consumer loans tend to bear higher
rates of interest and have shorter terms to maturity than residential mortgage loans. However, nationally, consumer loans have historically tended to have a higher rate of default than



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residential mortgage loans. Additionally, consumer loans entail greater risk than do residential mortgage loans, particularly in the case of loans that are
unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.



Commercial Loans. The Bank makes commercial business loans primarily in its market area through its branch network to
small businesses. Each county location of the branch network has an experienced commercial lender that is responsible for the generation of this product. In selective cases, the Bank will enter into a loan participation within its market area to
purchase a portion of a commercial loans that meets the Banks underwriting criteria. The Bank offers secured commercial loans with maturities of up to 20 years. The term for repayment will normally be limited to the lesser of the expected useful
life of the asset being financed or a fixed amount of time, generally less than seven years. These loans have adjustable rates of interest indexed to the prime rate as reported in The Wall Street Journal and are payable on demand, subject to
annual review and renewal. When making commercial loans, the Bank considers the financial statements of the borrower, the borrowers payment history of both corporate and personal debt, the debt service capabilities of the borrower, the
projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral. Commercial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and
equipment, and are generally supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 80% of the value of the collateral securing the loan. The Banks largest
commercial loan relationship was a $3.2 million loan secured by real estate located in Rock Hill, South Carolina. This loan was performing according to its original terms at December 31, 2004.



Unlike residential mortgage loans, which generally are made on the basis of
the borrowers ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrowers ability to make repayment from the cash flow of the borrowers business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself.
Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.



Loan Solicitation and Processing. Loan originations come from both walk-in customers and loan brokers. The loan origination process for walk-in
customers includes an initial interview with an officer of the Bank for the purpose of obtaining a formal application. Upon receipt of a loan application from a prospective borrower, a credit report is ordered to verify specific information relating
to the loan applicants employment, income and credit standing. This information may be further verified by personal contacts with other reference sources. An appraisal of the real estate intended to secure the proposed loan is undertaken by
pre-approved, independent fee appraisers. As soon as the required information has been obtained and the appraisal completed, the loan is submitted to the authorized officer, loan committees or full Board of Directors for review. The Bank utilizes
various officers and loan committees for the approval of real estate loans. The President and Chief Executive Officer has the authority to approve loan requests up to and including $500,000 in secured credit and up to and including $500,000 in
unsecured credit. The President and Chief Executive Officer or the Chief Credit Officer along with two members of the Board Loan Committee have the authority to approve loan requests up to $1,000,000 in secured credit and $500,000 in unsecured
credit. The Board of Directors has appointed a Board Loan Committee comprised of two members elected annually from the Board of Directors and four senior executive officers of the Bank. A quorum of three members, including at least one Board member,
is required for any action. This Committee has the authority to approve all secured and unsecured loan requests with the exception of a single loan request exceeding $2,000,000 in secured credit and exceeding $1,000,000 in unsecured credit, which
require approval of the entire Board of Directors.



Loan
applicants are promptly notified of the decision of the Bank by telephone, setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate, amortization term, and a brief
description of the real estate to be mortgaged to the Bank. The Bank also issues a commitment letter to the potential borrower which typically remains in effect for 60 days. The Banks experience is that very few commitments go unfunded. See
Loan Commitments. The borrower is required to pay all origination costs incurred in connection with the particular loan closing.



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Loan Originations, Purchases and Sales. During fiscal 2001, the Bank reduced broker loan purchases
and originations and phased out its mortgage lending operations to provide an increased capital allocation for consumer and commercial lending. Consequently, the Bank did not securitize any loans in either the 2004 or 2003 fiscal years. The Bank
does not have any current plans to sell a large volume of loans, other than fixed-rate mortgage loans it originates through its retail branch network. The Bank purchases participation interests in loans originated by other institutions. The Bank had
total purchases of participation interests of $7.8 million in fiscal 2004. These participation interests are on both residential and commercial properties and carry either a fixed or adjustable interest rate. The Bank performs its own underwriting
analysis on each of its participation interests before purchasing such loans and therefore believe there is no greater risk of default on these obligations. However, in a purchased participation loan, the Bank does not service the loan and thus are
subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings. The Bank is permitted to review all of the documentation relating to any loan in which
the Bank participates, including any annual financial statements provided by a borrower. Additionally, the Bank receives periodic updates on the loan from the lead lender.



The following table sets forth the Banks loan origination activity for the periods indicated (in thousands):



|                                    |  |                             |        |                         |      |        |  |   |       
|----------------------------------- |  | --------------------------- | ------ | ----------------------- | ---- | ------ |  | - | ------
|                                    |  | Year EndedDecember 31, 2004 |        | Year EndedSeptember 30,
|                                    |  |                             | 2003   |                         | 2002
|Loans originated:                   |  |                             |        |                         |      |        |  |   |       
|First mortgage loans:               |  |                             |        |                         |      |        |  |   |       
|Conventional loans                  |  | $                           | 6,025  |                         | $    | 7,590  |  | $ | 9,926 
|Multi-family and construction loans |  |                             | 1,411  |                         |      | 2,550  |  |   | 6,625 
|                                    |  |                             |        |                         |      |        |  |   |       
|Total mortgage loans originated     |  |                             | 7,436  |                         |      | 10,140 |  |   | 16,551
|                                    |  |                             |        |                         |      |        |  |   |       
|Consumer and installment loans      |  |                             | 15,166 |                         |      | 11,172 |  |   | 12,318
|Commercial loans                    |  |                             | 43,121 |                         |      | 41,229 |  |   | 57,838
|                                    |  |                             |        |                         |      |        |  |   |       
|Total loans originated              |  | $                           | 65,723 |                         | $    | 62,541 |  | $ | 86,707
|                                    |  |                             |        |                         |      |        |  |   |       
|Loan participations                 |  | $                           | 7,798  |                         | $    | 7,085  |  | $ | 5,275 



Loan
Commitments. The Banks commitments to make conventional mortgage and commercial loans are normally made for periods of up to 60 days from the date of loan approval. See Financial Condition, Liquidity and Capital Resources in
the Annual Report.



Loan Origination and Other Fees. In
addition to interest earned on loans and fees for making loan commitments, the Bank charges origination fees or points for originating loans. Loan origination fees are usually a percentage of the principal amount of the mortgage loan,
typically between 0.5% and 2%, depending on the terms and conditions. Other fees collected include late charges applied to delinquent payments and fees collected in connection with loan modifications. The Bank charges a 5% late charge fee on
payments delinquent 15 days or more on new loan originations, loan modifications, loan assumptions and loans currently in the Banks portfolio where applicable. Late charges and modification fees do not constitute a material source of income.
Accounting standards require fees received (net of certain loan origination costs) for originating loans to be deferred and amortized into interest income over the contractual life of the loan. As of December 31, 2004, the Corporation had net
deferred loan fees of approximately $124,000.



Problem
Assets. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the default by contacting the borrower. In general, borrowers are contacted after a payment is more than 30 days past due. In most cases, defaults are
cured promptly. If the delinquency on a mortgage loan is not cured through the Banks normal collection procedures, or an acceptable arrangement is not worked out with the borrower, the Bank will institute measures to remedy the default,
including commencing a foreclosure action.



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Loans are reviewed on a regular basis and an allowance for uncollectible interest is established against
accrued interest receivable when, in the opinion of management, the collection of additional interest is doubtful. An allowance for uncollectible interest on real estate loans and consumer loans is established when either principal or interest is
more than 90 days past due. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. See Notes 1 and 3 of Notes to
Consolidated Financial Statements.



A loan is impaired when it
is probable, based on current information, the Corporation will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Management has determined that, generally, a failure to make
a payment within a 90-day period constitutes a minimum delay or shortfall and does not generally constitute an impaired loan. However, management reviews each past due loan on a loan-by-loan basis and may determine a loan to be impaired prior to the
loan becoming over 90 days past due, depending upon the circumstances of that particular loan. A loan is classified as non-accrual at the time management believes that the collection of interest is improbable, generally when a loan becomes 90 days
past due. The Banks policy for charge-off of impaired loans is on a loan-by-loan basis. At the time management believes the collection of interest and principal is remote, the loan is charged off. The Bank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.



Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. When such property is
acquired it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value less selling costs. Any subsequent write-down of the property is charged to income.



The following table sets forth information with respect to the Banks
non-performing assets for the periods indicated (dollars in thousands). It is the policy of the Bank to cease accruing interest on loans 90 days or more past due. As of and for the years ended December 31, 2004 and September 30, 2003, $197,000 and
$718,246, respectively, were classified within the meaning of Statement of Financial Accounting Standards (SFAS) No. 15. The reduction in non-performing assets from $3.7 million at September 30, 2003 to $1.1 million at December 31, 2004
was due primarily to the increase in loan charge-offs of $1.4 million for the comparable period.



|                                                                |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  
|--------------------------------------------------------------- |  | ------------------- | ----- | - | ---------------- | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | - |  | - | ----- | -
|                                                                |  | AtDecember 31, 2004 |       |   | At September 30, |     
|                                                                |  |                     | 2003  |   |                  | 2002 |       |   | 2001 |   |       | 2000 | 
|Loans accounted for on a non-accrual basis:                     |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  
|Real estate                                                     |  | $                   | 217   |   |                  | $    | 408   |   |      | $ | 916   |      |  | $ | 626  |   |  | $ | 763   |  
|Commercial                                                      |  |                     | 142   |   |                  |      | 2,437 |   |      |   | 524   |      |  |   | 160  |   |  |   | 247   |  
|Consumer                                                        |  |                     | 391   |   |                  |      | 209   |   |      |   | 426   |      |  |   | 9    |   |  |   | 106   |  
|                                                                |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  
|Total                                                           |  |                     | 750   |   |                  |      | 3,054 |   |      |   | 1,866 |      |  |   | 795  |   |  |   | 1,116 |  
|                                                                |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more |  |                     |      |   |                  |      |      |   |      |   |      |      |  |   |     |   |  |   |      |  
|Real estate owned, net                                          |  |                     | 364   |   |                  |      | 652   |   |      |   | 356   |      |  |   | 77   |   |  |   | 459   |  
|                                                                |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  
|Total non-performing assets                                     |  | $                   | 1,114 |   |                  | $    | 3,706 |   |      | $ | 2,222 |      |  | $ | 872  |   |  | $ | 1,575 |  
|                                                                |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  
|Percentage of non-performing assets to loans receivable net     |  |                     | 0.65  | % |                  |      | 2.42  | % |      |   | 1.37  | %    |  |   | 0.56 | % |  |   | 0.94  | %
|                                                                |  |                     |       |   |                  |      |       |   |      |   |       |      |  |   |      |   |  |   |       |  



Interest income that
would have been recorded for the year ended December 31, 2004 had non-accruing loans been current in accordance with their original terms amounted to approximately $45,000. There was no interest included in interest income on such loans for the year
ended December 31, 2004.



Allowance for Loan Losses. In
originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for the loan. To cover losses inherent in the portfolio of performing loans, the Bank maintains an allowance for loan losses. Managements periodic evaluation of the
adequacy of the allowance is based on a number of factors,



9



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including managements evaluation of the collectibility of the loan portfolio, the nature and size of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans and economic conditions. The amount of the allowance is based on the estimated value of the collateral securing the loan and other analysis pertinent to each situation.



The Bank increases its allowance for loan losses by charging provisions for
loan losses against income. The allowance for loan losses is maintained at an amount management considers adequate to absorb losses inherent in the portfolio. Although management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the
determinations.



The provision for loan loss calculation
includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is rated for all loans including performing groups. The weights assigned to each performing group is developed from previous
loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition, as the amount of loans in each category increases and decreases, the provision for loan loss calculation adjusts accordingly.



While the Bank believes it has established its existing
allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the Banks loan portfolio, will not request the Bank to significantly increase its allowance for loan
losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses will adversely affect the Corporations financial condition and results of operations. See Notes 1
and 3 of Notes to Consolidated Financial Statements for information concerning the Banks provision and allowance for possible loan losses.



The following table sets forth an analysis of the Banks allowance for loan losses for the periods indicated (dollars in thousands):



|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------- |  | ------------------- | ------ | ---- | ---------------------------------- | - | ----- | ---------------- |  | ---- | ----- | - | ---- | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                              |  | AtDecember 31, 2004 |        |      | ThreeMonths EndedDecember 31, 2003 |   |       | At September 30, | 
|                                                                              |  |                     |        | 2003 |                                    |   | 2002  |                  |  | 2001 |       |   | 2000 |  
|Balance at beginning of year                                                  |  | $                   | 2,383  |      |                                    | $ | 1,842 |                  |  | $    | 1,371 |   |      | $ | 1,080 |   |  | $ | 1,360 |   |  | $ | 836   |  
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Loans charged off:                                                            |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Real estate                                                                   |  |                     | (62    | )    |                                    |   | (47   | )                |  |      | (255  | ) |      |   | (127  | ) |  |   | (180  | ) |  |   | (85   | )
|Commercial                                                                    |  |                     | (1,740 | )    |                                    |   | (154  | )                |  |      | (11   | ) |      |   | (542  | ) |  |   | (211  | ) |  |   |      |  
|Consumer                                                                      |  |                     | (40    | )    |                                    |   | (39   | )                |  |      | (65   | ) |      |   | (82   | ) |  |   | (176  | ) |  |   | (129  | )
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Total charge-offs                                                             |  |                     | (1,842 | )    |                                    |   | (240  | )                |  |      | (331  | ) |      |   | (751  | ) |  |   | (567  | ) |  |   | (214  | )
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Recoveries:                                                                   |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Real estate                                                                   |  |                     | 22     |      |                                    |   | 1     |                  |  |      | 31    |   |      |   | 36    |   |  |   | 4     |   |  |   |      |  
|Commercial                                                                    |  |                     | 192    |      |                                    |   | 51    |                  |  |      | 6     |   |      |   |      |   |  |   | 8     |   |  |   |      |  
|Consumer                                                                      |  |                     | 21     |      |                                    |   | 4     |                  |  |      | 40    |   |      |   | 16    |   |  |   | 35    |   |  |   | 64    |  
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Total recoveries                                                              |  |                     | 235    |      |                                    |   | 56    |                  |  |      | 77    |   |      |   | 52    |   |  |   | 47    |   |  |   | 64    |  
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Net charge-offs                                                               |  |                     | (1,607 | )    |                                    |   | (184  | )                |  |      | (254  | ) |      |   | (699  | ) |  |   | (520  | ) |  |   | (150  | )
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Merger additions                                                              |  |                     |       |      |                                    |   |      |                  |  |      |      |   |      |   |      |   |  |   |      |   |  |   | 449   |  
|Provision for loan losses (1)                                                 |  |                     | 1,250  |      |                                    |   | 725   |                  |  |      | 725   |   |      |   | 990   |   |  |   | 240   |   |  |   | 225   |  
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Balance at end of year                                                        |  | $                   | 2,026  |      |                                    | $ | 2,383 |                  |  | $    | 1,842 |   |      | $ | 1,371 |   |  | $ | 1,080 |   |  | $ | 1,360 |  
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|Ratio of net charge-offs to average gross loans outstanding during the period |  |                     | 0.91   | %    |                                    |   | 0.12  | %                |  |      | 0.16  | % |      |   | 0.42  | % |  |   | 0.32  | % |  |   | 0.08  | %
|                                                                              |  |                     |        |      |                                    |   |       |                  |  |      |       |   |      |   |       |   |  |   |       |   |  |   |       |  

---

|(1) | See Managements Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report for a discussion of the factors responsible for
changes in the provision for loan losses between the periods.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Bank experienced bad debt charge-offs, net of recoveries, of approximately $1.6 million in fiscal
2004 compared to $254,000 for fiscal 2003. The loan charge-offs for the current year included approximately $1.3 million from three commercial loans that were charged-off after the loans were determined to be uncollectable. The Bank does not think
that the higher level of loan charge-offs for the current year reflects any trends in the commercial loan portfolio. The allowance for loan losses to total loans ratio at the end of fiscal 2004 was 1.18% compared to 1.19% at the end of fiscal 2003.
Nonperforming assets, which includes repossessed assets and loans on non-accrual, decreased to $1.1 million at December 31, 2004 from $3.7 million at September 30, 2003.



The following table sets forth the breakdown of the allowance for loan losses by loan category and the percentage of loans
in each category to total loans for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of further
losses and does not restrict the use of the allowance to absorb losses in any category (dollars in thousands):



|                                |  |                      |       |                                       |                  |      |        |   |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                         |  |   |       |  |        |  
|------------------------------- |  | -------------------- | ----- | ------------------------------------- | ---------------- | ---- | ------ | - | ------------------------------------- |  | ------ | ------ |  | ------------------------------------- | ----- |  | ------ | - | ------------------------------------- | - | ----- | ------ | ------ | --------------------------------------- |  | - | ----- |  | ------ | -
|                                |  | At December 31, 2004 |       |                                       | At September 30, |     
|                                |  |                      | 2003  |                                       |                  | 2002 |        |   | 2001                                  |  |        | 2000   | 
|                                |  | Amount               |       | % ofLoans inEachCategoryto TotalLoans |                  |      | Amount |   | % ofLoans inEachCategoryto TotalLoans |  |        | Amount |  | % ofLoans inEachCategoryto TotalLoans |       |  | Amount |   | % ofLoans inEachCategoryto TotalLoans |   |       | Amount |        | % ofLoans in Each Categoryto TotalLoans | 
|Real estate                     |  | $                    | 208   |                                       | 26.87            | %    |        | $ | 339                                   |  | 43.45  | %      |  | $                                     | 357   |  | 62.58  | % |                                       | $ | 400   |        | 73.31  | %                                       |  | $ | 600   |  | 78.62  | %
|Commercial                      |  |                      | 1,584 |                                       | 55.65            |      |        |   | 1,182                                 |  | 37.05  |        |  |                                       | 778   |  | 20.82  |   |                                       |   | 100   |        | 13.11  |                                         |  |   | 200   |  | 8.79   |  
|Consumer                        |  |                      | 121   |                                       | 17.48            |      |        |   | 209                                   |  | 19.50  |        |  |                                       | 141   |  | 16.60  |   |                                       |   | 500   |        | 13.58  |                                         |  |   | 500   |  | 12.59  |  
|Unallocated                     |  |                      | 113   |                                       | N/A              |      |        |   | 112                                   |  | N/A    |        |  |                                       | 95    |  | N/A    |   |                                       |   | 80    |        | N/A    |                                         |  |   | 60    |  | N/A    |  
|                                |  |                      |       |                                       |                  |      |        |   |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                         |  |   |       |  |        |  
|Total allowance for loan losses |  | $                    | 2,026 |                                       | 100.00           | %    |        | $ | 1,842                                 |  | 100.00 | %      |  | $                                     | 1,371 |  | 100.00 | % |                                       | $ | 1,080 |        | 100.00 | %                                       |  | $ | 1,360 |  | 100.00 | %
|                                |  |                      |       |                                       |                  |      |        |   |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                         |  |   |       |  |        |  



The Bank adjusts
balances on real estate acquired in settlement of loans to the lower of cost or market based on appraised value when the property is received in settlement. These values reflect current market conditions and sales experience. See Notes 1 and 3 of
Notes to Consolidated Financial Statements.



Asset
Classification. The Office of the Comptroller of the Currency requires national banks to classify problem assets. The Bank classifies its problem assets as substandard, doubtful or loss, depending on the
presence of certain characteristics. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard assets
include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified
as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do
not currently expose the insured institution to sufficient risk to warrant classification in the above-mentioned categories but possess weaknesses are designated special mention.



When an institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an institution classifies problem assets or a portion of assets as loss, it is required either to establish a specific allowance for losses
equal to



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100% of the amount of the asset or a portion thereof so classified or to charge-off such amount. An institutions determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by the Comptroller of the Currency who can order the establishment of additional general or specific loss allowances.



The following tables set forth the number and amount of classified loans at
December 31, 2004 (dollars in thousands):



|            |  |        |  |          |   |             |   |                 |   |        |  |        |  |        |       |        |    |  |   |      
|----------- |  | ------ |  | -------- | - | ----------- | - | --------------- | - | ------ |  | ------ |  | ------ | ----- | ------ | -- |  | - | -----
|            |  | Loss   |  | Doubtful |   | Substandard |   | Special Mention
|            |  | Number |  | Amount   |   | Number      |   | Amount          |   | Number |  | Amount |  | Number |       | Amount
|Real estate |  |       |  | $        |  |             |  |                 | $ |       |  | 5      |  | $      | 217   |        | 10 |  | $ | 616  
|Commercial  |  |       |  |          |  |             |  |                 |   |       |  | 7      |  |        | 3,528 |        | 6  |  |   | 2,118
|Consumer    |  |       |  |          |  |             |  |                 |   |       |  | 7      |  |        | 391   |        | 2  |  |   | 54   
|            |  |        |  |          |   |             |   |                 |   |        |  |        |  |        |       |        |    |  |   |      
|Total       |  |       |  | $        |  |             |  |                 | $ |       |  | 19     |  | $      | 4,136 |        | 18 |  | $ | 2,788
|            |  |        |  |          |   |             |   |                 |   |        |  |        |  |        |       |        |    |  |   |      



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Investment Activities



SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that investments be categorized as held to
maturity, trading securities or available for sale, based on managements intent as to the ultimate disposition of each security. SFAS No. 115 allows debt securities to be classified as held to maturity
and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in
the securitys prepayment risk, increases in loan demand, or other similar factors cannot be classified as held to maturity. Debt and equity securities held for current resale are classified as trading securities. Such
securities are reported at fair value, and unrealized gains and losses on such securities would be included in earnings. The Corporation currently does not use or maintain a trading account. Debt and equity securities not classified as either
held to maturity or trading securities are classified as available for sale. Such securities are reported at fair value, and unrealized gains and losses on such securities are excluded from earnings and reported
as a net amount in a separate component of equity.



The
following table sets forth the Corporations investment and mortgage-backed securities portfolio at the dates indicated (dollars in thousands):



|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|-------------------------------------- |  | --------------- | ------- | ------------------- | ---------------- | - | -------------- | ---- | ------------------- |  | ------ | ------------- |  | -------------------- | ------- |  | ------ | -
|                                       |  | At December 31, |         |                     | At September 30, |  
|                                       |  | 2004            |         |                     | 2003             |   |                | 2002 |                    
|                                       |  | Carrying Value  |         | Percent ofPortfolio |                  |   | CarryingValue  |      | Percent ofPortfolio |  |        | CarryingValue |  | Percent of Portfolio |        
|Available for sale:                    |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Investment securities:                 |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|U.S. Agency obligations                |  | $               | 71,548  |                     | 50.43            | % |                | $    | 48,596              |  | 30.87  | %             |  | $                    | 10,599  |  | 9.01   | %
|Corporate securities                   |  |                 | 8,619   |                     | 6.08             |   |                |      | 5,425               |  | 3.45   |               |  |                      | 3,717   |  | 3.16   |  
|Equity securities                      |  |                 | 2,257   |                     | 1.59             |   |                |      | 2,435               |  | 1.55   |               |  |                      |        |  |       |  
|Municipal securities                   |  |                 | 20,544  |                     | 14.48            |   |                |      | 22,334              |  | 14.18  |               |  |                      | 14,597  |  | 12.41  |  
|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Total investment securities            |  |                 | 102,968 |                     | 72.58            |   |                |      | 78,790              |  | 50.05  |               |  |                      | 28,913  |  | 24.58  |  
|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Mortgage-backed and related securities |  |                 | 38,896  |                     | 27.42            |   |                |      | 78,648              |  | 49.95  |               |  |                      | 88,720  |  | 75.42  |  
|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Total                                  |  | $               | 141,864 |                     | 100.00           | % |                | $    | 157,438             |  | 100.00 | %             |  | $                    | 117,633 |  | 100.00 | %
|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|                                       |  |                
|                                       |  | At December 31, |         |                     | At September 30, |  
|                                       |  | 2004            |         |                     | 2003             |   |                | 2002 |                    
|                                       |  | Carrying Value  |         | Percent ofPortfolio |                  |   | Carrying Value |      | Percent ofPortfolio |  |        | CarryingValue |  | Percent of Portfolio |        
|Held to Maturity:                      |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Investment securities:                 |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Municipal securities                   |  | $               | 1,630   |                     | 100.00           |   |                |      |                    |  |       |               |  |                      |        |  |       |  
|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  
|Total                                  |  | $               | 1,630   |                     | 100.00           | % |                |      |                    |  |       |               |  |                      |        |  |       |  
|                                       |  |                 |         |                     |                  |   |                |      |                     |  |        |               |  |                      |         |  |        |  



The Corporation
purchases mortgage-backed securities, both fixed-rate and adjustable-rate, from Freddie Mac, Fannie Mae and Ginnie Mae with maturities from five to 30 years. The Corporation also purchases government agency adjustable-rate securities that are backed
by the full faith and credit of the U.S. government. The Corporation increased its level of agency securities over the previous year to balance the portfolio mix and stabilize interest rate flows as a result of the high loan prepayment speeds
experienced with mortgage-backed securities.



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The Corporation also purchases mortgage derivative securities in the form of collateralized mortgage
obligations (CMOs). While these securities possess minimal credit risk due to the Federal guarantee backing the U.S. government agencies, they possess liquidity and interest rate risk. The amortized cost and fair value of the CMOs at
December 31, 2004 was approximately $7.2 million. See Note 2 of Notes to Consolidated Financial Statements for more information regarding investment and mortgage-backed securities.



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The following table sets forth at amortized cost (held to maturity) and market value (available for sale)
the maturities and weighted average yields of the Corporations investment and mortgage-backed securities portfolio at December 31, 2004 (dollars in thousands):



|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|-------------------------------------- |  | ------------------------------- | ------ | -------------------- | ---------------------- | - | ------------- | ---------------------- | ---------------------- |  | -------------- | ------------- | ----- | -------------------- | ------ |  | -------------- | - | -------------------- | - | ------------- |  | ---------------------- |  | - | ------- |  | ---- | -
|                                       |  | Amount Due or Repricing within: |       
|                                       |  | One Year or Less                |        |                      | Over One to Five Years |   |               | Over Five to Ten Years |                        |  | Over Ten Years |               | Total |                     
|                                       |  | CarryingValue                   |        | WeightedAverageYield |                        |   | CarryingValue |                        | Weighted Average Yield |  |                | CarryingValue |       | WeightedAverageYield |        |  | Carrying Value |   | WeightedAverageYield |   | CarryingValue |  | Weighted Average Yield | 
|Available for Sale:                    |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Investment securities:                 |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|U.S. Agency obligations                |  | $                               | 7,600  |                      | 3.34                   | % |               | $                      | 49,938                 |  | 4.23           | %             |       | $                    | 14,010 |  | 3.66           | % |                      |   |              |  |                       |  | $ | 71,548  |  | 4.02 | %
|Municipal securities                   |  |                                 | 71     |                      | 5.06                   |   |               |                        | 1,423                  |  | 5.19           |               |       |                      | 495    |  | 4.42           |   |                      |   | 18,555        |  | 4.67                   |  |   | 20,544  |  | 4.70 |  
|Equity securities                      |  |                                 |       |                      |                       |   |               |                        |                       |  |               |               |       |                      |       |  |               |   |                      |   | 2,257         |  | 2.56                   |  |   | 2,257   |  | 2.56 |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Corporate securities                   |  |                                 | 2,171  |                      | 5.02                   |   |               |                        | 4,460                  |  | 4.64           |               |       |                      |       |  |               |   |                      |   | 1,988         |  | 7.00                   |  |   | 8,619   |  | 5.28 |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Totalinvestmentsecurities              |  |                                 | 9,842  |                      | 3.72                   |   |               |                        | 55,821                 |  | 3.79           |               |       |                      | 14,505 |  | 3.68           |   |                      |   | 22,800        |  | 4.67                   |  | $ | 102,968 |  | 4.23 |  
|Mortgage-backed and related securities |  |                                 | 1,791  |                      | 3.87                   |   |               |                        | 14,722                 |  | 3.66           |               |       |                      | 2,713  |  | 5.36           |   |                      |   | 19,670        |  | 4.54                   |  |   | 38,896  |  | 4.23 |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Total available for sale               |  |                                 | 11,633 |                      | 3.74                   |   |               |                        | 70,543                 |  | 3.76           |               |       |                      | 17,218 |  | 3.95           |   |                      |   | 42,470        |  | 4.61                   |  |   | 141,864 |  | 4.23 |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        | 
|Held to Maturity:                      |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Investment securities:                 |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Municipal securities                   |  |                                 |       |                      |                       |   |               |                        |                       |  |               |               |       |                      |       |  |               |   |                      |   | 1,630         |  | 3.90                   |  |   | 1,630   |  | 3.90 |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  
|Total held to maturity                 |  | $                               |       |                      |                       |   |               | $                      |                       |  |               |               |       | $                    |       |  |               |   |                      | $ | 1,630         |  | 3.90                   |  | $ | 1,630   |  | 3.90 |  
|                                       |  |                                 |        |                      |                        |   |               |                        |                        |  |                |               |       |                      |        |  |                |   |                      |   |               |  |                        |  |   |         |  |      |  



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At December 31, 2004, approximately $16.3 million of mortgage-backed securities were adjustable-rate
securities.



Deposits and Borrowings



Deposits are the major source of the Corporations funds for lending
and other investment purposes. In addition to deposits, the Corporation derives funds from principal repayments and interest payments on loans and investment and mortgage-backed securities. Principal repayments and interest payments are a relatively
stable source of funds, although principal prepayments tend to slow when interest rates increase. Deposit inflows and outflows may be significantly influenced by general market interest rates and money market conditions. During fiscal year 2004, the
Bank experienced a net increase in deposits of approximately $4.4 million due to the result of various deposit promotion programs with continued emphasis on increasing core deposits. In addition, the Bank also opened a new branch location during the
third quarter of the fiscal year that contributed to the deposit growth. The Bank borrowed funds to support the remaining growth experienced in fiscal 2004.



Deposits. Local deposits are, and traditionally have been, the primary source of the Banks funds for use in lending and for other general
business purposes. The Bank offers a number of deposit accounts including NOW accounts, money market savings accounts, passbook and statement savings accounts, individual retirement accounts and certificate of deposit accounts. Deposit accounts vary
as to terms regarding withdrawal provisions, deposit provisions and interest rates.



The Bank adjusts the interest rates offered on its deposit accounts as necessary so as to remain competitive with other financial institutions in Union, Laurens, York and Fairfield County.



The following table sets forth the time deposits of the Bank classified by
rates as of the dates indicated (in thousands):



|                           |  |                 |         |                  |   |         |  |   |        
|-------------------------- |  | --------------- | ------- | ---------------- | - | ------- |  | - | -------
|                           |  | At December 31, |         | At September 30,
|                           |  | 2004            |         | 2003             |   | 2002   
|Up to 2.0%                 |  | $               | 58,034  |                  | $ | 73,282  |  | $ | 16,830 
|2.01% to 4.0%              |  |                 | 68,942  |                  |   | 57,186  |  |   | 90,116 
|4.01% to 6.0%              |  |                 | 16,089  |                  |   | 21,951  |  |   | 29,103 
|6.01% to 8.0%              |  |                 | 495     |                  |   | 823     |  |   | 2,791  
|                           |  |                 |         |                  |   |         |  |   |        
|Total savings certificates |  | $               | 143,560 |                  | $ | 153,242 |  | $ | 138,840
|                           |  |                 |         |                  |   |         |  |   |        



The following table
sets forth the maturities of time deposits at December 31, 2004 (in thousands):



|                                         |  |        |        
|---------------------------------------- |  | ------ | -------
|                                         |  | Amount
|Within three months                      |  | $      | 23,362 
|After three months but within six months |  |        | 28,527 
|After six months but within one year     |  |        | 40,445 
|After one year but within three years    |  |        | 48,544 
|After three years but within five years  |  |        | 2,085  
|After five years but within ten years    |  |        | 597    
|                                         |  |        |        
|Total                                    |  | $      | 143,560
|                                         |  |        |        



Certificates of
deposit with maturities of less than one year decreased from $103.6 million at September 30, 2003 to $92.3 million at December 31, 2004. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. In addition,
management of the Bank believes that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments.



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The following table indicates the amount of the Banks jumbo certificates of deposit by time
remaining until maturity as of December 31, 2004 (in thousands). Jumbo certificates of deposit are certificates in amounts of $100,000 or more.



|                                      |  |        |       
|------------------------------------- |  | ------ | ------
|Maturity Period                       |  | Amount
|Three months or less                  |  | $      | 8,458 
|Over three through six months         |  |        | 10,325
|Over six months through twelve months |  |        | 14,632
|Over twelve months                    |  |        | 18,472
|                                      |  |        |       
|Total jumbo certificates              |  | $      | 51,887
|                                      |  |        |       



See Note 6 of Notes to
Consolidated Financial Statements for additional information about deposit accounts.



Borrowings. The Corporation utilizes advances from the FHLB agreements and other borrowings (treasury, tax and loan deposits, security repurchase agreements and trust preferred capital obligations) to
supplement its supply of lendable funds for granting loans, making investments and meeting deposit withdrawal requirements. See Regulation and Supervision  Federal Home Loan Bank System.



The following tables set forth certain information regarding borrowings by
the Bank at the dates and for the periods indicated (dollars in thousands):



|                                      |  |                      |        |   |                  |      |        |   |  |   |        |  
|------------------------------------- |  | -------------------- | ------ | - | ---------------- | ---- | ------ | - |  | - | ------ | -
|                                      |  | At December 31, 2004 |        |   | At September 30, |     
|                                      |  |                      | 2003   |   |                  | 2002 |       
|Balance outstanding at end of period: |  |                      |        |   |                  |      |        |   |  |   |        |  
|FHLB advances and other borrowings    |  | $                    | 95,747 |   |                  | $    | 93,000 |   |  | $ | 82,000 |  
|Weighted average rate paid on:        |  |                      |        |   |                  |      |        |   |  |   |        |  
|FHLB advances and other borrowings    |  |                      | 3.07   | % |                  |      | 3.59   | % |  |   | 4.94   | %



|                                                            |  |                             |         |   |                         |      |         |   |  |   |        |  
|----------------------------------------------------------- |  | --------------------------- | ------- | - | ----------------------- | ---- | ------- | - |  | - | ------ | -
|                                                            |  | Year EndedDecember 31, 2004 |         |   | Year EndedSeptember 30, |     
|                                                            |  |                             | 2003    |   |                         | 2002 |        
|Maximum amount of borrowings outstanding at any month end:  |  |                             |         |   |                         |      |         |   |  |   |        |  
|FHLB advances and other borrowings                          |  | $                           | 103,750 |   |                         | $    | 104,000 |   |  | $ | 82,000 |  
|Approximate average borrowings outstanding with respect to: |  |                             |         |   |                         |      |         |   |  |   |        |  
|FHLB advances and other borrowings                          |  | $                           | 103,600 |   |                         |      | 97,900  |   |  |   | 74,936 |  
|Approximate weighted average rate paid on:                  |  |                             |         |   |                         |      |         |   |  |   |        |  
|FHLB advances and other borrowings                          |  |                             | 3.23    | % |                         |      | 4.13    | % |  |   | 5.04   | %



At December 31, 2004,
the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $10 million. These lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have
reserved the right to withdraw these lines at their option. At December 31, 2004, the Bank had unused lines of credit for longer term advances totaling $11 million.



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Subsidiary Activities



Under OCC regulations, the Bank generally may invest in operating subsidiaries, which may engage in activities permissible for the Bank itself. The Bank
currently holds Provident Financial Services, Inc. for the purpose of engaging in securities brokerage activities for the benefit of the Banks customers.



Union Financial maintains one other subsidiary other than the Bank. In November 2001, Union Financial Statutory Trust I was established as a statutory
trust under Connecticut law for the purpose of issuing trust preferred securities. Union Financial Statutory Trust I issued trust preferred securities on December 18, 2001.



Employees



The Corporation has 68 full-time employees and 11 part-time employees. None of the employees are represented by a collective bargaining unit. The
Corporation believes that relations with its employees are excellent.



REGULATION AND SUPERVISION



General



Union Financial, which is a bank holding company, is required to file
certain reports with the Federal Reserve Board and otherwise comply with the Bank Holding Company Act of 1956, as amended (BHCA) and the rules and regulations promulgated thereunder.



The Bank, as a national bank, is subject to extensive regulation, examination
and supervision by the Office of the Comptroller of the Currency, as its primary regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer. The Banks deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund managed by the FDIC. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other institutions. The OCC and/or the FDIC conduct periodic examinations to test the Banks safety and soundness and compliance with various regulatory requirements. Many aspects of the Banks operations
are regulated by federal law including allowable activities, reserves against deposits, branching, mergers and investments. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OCC, the FDIC, or Congress, could
have a material adverse impact on Union Financial or the Bank and their operations.



Certain regulatory requirements applicable to the Bank and Union Financial are referred to below or elsewhere herein. This description of statutory provisions and regulations applicable to national banks and their
holding companies does not purport to be a complete description of such statutes and regulations and their effects on the Bank and Union Financial.



Holding Company Regulation



Federal Regulation.As a bank holding company, Union Financial is subject to examination, regulation and periodic reporting under the BHCA,
as administered by the FRB. Union Financial is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company or merge with another bank holding company. Prior FRB approval is
also required for Union Financial to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, Union Financial would, directly or indirectly, own or
control more than 5% of any class of voting shares of the bank or bank holding company. In evaluating such transactions, the FRB considers such matters as the financial and managerial resources of and future prospects of the companies and banks
involved, competitive factors and the convenience and needs of the communities to be served. Bank holding companies may acquire additional banks in any state, subject to certain restrictions such as deposit concentration limits. In addition to the
approval of the FRB, before any bank acquisition can be completed, prior approval may also be required from other agencies having supervisory jurisdiction over the banks to be acquired.



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A bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control
of more than 5% of the voting securities of any company conducting non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks to
be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be closely related to banking are: (1) making or servicing loans; (2) performing certain data processing services; (3) providing discount
brokerage services; (4) acting as fiduciary, investment or financial advisor; (5) finance leasing personal or real property; (6) making investments in corporations or projects designed primarily to promote community welfare; and (7) acquiring a
savings association, provided that the savings association only engages in activities permitted by bank holding companies.



The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including being well-capitalized and
well managed, to opt to become a financial holding company and thereby engage in a broader array of financial activities than previously permitted. Such activities may include insurance underwriting and investment banking.
The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in certain of the activities permitted for financial holding companies. Financial subsidiaries are generally treated as affiliates for purposes of
restrictions on a banks transactions with affiliates.



The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the OCC for the Bank. See Capital Requirements. Union Financials total and Tier 1
capital exceed these requirements.



Bank holding companies are
generally required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound
practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain
other conditions.



The FRB has issued a policy statement
regarding the payment of dividends by bank holding companies. In general, the FRBs policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Bank holding company
appears consistent with the organizations capital needs, asset quality, and overall financial condition. The FRBs policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by
standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks where necessary. Furthermore, the FRB has authority to prohibit a bank holding company from paying a capital distribution where a subsidiary bank is undercapitalized. These regulatory policies could affect the ability
of Union Financial to pay dividends or otherwise engage in capital distributions.



The FRB has general authority to enforce the BHCA as to Union Financial and may require a bank holding company to cease any activity or terminate control of any subsidiary engaged in an activity that the FRB believes
constitutes a serious risk to the safety, soundness or stability of its bank subsidiaries.



Union Financial and its subsidiaries will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in
the national economy and money markets, it is impossible for the management of Union Financial accurately to predict future changes in monetary policy or the effect of such changes on the business or financial condition of Union Financial or the
Bank.



State Regulation.Union Financial
is also a bank holding company within the meaning of the South Carolina bank holding company laws, which assigns the same definition to bank holding company as the meaning set forth in section 2(a) of the BHCA. The prior
approval of the South Carolina Board of Financial Institutions is required before Union Financial may merge or consolidate with another bank holding company. Such approval is



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also necessary for Union Financial to assume direct or indirect ownership or control of more than 5% of any class of voting stock of a bank holding company
or bank, or control of substantially all of the assets of a bank holding company or bank.



Acquisition of Union Financial



Federal Regulation. Federal law requires that a notice be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of Union Financials outstanding voting stock,
unless the FRB has found that the acquisition will not result in a change in control of Union Financial. The FRB has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the acquisition.



Under the BHCA, any company would be required to obtain prior approval from the FRB before it may obtain control of Union Financial within the meaning of the BHCA. Control generally is defined
to mean the ownership or power to vote 25% or more of any class of voting securities of Union Financial or the ability to control in any manner the election of a majority of Union Financials directors. An existing bank holding company would be
required to obtain the FRBs prior approval under the BHCA before acquiring more than 5% of Union Financials voting stock. See Holding Company Regulation. Approval of the South Carolina Board of Financial Institutions may also
be required for acquisition of Union Financial under some circumstances.



Federal Banking Regulations



Capital
Requirements. The OCCs capital regulations require national banks to meet two minimum capital standards: a 4% Tier 1 capital to total adjusted assets ratio for most banks (3% for national banks with the highest examination rating) (the
leverage ratio) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital to total assets standard, a 4% leverage ratio (3% for
institutions receiving the highest rating on the financial institution examination rating system) and, together with the risk-based capital standard itself, a 4% Tier 1 capital to risk-based assets standard. Tier 1 capital is generally
defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than
certain mortgage servicing rights and credit card relationships.



The risk-based capital standard requires the maintenance of Tier 1 and total capital (which is defined as Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OCC capital regulation based on the risks that the agency believes are inherent in the type of
asset. The regulators have recently added a market risk adjustment to cover a banks trading account, foreign exchange and commodity positions. Tier 2 capital may include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of Tier 2 capital included as part of total capital cannot exceed 100% of Tier 1 capital.



The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar
to those of the OCC for the Bank. Union Financials total and Tier 1 capital exceed these requirements.



Both the OCC and the FRB have the discretion to establish higher capital requirements on a case-by-case basis where deemed appropriate in the
circumstances of a particular bank or bank holding company.



Prompt Corrective Regulatory Action. Under the prompt corrective action regulations, the OCC is required to take certain supervisory actions against undercapitalized institutions under its jurisdiction, the severity of which
depends upon the institutions degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a
ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be undercapitalized. An institution that has a total risk-based capital ratio less than 6%, a Tier 1



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capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be significantly undercapitalized and an institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be critically undercapitalized. Subject to a narrow exception, the OCC is required to appoint a receiver or conservator within specified time frames for an
institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OCC within 45 days of the date an institution receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OCC could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior executive officers and directors.



Insurance of Deposit Accounts. Deposits of the Bank are insured by the Savings Association Insurance Fund (SAIF) maintained by
the FDIC. The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories (well capitalized, adequately capitalized or undercapitalized) based on the institutions financial
information as of the reporting period ending seven months before the assessment period. The FDIC also assigns the institution to one of three supervisory subcategories within each capital group, based on a supervisory evaluation provided to the
FDIC by the institutions primary regulator and such other information that the FDIC deems relevant with respect to the financial condition and the risk posed to the deposit insurance funds. An institutions assessment rate depends on the
capital category and supervisory category to which it is assigned. Assessment rates for SAIF deposits are determined semi-annually and currently range from 0 basis points for well-capitalized institutions in the highest supervisory category to 27
basis points for the weakest institutions. The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised its authority to raise rates in the past and may raise insurance premiums in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of the Bank.



In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation (FICO) to recapitalize the predecessor to the
SAIF. FICO payments during 2004 approximated 1.51 basis points of assessable deposits.



Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the regulators. Bank management does not know of any practice, condition or violation that might lead to termination of deposit insurance.



Loans to One Borrower. National banks are subject to
limits on the amount that they may lend to single borrowers. Generally, banks may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its capital and surplus (including Tier 1 capital, Tier 2 capital and
the amount of the allowance for loan and lease losses not included in Tier 2 capital). An additional amount may be lent, equal to 10% of capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. At December 31, 2004, the Banks limit on loans to one borrower was $4.8 million and the Banks largest aggregate outstanding balance of loans to one borrower was $3.2 million.



Limitation on Capital Distributions. National banks may not pay
dividends out of their permanent capital and may not, without OCC approval, pay dividends in excess of the total of the banks retained net income for the year combined with retained net income for the prior two years less any transfers to
surplus and capital distributions. A national bank may not pay a dividend that would cause it to fall below any applicable regulatory capital standard.



Branching. National banks are authorized to establish branches within the state in which they are headquartered to the extent state law
allows branching by state banks. Federal law also provides for interstate branching for national banks. Interstate branching by merger was authorized as of June 1, 1997 unless the state in which the bank is to branch has enacted a law opting out of
interstate branching or expedites the effective date by passing legislation. De novo interstate branching is permitted to the extent the state into which the bank is to branch has enacted a law authorizing out-of-state banks to establish
de novo branches.



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Transactions with Related Parties.The authority of a depository institution to engage in
transactions with related parties or affiliates (e.g., any company that controls or is under common control with an institution, including Union Financial) is limited by Sections 23A and 23B of the Federal Reserve Act
(FRA). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the depository institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the depository institutions capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same
or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.



The authority of the Bank to extend credit to executive officers, directors and 10% shareholders (insiders), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and are not to involve more
than the normal risk of repayment. There is an exception to this requirement for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over
other employees. Regulation O also places individual and aggregate limits on the amount of loans that institutions may make to insiders based, in part, on the institutions capital position and requires certain board approval procedures to be
followed.



Enforcement. The OCC has
primary enforcement responsibility over national banks and has the authority to bring actions against such banks and all institution-affiliated parties, including directors, officers, stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership or conservatorship. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has the authority to recommend to
the OCC that it take enforcement action with respect to a national bank. If action is not taken by the agency, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain
violations. The FRB has generally similar enforcement authority with respect to Union Financial. Neither Union Financial nor the Bank are under any enforcement action.



Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines
Prescribing Standards for Safety and Soundness (Guidelines) and a final rule to implement safety and soundness standards required under federal law. The Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards address internal controls and information systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution
to submit to the agency an acceptable plan to achieve compliance with the standard. The final rule establishes deadlines for the submission and review of such safety and soundness compliance plans when such plans are required.



Community Reinvestment Act. The Community Reinvestment Act, as
amended (CRA), as implemented by OCC regulations, provides that a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a bank, to assess the institutions record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain corporate applications by such institution, such as mergers and branching. The Banks most recent rating was satisfactory.



USA Patriot Act.The USA Patriot Act of 2001 (the Patriot Act), designed to deny terrorists and
others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates or will
require financial institutions to implement additional policies and procedures with respect to, or



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additional measures designed to address matters such as: money laundering, suspicious activities and currency transaction reporting.



Federal Reserve System



The FRB regulations require savings institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $47.6 million or less (subject to adjustment by the
FRB) the reserve requirement is 3%; and for accounts aggregating greater than $47.6 million, a reserve requirement of 10% (subject to adjustment by the FRB between 8% and 14%) is applied against that portion of total transaction accounts in excess
of $47.6 million. The first $7.0 million of otherwise reservable balances (subject to adjustments by the FRB) are exempted from the reserve requirements.



Federal Home Loan Bank System



The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Atlanta in an amount at least equal
to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank of Atlanta, whichever is greater. The Bank
was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2004 of $3.5 million.



The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs.
These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were
reduced, or interest on future Federal Home Loan Bank advances increased, the Banks net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks funding obligations for
insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal
Home Loan Bank membership.



|Item 2. | Description of Property
|------- | -----------------------



The Corporation owns two banking offices and an operations center in Union, South Carolina, two banking offices in Winnsboro, South Carolina and a banking
office in each of Laurens, Jonesville and Rock Hill, South Carolina. The net book value of the Corporations investment in premises and equipment totaled approximately $5.6 million at December 31, 2004. See Note 4 of Notes to Consolidated
Financial Statements. All property is in good condition and meets the operating needs of the Corporation.



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|Item 3. | Legal Proceedings
|------- | -----------------



Neither Union Financial nor the Bank is engaged in any legal proceedings of a material nature at the present time. From time to time, the Bank is involved
in routine legal proceedings occurring in the ordinary course of business wherein it enforces the Banks security interest in mortgage loans the Bank has made.



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



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.



PART II



|Item 5. | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------------------------------------



For information related to the market for common equity and related
stockholder matters, the information contained under the section captioned Common Stock Market Price and Dividend Information in the Annual Report to Shareholders (the Annual Report) is incorporated herein by reference.



|                                           |  |                                 |  |                              |       |                                                                                 |        |                                                                            |       
|------------------------------------------ |  | ------------------------------- |  | ---------------------------- | ----- | ------------------------------------------------------------------------------- | ------ | -------------------------------------------------------------------------- | ------
|Period                                     |  | Total Numberof Shares Purchased |  | Average Price Paid Per Share |       | Total Number of Shares Purchased as Part of Publicly AnnouncedPlans or Programs |        | Maximum Number ofShares that May Yetbe PurchasedUnder the Plans orPrograms
|October 1, 2004 through October 31, 2004   |  | 4,000                           |  | $                            | 17.32 |                                                                                 | 4,000  |                                                                            | 25,882
|                                           |  |                                 |  |                              |       |                                                                                 |        |                                                                            |       
|November 1, 2004 through November 30, 2004 |  | 10,200                          |  | $                            | 18.01 |                                                                                 | 10,200 |                                                                            | 15,682
|                                           |  |                                 |  |                              |       |                                                                                 |        |                                                                            |       
|December 1, 2004 through December 31, 2004 |  | 667                             |  | $                            | 17.95 |                                                                                 | 667    |                                                                            | 15,015
|                                           |  |                                 |  |                              |       |                                                                                 |        |                                                                            |       
|Total                                      |  | 14,867                          |  | $                            | 17.82 |                                                                                 | 14,867 |                                                                            | N/A   
|                                           |  |                                 |  |                              |       |                                                                                 |        |                                                                            |       

---

|(1) | On January 29, 2003, the Corporation announced that the Board of Directors had approved a stock repurchase program authorizing the Corporation to repurchase up to 98,000 shares of
the Corporations common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 6. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The information contained in the section captioned Managements Discussion and Analysis of Financial Condition
and Results of Operations in the Annual Report is incorporated herein by reference.



|Item 7. | Financial Statements
|------- | --------------------



The financial statements contained in the Annual Report are incorporated herein by reference.



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|Item 8. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



No changes in or disagreements with the Corporations independent accountants on accounting and financial disclosure
has occurred during the two most recent fiscal years.



|Item 8A. | Controls and Procedures
|-------- | -----------------------



The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness
of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
In addition, based on that evaluation, no change in the Companys internal control over financial reporting occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.



|Item 8B. | Other Information
|-------- | -----------------



None.



PART III



|Item 9. | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
|------- | ---------------------------------------------------------------------------------------------------------------



For information concerning the Board of Directors of Union Financial, the
information contained under the section captioned Proposal I  Election of Directors and Directors Compensation in the Proxy Statement is incorporated herein by reference. Reference is made to the cover page of
this Form 10-KSB and to the section captioned Compliance with Section 16(a) of the Exchange Act for information regarding compliance with section 16(a) of the Exchange Act.



For information concerning the Corporations code of ethics, the information contained under the section captioned
Corporate Governance  Code of Business Conduct in the Proxy Statement is incorporated herein by reference. A copy of the code of ethics is available, without charge, upon written request to Wanda J. Wells, Corporate Secretary,
Union Financial Bancshares, Inc., 203 West Main Street, Union, South Carolina 29379.



Executive Officers of the Registrant



Certain executive officers of the Bank also serve as executive officers of Union Financial. The day-to-day management duties of the executive officers of Union Financial and the Bank relate primarily to their duties
as to the Bank. The executive officers of Union Financial currently are as follows:



|                 |  |        |  |                                                   
|---------------- |  | ------ |  | --------------------------------------------------
|Name             |  | Age(1) |  | Position as of December 31, 2004                  
|Dwight V. Neese  |  | 54     |  | President, Chief Executive Officer and Director   
|Richard H. Flake |  | 56     |  | Executive Vice President - Chief Financial Officer
|Lud W. Vaughn    |  | 54     |  | Executive Vice President - Chief Credit Officer   
|Edward A. Brock  |  | 43     |  | Senior Vice President of the Bank                 



25



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##### Table of Contents

|                        |  |         |  |                                                                             
|----------------------- |  | ------- |  | ----------------------------------------------------------------------------
|Name                    |  | Age (1) |  | Position as of December 31, 2004                                            
|Wanda J. Wells          |  | 49      |  | Senior Vice President - Chief Administrative Officer and Corporate Secretary
|Mark F. Pack            |  | 39      |  | Senior Vice President - Business Manager Program                            
|Henry G. Alexander, Jr. |  | 44      |  | Vice President - Commercial Lending of the Bank                             
|Carolyn H. Belue        |  | 48      |  | Vice President - Operations Manager of the Bank                             
|Brenda Billardello      |  | 45      |  | Vice President - Marketing Director of the Bank                             
|Lisa G. Morris          |  | 32      |  | Vice President - Human Resources Manager of the Bank                        
|Lori H. Patrick         |  | 37      |  | Vice President - Market Executive of the Bank                               
|Susan D. Taylor         |  | 44      |  | Vice President - Fairfield Market Executive of the Bank                     
|Jeff Thompson           |  | 33      |  | Vice President                                                              

---

|(1) | At December 31, 2004.
|--- | ---------------------



Dwight V. Neese was appointed as President and Chief Executive Officer of the Bank effective September 5, 1995. As President and Chief Executive
Officer of the Bank and Union Financial, Mr. Neese is responsible for daily operations of the Bank and implementation of the policies and procedures approved by the Board of Directors.



Richard H. Flake joined Union Financial in September 1995.



Lud W. Vaughn joined Union Financial in April 2003. Prior to joining
Union Financial, Mr. Vaughn was Senior Vice President for Bank of America in Rock Hill, South Carolina.



Edward A. Brock joined the Bank in November 2002. Before joining the Bank, Mr. Brock was a vice presidentcommercial banking for First
Citizens Bank from December 2001 to November 2002 and a vice president -commercial lender of Bank of America form 1993 until December 2001.



Wanda J. Wells has been employed by the Bank since 1975.



Mark F. Pack joined Union Financial in December 2004. Prior to joining Union Financial, Mr. Pack was Vice President and Senior Commercial
Account Manager for SouthTrust Bank in Charlotte, North Carolina.



Henry G. Alexander, Jr. has been employed by the Bank since 1983.



Carolyn H. Belue has been employed by the Bank since 1979.



Brenda Billardello joined the Bank in December 2004. Prior to joining the Bank, Ms. Billardello was a vice president of the York County Regional
Chamber of Commerce.



Lisa G. Morris has been employed
by the Bank since 1999.



Lori H. Patrick has been
employed by the Bank since 1987.



Susan D. Taylor has
been employed by the Bank since 1995.



Jeff Thompson has
been employed by the Bank since 2000.



|Item 10. | Executive Compensation
|-------- | ----------------------



The information contained under the sections captioned Executive Compensation and Directors Compensation in the Proxy
Statement is incorporated herein by reference.



26



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##### Table of Contents

|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



| | (a) | Security Ownership of Certain Beneficial Owners
| | --- | -----------------------------------------------



Information required by this item is incorporated herein by reference to the section captioned Stock Ownership in the Proxy Statement.



| | (b) | Security Ownership of Management
| | --- | --------------------------------



Information required by this item is incorporated herein by reference to the section captioned Stock Ownership in the Proxy Statement.



| | (c) | Management of Union Financial knows of no arrangements, including any pledge by any person of securities of Union Financial, the operation of which may at a subsequent date result
in a change in control of the registrant.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Equity Compensation Plan Information
| | --- | ------------------------------------



The following table sets forth information about the Company common stock that may be issued upon the exercise of stock options, warrants and rights under
all of the Companys equity compensation plans as of December 31, 2004.



|                                                           |  |                                                                                                 |  |                                                                                |       |                                                                                                                                               |       
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | ----- | --------------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |  | Weighted-average exercise price of outstanding options, warrants and rights(b) |       | Number of securities remaining available for future issuance under equity compensation plans (excluding securitiesreflected in column (a))(c)
|Equity compensation plans approved by security holders     |  | 156,716                                                                                         |  | $                                                                              | 10.20 |                                                                                                                                               | 33,623
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                |      |                                                                                                                                               |      
|                                                           |  |                                                                                                 |  |                                                                                |       |                                                                                                                                               |       
|Total                                                      |  | 156,716                                                                                         |  | $                                                                              | 10.20 |                                                                                                                                               | 33,623
|                                                           |  |                                                                                                 |  |                                                                                |       |                                                                                                                                               |       



|Item 12. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



The information required by this item is incorporated herein by reference to the section captioned Transactions with Management in the Proxy
Statement.



PART IV



|Item 13. | Exhibits
|-------- | --------



|         |     |  |                                                                                   
|-------- | --- |  | ----------------------------------------------------------------------------------
|Exhibits
|         |    
|3        | (a) |  | Certificate of Incorporation(1)                                                   
|         |    
|3        | (b) |  | Bylaws(2)                                                                         
|         |    
|3        | (c) |  | Certificate of Amendment of Certificate of Incorporation dated January 22, 1997(3)
|         |    
|3        | (d) |  | Certificate of Amendment to Certificate of Incorporation dated January 28, 2004(4)



27



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##### Table of Contents

|   |     |  |                                                                  
|-- | --- |  | -----------------------------------------------------------------
|   |    
|10 | (a) |  | Employment Agreement with Dwight V. Neese(5)                     
|   |    
|10 | (b) |  | Employment Agreement with Richard H. Flake(5)                    
|   |    
|10 | (c) |  | Union Financial Bancshares, Inc. 1995 Stock Option Plan(6)       
|   |    
|10 | (d) |  | Union Financial Bancshares, Inc. 2001 Stock Option Plan(7)       
|   |    
|10 | (e) |  | Change in Control Agreement with Lud W. Vaughn(5)                
|   |    
|10 | (f) |  | Change in Control Agreement with Edward A. Brock                 
|   |    
|10 | (g) |  | Form of Stock Option Award Agreements                            
|   |    
|13 |     |  | 2004 Annual Report to Shareholders                               
|   |    
|21 |     |  | Subsidiaries of the Registrant                                   
|   |    
|23 |     |  | Consent of Independent Auditor                                   
|   |    
|31 | (a) |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|   |    
|31 | (b) |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|   |    
|32 |     |  | Section 1350 Certifications                                      

---

|(1) | Incorporated herein by reference to Union Financials Registration Statement on Form S-4 (File No. 33-80808) filed with the Securities and Exchange Commission on June 29, 1994.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated herein by reference to Union Financials Form 10-KSB for the year ended September 30, 1999.
|--- | --------------------------------------------------------------------------------------------------------



|(3) | Incorporated herein by reference to Union Financials Form 10-KSB for the year ended September 30, 1997.
|--- | --------------------------------------------------------------------------------------------------------



|(4) | Incorporated herein by reference to Union Financials 10-QSB for the quarter ended December 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------



|(5) | Incorporated herein by reference to Union Financials Form 10-KSB for the year ended September 30, 2003.
|--- | --------------------------------------------------------------------------------------------------------



|(6) | Incorporated herein by reference to Exhibit A to Union Financials Proxy Statement for its 1996 Annual Meeting of Stockholders.
|--- | -------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated herein by reference to Appendix A to Union Financials Proxy Statement for its 2000 Annual Meeting of Stockholders.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



The information required by this Item is incorporated herein by reference to the section captioned Proposal 2-Ratification of Appointment of
Auditors in the Proxy Statement.



28



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##### Table of Contents

SIGNATURES



In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



|      |  |                |  |                                  |  |     |  |                                      
|----- |  | -------------- |  | -------------------------------- |  | --- |  | -------------------------------------
|      |  |                |  | UNION FINANCIAL BANCSHARES, INC.
|      |  |                |  |                                 
|Date: |  | March 15, 2005 |  |                                  |  | By: |  | /s/ Dwight V. Neese                  
|      |  |                |  |                                  |  |     |  | Dwight V. Neese                      
|      |  |                |  |                                  |  |     |  | President and Chief Executive Officer



In accordance with the
Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|      |  |                                              |  |  |  |       |  |                      
|----- |  | -------------------------------------------- |  |  |  | ----- |  | ---------------------
|      |  |                                              |  | 
|By:   |  | /s/ Dwight V. Neese                          |  |  |  | By:   |  | /s/ Carl L. Mason    
|      |  | Dwight V. Neese                              |  |  |  |       |  | Carl L. Mason        
|      |  | (Principal Executive Officer)                |  |  |  |       |  | Director             
|      |  |                                              |  | 
|Date: |  | March 15, 2005                               |  |  |  | Date: |  | March 15, 2005       
|      |  |                                              |  | 
|By:   |  | /s/ Richard H. Flake                         |  |  |  | By:   |  | /s/ Philip C. Wilkins
|      |  | Richard H. Flake                             |  |  |  |       |  | Philip C. Wilkins    
|      |  | (Principal Financial and Accounting Officer) |  |  |  |       |  | Director             



|      |  |                               |  |  |  |       |  |               
|----- |  | ----------------------------- |  |  |  | ----- |  | --------------
|      |  |                               |  | 
|Date: |  | March 15, 2005                |  |  |  | Date: |  | March 15, 2005
|      |  |                               |  | 
|By:   |  | /s/ Robert A. Breakfield      |  |  |  |       |  |               
|      |  | Robert A. Breakfield Director |  |  |  |       |  |               
|      |  |                               |  | 
|Date: |  | March 15, 2005                |  |  |  |       |  |               
|      |  |                               |  | 
|By:   |  | /s/ James W. Edwards          |  |  |  |       |  |               
|      |  | James W. Edwards Director     |  |  |  |       |  |               
|      |  |                               |  | 
|Date: |  | March 15, 2005                |  |  |  |       |  |               
|      |  |                               |  | 
|By:   |  | /s/ William M. Graham         |  |  |  |       |  |               
|      |  | William M. Graham Director    |  |  |  |       |  |               
|      |  |                               |  | 
|Date: |  | March 15, 2005                |  |  |  |       |  |               
|      |  |                               |  | 
|By:   |  | /s/ Louis M. Jordan           |  |  |  |       |  |               
|      |  | Louis M. Jordan Director      |  |  |  |       |  |               
|      |  |                               |  | 
|Date: |  | March 15, 2005                |  |  |  |       |  |