10KSB

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 September 30, 2003

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 incorporation or organization)	(I.R.S. Employer Identification 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 gross revenues for the fiscal year ended September 30, 2003 were approximately $19,135,000.

As of November 17, 2003, there were 1,965,103 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 November 3, 2003, was approximately $31,056,043 (1,810,848 shares at $17.15 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 September 30, 2003 (Part II).

2. Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders (Part III).

INDEX

		Page
	Part I
Item 1.	Description of Business	1
Item 2.	Description of Property	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
	Part II
Item 5.	Market for Common Equity and Related Stockholder Matters	22
Item 6.	Management’s Discussion and Analysis or Plan of Operation	22
Item 7.	Financial Statements	22
Item 8.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 8A.	Controls and Procedures	22
	Part III
Item 9.	Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act	23
Item 10.	Executive Compensation	23
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 12.	Certain Relationships and Related Transactions	24
Item 13.	Exhibits and Reports on Form 8-K	25

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 is a national bank headquartered in Union, South Carolina. The Bank’s operations are conducted through its main office and six full-service banking centers, all of which are located in the upstate area of South Carolina. The Bank 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”).

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-Atlanta. 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.

Recent Events

On July 26, 2003, the Bank completed its conversion from a federal savings bank to a national bank. The Bank, which adopted the name “Provident Community Bank, National Association” in connection with the charter conversion, is now regulated by the Office of the Comptroller of the Currency (the “OCC”). In addition, Union Financial became a bank holding company, subject to regulation by the Federal Reserve Board (the “FRB”).

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 derived from other thrift institutions and commercial banks located in and around Union, Laurens and Fairfield County, South Carolina. As of June 30, 2003, according to information presented on the Federal Deposit Insurance Corporation’s website, the Corporation held 46% of the deposits in Union County, which was the largest share of deposits out of four financial institutions in the county.

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Additionally, the Corporation held 6% of the deposits in Laurens County, which was the sixth largest share of deposits out of eight financial institutions in the county. However, the Corporation competes with super-regional banks, 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.

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. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances results in any material difference in the information presented.

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	Year Ended September 30,
	2003							2002							2001
	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)	$	157,265	$	10,914		6.94	%	$	165,085	$	12,519		7.58	%	$	163,665	$	14,487		8.85	%
Mortgage-backed securities		79,104		2,991		3.78			73,397		4,012		5.47			48,721		2,894		5.94
Investment securities:
Taxable		52,459		2,115		4.03			14,606		1,015		6.95			19,872		1,417		7.13
Nontaxable		18,490		881		4.77			17,648		731		4.14			2,276		108		4.75
Total investment securities		70,949		2,996		4.22			32,254		1,745		5.41			22,148		1,525		6.88
Overnight deposits		5,396		23		0.42			8,246		86		1.03			5,526		112		2.03
Total interest-earning assets		312,714		16,924		5.41			278,983		18,361		6.58			240,060		19,018		7.92
Non-interest-earning assets		22,630							18,365							21,998
Total assets	$	335,344						$	297,347						$	262,058
Interest-bearing liabilities:
Savings accounts	$	15,639		116		0.75		$	15,336		146		0.95		$	15,354		279		1.82
Negotiable order of withdrawal accounts		42,348		277		0.65			37,862		425		1.12			31,779		604		1.90
Certificate accounts		149,355		4,267		2.86			142,953		5,430		3.80			140,576		7,939		5.65
FHLB advances and other borrowings		97,900		4,042		4.13			74,918		3,774		5.04			47,169		2,791		5.92
Total interest-bearing liabilities		305,242		8,702		2.85			271,069		9,775		3.61			234,878		11,613		4.94
Non-interest-bearing liabilities		5,400							1,576							4,907
Total liabilities		310,642							272,645							239,785
Shareholders’ equity		24,702							24,702							22,273
Total liabilities and shareholders’ equity	$	335,344						$	297,348						$	262,058
Net interest income			$	8,222						$	8,586						$	7,405
Interest rate spread (2)						2.56	%						2.97	%						2.98	%
Net interest margin (3)				2.63	%						3.08	%						3.08	%
Ratio of average interest-earning assets to average interest-bearing liabilities		1.02x							1.03x							1.02x

(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 September 30,
	2003					2002					2001					2000					1999
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
First mortgage loans:
Conventional	$	66,254		43.32	%	$	99,442		61.54	%	$	110,109		69.66	%	$	126,949		75.65	%	$	113,970		76.28	%
Construction loans		2,170		1.42			5,514		3.41			12,259		7.76			12,335		7.35			17,039		11.40
Total mortgage loans		68,424		44.74			104,956		64.95			122,368		77.42			139,284		83.00			131,009		87.68
Consumer and installment loans		30,705		20.08			27,847		17.24			22,662		14.33			22,307		13.29			17,823		11.94
Commercial loans		58,364		38.17			34,906		21.60			21,892		13.85			15,563		9.28			10,920		7.31
Total loans		157,493		102.99			167,709		103.79			166,922		105.60			177,154		105.57			159,752		106.93
Less:
Undisbursed loans in process		(1,392	)	(0.91	)		(3,204	)	(1.97	)		(6,108	)	(3.86	)		(5,445	)	(3.24	)		(9,964	)	(6.67	)
Loan discount unamortized		(1,448	)	(0.95	)		(1,685	)	(1.04	)		(1,922	)	(1.22	)		(2,718	)	(1.62	)		—		—
Allowance for loan losses		(1,842	)	(1.20	)		(1,371	)	(0.85	)		(1,080	)	(0.68	)		(1,360	)	(0.81	)		(836	)	(0.56	)
Deferred loan fees		110		0.07			127		0.07			251		0.16			176		0.10			449		0.30
Net loans receivable	$	152,921		100.00	%	$	161,576		100.00	%	$	158,063		100.00	%	$	167,807		100.00	%	$	149,401		100.00	%

The following table sets forth, at September 30, 2003, 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 One Year		Due After 1 Year Through 5 Years		Due After 5 Years		Total
First mortgage loans:
Conventional loans	$	180	$	13,773	$	52,301	$	66,254
Construction loans (1)		2,170		—		—		2,170
Consumer and installment loans		7,797		4,187		18,721		30,705
Commercial loans		16,549		37,640		4,175		58,364
Total	$	26,696	$	55,600	$	75,197	$	157,493

(1) Includes construction/permanent loans.

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 which 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.

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The following table sets forth, at September 30, 2003, the dollar amount of loans due after September 30, 2004 which have fixed rates of interest and which have adjustable rates of interest (in thousands).

	Fixed		Adjustable		Total
Mortgage loans	$	40,125	$	25,949	$	66,074
Consumer and installment loans		12,206		10,702		22,908
Commercial loans		20,455		21,360		41,815
Total	$	72,786	$	58,011	$	130,797

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). At September 30, 2003, approximately $57.8 million, or 37.8% of the Corporation’s net loan portfolio consisted of loans secured by residential real estate (net of undisbursed principal).

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 Union, Fairfield, and Laurens County by third party originators. These loans are originated and underwritten using the same terms and conditions as loans originated by the Corporation. The Bank offers ARMs tied to U.S. Treasury Bills with a maximum interest rate adjustment of 2% annually and 6% over the life of the loan. At September 30, 2003, the Bank had approximately $15.3 million of ARMs, or 9.7% of the Bank’s total loans receivable. At September 30, 2003, 29.7% 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 $5.2 million, or 3.4%, of the Bank’s net loan portfolio at September 30, 2003. 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.

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Loans secured by multi-family and residential commercial 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 September 30, 2003, the Bank had approximately $2.2 million outstanding in construction loans, including approximately $1.4 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 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

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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 million loan secured by real estate located in Rock Hill, South Carolina. This loan was performing according to its original terms at September 30, 2003.

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/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/Chief Executive Officer or the Chief Credit Officer along with two members of the Board Loan Committee has the authority to approve loan requests up to $1,000,000 secured and $500,000 unsecured. 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.

Loan Originations, Purchases and Sales. The Bank purchases loans from mortgage brokers primarily located in South Carolina. The loan types purchased are primarily adjustable-rate residential loans. The Bank had total purchases through the broker network of $1.2 million in fiscal 2003. The Bank reduced broker loan purchases beginning in fiscal 2001 to provide an increased capital allocation for consumer and commercial lending. At September 30, 2003, the Bank was servicing $22.4 million of loans for others.

The Bank purchases participation interests in loans originated by other institutions. These participation interests are on both residential and commercial properties and carry either a fixed or adjustable interest rate.

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

	Year Ended September 30,
	2003		2002		2001
Loans originated:
First mortgage loans:
Conventional loans	$	7,590	$	9,926	$	28,795
Construction loans		2,550		6,625		11,726
Total mortgage loans originated		10,140		16,551		40,521
Consumer and installment loans		11,172		12,318		15,467
Commercial loans		41,229		57,838		27,359
Total loans originated	$	62,541	$	86,707	$	83,347
Loans purchased	$	7,085	$	5,275	$	30,851
Loans sold	$	—	$	—	$	32,868

Loan Commitments. The Bank’s commitments to make conventional mortgage loans on existing residential dwellings 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. Current 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 September 30, 2003, the Corporation had net deferred loan fees of approximately $110,000.

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.

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.

The Bank generally determines a loan to be impaired at the time management believes that it is probable that the principal and interest may be uncollectible. Management has determined that, generally, a failure to make a payment within a 90-day period constitutes a minimum delay or shortfall and does not generally constitute an impaired loan. However, management reviews each past due loan 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.

8

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 September 30, 2003 and 2002, loans totaled $718,246 and $809,293 respectively, that were classified within the meaning of Statement of Financial Accounting Standards (“SFAS”) No. 15. The increase in non-accrual loans over the previous year was due to higher loan delinquencies as a result of higher than state average unemployment from plant layoffs and closings in the surrounding communities. Also, at the dates indicated, there were no loans which are not disclosed in the following table about which there was known information of possible credit problems of the borrowers’ ability to comply with the present repayment terms:

	At September 30,
	2003			2002			2001			2000			1999
Loans accounted for on a non-accrual basis:
Real estate	$	408		$	916		$	626		$	763		$	43
Commercial		2,437			524			160			247			—
Consumer		209			426			9			106			141
Total		3,054			1,866			795			1,116			184
Accruing loans which are contractually past due 90 days or more		—			—			—			—			—
Real estate owned, net		652			356			77			459			241
Total non-performing assets	$	3,706		$	2,222		$	872		$	1,575		$	425
Percentage of loans receivable net		2.42	%		1.37	%		0.56	%		0.94	%		0.28	%

Interest income that would have been recorded for the year ended September 30, 2003 had non-accruing loans been current in accordance with their original terms amounted to approximately $161,000. There was no interest included in interest income on such loans for the year ended September 30, 2003.

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, including management’s evaluation of the collectibility of the loan portfolio, the nature 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.

9

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 Bank’s financial condition and results of operations. Management periodically evaluates the adequacy of the allowance based upon historical delinquency rates, the size of the Bank’s loan portfolio and various other factors. 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):

	At September 30,
	2003			2002			2001			2000			1999
Balance at beginning of year	$	1,371		$	1,080		$	1,360		$	836		$	827
Loans charged off:
Real estate		(255	)		(127	)		(180	)		(85	)		—
Commercial		(11	)		(542	)		(211	)		—			—
Consumer		(65	)		(82	)		(176	)		(129	)		(106	)
Total charge-offs		(331	)		(751	)		(567	)		(214	)		(106	)
Recoveries:
Real estate		31			36			4			—			—
Commercial		6			—			8			—			—
Consumer		40			16			35			64			10
Total recoveries		77			52			47			64			10
Net charge-offs		(254	)		(699	)		(520	)		(150	)		(96	)
Merger additions		—			—			—			449			—
Provision for loan losses (1)		725			990			240			225			105
Balance at end of year	$	1,842		$	1,371		$	1,080		$	1,360		$	836
Ratio of net charge-offs to average gross loans outstanding during the period		0.16	%		0.42	%		0.32	%		0.08	%		0.07	%

(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.

The Bank experienced bad debt charge-offs, net of recoveries, of approximately $254,000 in fiscal 2003 compared to $699,000 for fiscal 2002. The decrease in bad debt charge-offs over the previous year was due to approximately $500,000 from one commercial loan that was written down in the 2002 fiscal year due to a reduction in the market value of the supporting loan collateral. The allowance for loan losses to total loans ratio at the end of fiscal 2003 was 1.19% compared to 0.83% at the end of fiscal 2002. Nonperforming assets, which includes repossessed assets and loans on non-accrual, increased to $3.7 million at September 30, 2003 from $2.2 million at September 30, 2002.

10

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 September 30,
	2003				2002				2001				2000				1999
	Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans
Real estate	$	339	43.45	%	$	357	62.58	%	$	400	73.31	%	$	600	78.62	%	$	400	82.00	%
Commercial		1,182	37.05			778	20.81			100	13.11			200	8.79			75	6.84
Consumer		209	19.50			141	16.60			500	13.58			500	12.59			311	11.16
Unallocated		112	N/A			95	N/A			80	N/A			60	N/A			50	N/A
Total allowance for loan losses	$	1,842	100.00	%	$	1,371	100.00	%	$	1,080	100.00	%	$	1,360	100.00	%	$	836	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 which 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 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 September 30, 2003 (dollars in thousands):

	Loss			Doubtful			Substandard			Special Mention
	Number	Amount		Number	Amount		Number	Amount		Number	Amount
Real estate	—	$	—	—	$	—	20	$	650	20	$	1,070
Commercial	—		—	—		—	6		2,568	3		2,519
Consumer	—		—	—		—	13		341	8		258
Total	—	$	—	—	$	—	39	$	3,559	31	$	3,847

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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 September 30,
	2003				2002				2001
	Carrying Value		Percent of Portfolio		Carrying Value		Percent of Portfolio		Carrying Value		Percent of Portfolio
Available for sale:
Investment securities:
U.S. Agency obligations	$	48,596	30.87	%	$	10,599	9.01	%	$	13,494	17.35	%
Corporate securities		5,425	3.45			3,717	3.16			—	—
Equity securities		2,435	1.55			—	—			—	—
Municipal securities		22,334	14.18			14,597	12.41			9,726	12.50
Total investment securities		78,790	50.05			28,913	24.58			23,220	29.85
Mortgage-backed and related securities		78,648	49.95			88,720	75.42			54,582	70.15
Total available for sale	$	157,438	100.00	%	$	117,633	100.00	%	$	77,802	100.00	%
Held to Maturity:
Investment securities:
U.S. Agency obligations	$	—	—	%	$	—	—	%	$	950	8.40	%
Mortgage-backed and related securities		—	—			—	—			10,365	91.60
Total held to maturity	$	—	—		$	—	—		$	11,315	100.00	%

During the quarter ended December 31, 2001, the Corporation reclassified all securities in held to maturity to available for sale as part of the adoption of FASB 133, “Accounting for Derivative Instruments and Hedging Activities.” The purpose of this transfer was to allow for the sale of the fixed rate securities in order to reduce interest rate risk exposure.

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 in order to balance the portfolio mix and stabilize interest rate flows as a result of the high loan prepayment speeds experienced with mortgage-backed securities.

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 do possess liquidity risk and interest rate risk. The amortized cost and fair value of the CMOs at September 30, 2003 was approximately $6.8 million. See Note 2 of Notes to Consolidated Financial Statements for more information regarding investment and mortgage-backed securities.

12

The following table sets forth at amortized cost and market value the maturities and weighted average yields of the Corporation’s investment and mortgage-backed securities portfolio at September 30, 2003 (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
	Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield
Available for Sale:
Investment securities:
U.S. Agency obligations	$	5,178	3.20	%	$	34,629	3.75	%	$	8,254	6.16	%	$	534	6.50	%	$	48,596	4.13	%
Municipal securities		85	4.40			—	—			501	4.49			21,748	4.45			22,334	4.45
Equity securities		—	—			—	—			—	—			2,435	5.81			2,435	5.81
Corporate securities		3,709	3.91			—	—			—	—			1,716	8.59			5,425	5.39
Total investment securities		8,972	3.51			34,629	3.75			8,755	6.06			26,433	4.88			78,790	4.36
Mortgage-backed and related securities		6,950	4.33			49,826	4.08			11,467	4.44			10,406	6.44			78,648	4.47
Total available for sale	$	15,922	3.87		$	84,455	3.94		$	20,222	5.14		$	36,839	5.32		$	157,438	4.41

13

At September 30, 2003, approximately $53.6 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 2003, the Bank experienced a net increase in deposits of approximately $19.9 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 2003.

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 September 30,
	2003		2002		2001
Up to 2.0%	$	73,282	$	16,830	$	—
2.01% to 4.0%		57,186		90,116		18,152
4.01% to 6.0%		21,951		29,103		98,064
6.01% to 8.0%		823		2,791		24,187
Total savings certificates	$	153,242	$	138,840	$	140,403

The following table sets forth the maturities of time deposits at September 30, 2003 (in thousands):

	Amount
Within three months	$	31,894
After three months but within six months		31,787
After six months but within one year		40,002
After one year but within three years		42,646
After three years but within five years		6,818
After five years but within ten years		95
Total	$	153,242

Certificates of deposit with maturities of less than one year increased from $96.6 million at September 30, 2002 to $103.6 million at September 30, 2003. 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.

14

The following table indicates the amount of the Bank’s jumbo certificates of deposit by time remaining until maturity as of September 30, 2003 (in thousands). Jumbo certificates of deposit are certificates in amounts of $100,000 or more.

Maturity Period	Amount
Three months or less	$	12,319
Over three through six months		12,278
Over six months through twelve months		15,450
Over twelve months		19,152
Total jumbo certificates	$	59,199

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 September 30,
	2003			2002			2001
Balance outstanding at end of period:
FHLB advances and other borrowings	$	93,000		$	82,000		$	57,007
Weighted average rate paid on:
FHLB advances and other borrowings		3.59	%		4.94	%		5.41	%

	Year Ended September 30,
	2003			2002			2001
Maximum amount of borrowings outstanding at any month end:
FHLB advances and other borrowings	$	104,000		$	82,000		$	57,007
Approximate average short-term borrowings outstanding with respect to:
FHLB advances and other borrowings		97,900			74,936			47,169
Approximate weighted average rate paid on:
FHLB advances and other borrowings		4.13	%		5.04	%		5.92	%

At September 30, 2003, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $15.0 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 September 30, 2003, the Bank had unused lines of credit with the FHLB of Atlanta totaling $18.0 million.

15

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.

Employees

The Corporation has 80 full-time employees and 7 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 now 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. Upon the conversion of the Bank to a national bank charter, Union Financial became a bank holding company 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.

16

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 exceeds 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. 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 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.

17

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 exceeds 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

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“undercapitalized.” An institution that has a total risk-based capital ratio less than 6%, a Tier 1 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 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 Bank Insurance Fund (“BIF”) 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 BIF 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 2002 approximated 1.65 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 September 30, 2003, the Bank’s limit on loans to one borrower was $4.2 million and the Bank’s largest aggregate outstanding balance of loans to one borrower was $3.0 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 additional measures designed to address matters such as: money laundering, suspicious activities and currency transaction reporting.

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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 $42.1 million or less (subject to adjustment by the FRB) the reserve requirement is 3%; and for accounts aggregating greater than $42.1 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 $42.1 million. The first $6.0 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 September 30, 2003 of $3.9 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 $6.4 million at September 30, 2003. See Note 4 of Notes to Consolidated Financial Statements. All property is in good condition and meets the operating needs of the Corporation.

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 September 30, 2003.

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PART II

Item 5. 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.

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.

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 September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 September 30, 2003
Dwight V. Neese	53	President, Chief Executive Officer and Director
Richard H. Flake	55	Executive Vice President - Chief Financial Officer
Lud W. Vaughn	53	Executive Vice President - Chief Credit Officer
Wanda J. Wells	47	Senior Vice President - Corporate Secretary

(1) At September 30, 2003.

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.

Wanda J. Wells has been employed by Union Financial since 1975.

Item 10. Executive Compensation

The information contained under the section captioned “Executive Compensation” in the Proxy Statement is incorporated herein by reference.

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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

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 securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	193,524	$	8.15	82,017
Equity compensation plans not approved by security holders	—		—	—
Total	193,524	$	8.15	82,017

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.

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PART IV

Item 13. Exhibits and Reports on Form 8-K

(a)	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)
	10(a)	Employment Agreement with Dwight V. Neese
	10(b)	Employment Agreement with Richard H. Flake
	10(c)	Union Financial Bancshares, Inc. 1995 Stock Option Plan(4)
	10(d)	Union Financial Bancshares, Inc. 2000 Stock Option Plan(5)
	10(e)	Change in Control Agreement with Lud W. Vaughn
	13	2003 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
(b)	Reports on Form 8-K
	(1)	On July 15, 2003, Union Financial Bancshares, Inc. furnished a Form 8-K reporting financial results for the quarter ended June 30, 2003. A copy of a press release was filed by exhibit.
	(2)	On July 28, 2003, Union Financial Bancshares, Inc. furnished a Form 8-K in which it announced that its subsidiary, Provident Community Bank, completed its conversion from a federal savings bank to a national bank. A copy of a press release was filed by exhibit.

(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 Exhibit 3(c) to Union Financial’s Form 10-KSB for the year ended September 30, 1997.

(4) Incorporated herein by reference to Exhibit A to Union Financial’s Proxy Statement for its 1996 Annual Meeting of Stockholders.

(5) Incorporated herein by reference to Appendix A to Union Financial’s Proxy Statement for its 2000 Annual Meeting of Stockholders.

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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: December 16, 2003	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
	Dwight V. Neese
	(Principal Executive Officer)
Date:	December 16, 2003
By:	/s/    Richard H. Flake
	Richard H. Flake
	(Principal Financial and Accounting Officer)
Date:	December 16, 2003
By:	/s/    Mason G. Alexander
	Mason G. Alexander
	Director
Date:	December 16, 2003
By:	/s/    James W. Edwards
	James W. Edwards
	Director
Date:	December 16, 2003
By:	/s/    William M. Graham
	William M. Graham
	Director
Date:	December 16, 2003
By:	/s/    Louis M. Jordan
	Louis M. Jordan
	Director
Date:	December 16, 2003
By:	/s/    Carl L. Mason
	Carl L. Mason
	Director
Date:	December 16, 2003
By:	/s/    Philip C. Wilkins
	Philip C. Wilkins
	Director
Date:	December 16, 2003

EX-10.A

Exhibit 10(a)

EMPLOYMENT AGREEMENT

THIS AGREEMENT (the “Agreement”), made this 1st day of January, 2003, by and among UNION FINANCIAL BANCSHARES, INC., a Delaware corporation (“the Company”), PROVIDENT COMMUNITY BANK, a wholly owned subsidiary of the Company (the “Bank”), and Dwight V. Neese (the “Executive”).

W I T N E S S E T H

WHEREAS, the Company and the Bank desires to retain the services of the Executive as the President and Chief Executive Officer of the Company and the Bank;

WHEREAS, the Company and the Bank have previously entered into an employment agreement with the Executive;

WHEREAS, the Executive and the respective Boards of Directors of the Bank and the Company desire to enter into an updated and revised agreement setting forth the terms and conditions of the continuing employment of the Executive and the related rights and obligations of each of the parties;

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed as follows:

1.     Employment. The Executive is employed as the President and Chief Executive Officer of the Company and the Bank, reporting directly to their respective Boards. The Executive shall have responsibility for the general management and control of the business and affairs of the Company, the Bank, and their respective subsidiaries, and shall perform all duties and shall have all powers which are commonly incident to the offices of President and Chief Executive Officer or which, consistent with those offices, are delegated to him by the respective Boards.

2.     Location and Facilities. The Executive will be furnished with the working facilities and staff customary for executive officers with the title and duties set forth in Section 1 and as are necessary for him to perform his duties. The location of such facilities and staff shall be at the principal administrative offices of the Company and the Bank, or at such other site or sites customary for such offices.

3. Term.

a. The term of this Agreement shall be (i) the initial term, consisting of the period commencing on the date of this Agreement (the “Effective Date”) and ending on the third anniversary of the Effective Date, plus (ii) any and all extensions of the initial term made pursuant to this Section 3.

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b. Commencing on the Effective Date and on each day thereafter, the term under this Agreement shall be renewed automatically for an additional one (1) day period beyond the then effective expiration date without action by any party, provided that neither the Company, on the one hand, nor Executive, on the other, shall have given at least sixty (60) days written notice of its or his desire that the term not be renewed. In the case such notice is given by one party to the other, the term of this Agreement shall become fixed and shall end on the third anniversary of the date of written notice.

4. Base Salary.

a. The Bank agrees to pay the Executive during the term of this Agreement a base salary at the rate of $168,000 per annum, payable in accordance with the Bank’s customary payroll practices.

b. The Board of the Bank shall review annually the rate of the Executive’s base salary based upon factors they deem relevant, and may maintain or increase his salary, provided that no such action shall reduce the rate of salary below the rate in effect on the Effective Date. In addition, it is the intention of the parties to this Agreement that the Board of Directors of the Bank or a committee designated by the Board for such purpose shall also review this Agreement not less than annually to evaluate the provisions hereof and to determine whether the continuing extension of the term of the Agreement is appropriate.

c. In the absence of action by the Board of the Bank, the Executive shall continue to receive salary at the per annum rate specified on the Effective Date or, if another rate has been established under the provisions of this Section 4, the rate last properly established by action of the Board of the Bank under the provisions of this Section 4.

5.     Bonuses. The Executive shall be entitled to participate in any discretionary bonus or other incentive compensation programs that the Board of the Company or the Bank may establish from time to time for the benefit of the officers or employees of the Company or the Bank.

6.     Benefit Plans. The Executive shall be entitled to participate in such life insurance, medical, dental, pension, profit sharing, and retirement plans, stock compensation plans and other programs and arrangements as may be approved from time to time by the Company or the Bank for the benefit of their respective employees.

7.     Vacation and Leave. The Executive shall be entitled to vacations and other leave in accordance with Bank policy for senior executives, or otherwise as approved by the Board, but in any event, not less than four (4) weeks vacation per calendar year.

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8.     Expense Payments and Reimbursements. The Executive shall be reimbursed for all reasonable out-of-pocket business expenses that he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with applicable policies of the Company or the Bank. In addition, the Executive shall be reimbursed for business-related expenses associated with his membership in the Poinsett Club and such other clubs as may agreed upon by the Executive and the Board of the Bank.

9. Loyalty.

a. During the term of this Agreement the Executive: (i) shall devote all his time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, that from time to time, the Executive may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations which will not present any conflict of interest with the Company or the Bank or any of their subsidiaries or affiliates, unfavorably affect the performance of Executive’s duties pursuant to this Agreement, or violate any applicable statute or regulation and (ii) shall not engage in any business or activity contrary to the business affairs or interests of the Company or the Bank.

b. Nothing contained in this Agreement shall prevent or limit the Executive’s right to invest in the capital stock or other securities of any business dissimilar from that of the Company and the Bank, or, solely as a passive, minority investor, in any business.

10.   Termination and Termination Pay. Subject to Section 11 of this Agreement, the Executive’s employment under this Agreement may be terminated in the following circumstances:

a. Death. The Executive’s employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Executive’s estate shall be entitled to receive the compensation due to the Executive through the last day of the calendar month in which his death occurred.

b. Retirement. Notwithstanding anything in this Agreement to the contrary, this Agreement shall, unless otherwise extended by mutual agreement of the parties, terminate immediately upon the Executive’s attainment of age 65, unless prior to such date an event or occurrence which is reasonably likely to constitute a Change in Control has been announced by the Company or otherwise publicly disclosed. For all other purposes, the Executive’s termination of employment at age 65 shall be considered his retirement and the Executive’s termination of employment at retirement shall be treated in the same manner as if he voluntarily terminated employment pursuant to Section 10(f).

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c. Disability.

i. The Company, the Bank, or the Executive may terminate the Executive’s employment after having established the Executive’s Disability. For purposes of this Agreement, “Disability” means a physical or mental infirmity that impairs the Executive’s ability to substantially perform his duties under this Agreement and that results in the Executive’s becoming eligible for long-term disability benefits under the Company’s or the Bank’s long-term disability plan (or, if the Company or the Bank has no such plan in effect, that impairs the Executive’s ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Boards of the Company and the Bank shall determine whether or not the Executive is and continues to be permanently disabled for purposes of this Agreement in good faith, based upon competent medical advice and other factors that they reasonably believe to be relevant. As a condition to any benefits, such Board may require the Executive to submit to such physical or mental evaluations and tests as it deems reasonably appropriate.

ii. In the event of such Disability, the Executive’s obligation to perform services under this Agreement will terminate. In the event of such termination, the Executive shall continue to receive seventy-five (75) percent of his monthly base salary (at the annual rate in effect on his date of termination) through the earlier of the date of the Executive’s death, the date he attains age 65 or the date which is three (3) years after the Executive’s termination date. Such payments shall be reduced by the amount of any short- or long-term disability benefits payable to the Executive under any other disability program sponsored by the Company or the Bank. In addition, during any period of the Executive’s Disability in which he is receiving payments under this paragraph, the Executive and his dependents shall, to the greatest extent possible, continue to be covered under all benefit plans (including, without limitation, retirement plans and medical, dental and life insurance plans) of the Company and the Bank in which Executive participated prior to his Disability on the same terms as if Executive were actively employed by the Company and the Bank.

d. Just Cause.

i. The Board of the Company or the Bank may, by written notice to the Executive in the form and manner specified in this paragraph, immediately terminate his employment with the Company or the Bank, respectively, at any time, for Just Cause. The Executive shall have no right to receive compensation or other benefits for any period after termination for Just Cause except for vested benefits. Termination for “Just Cause” shall mean

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termination because of, in the good faith determination of the Company’s or the Bank’s Board, the Executive’s:

(1) Personal dishonesty;

(2) Incompetence;

(3) Willful misconduct;

(4) Breach of fiduciary duty involving personal profit;

(5) Intentional failure to perform duties under this Agreement;

(6) Willful violation of any law, rule or regulation (other than traffic violations or similar offenses) that reflects adversely on the reputation of the Bank, any felony conviction, any violation of law involving moral turpitude, or any violation of a final cease-and-desist order; or

(7) Material breach by the Executive of any provision of this Agreement.

ii. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Just Cause by the Company or the Bank unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the entire membership of the Board of the Company or the Bank at a meeting of such Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board with counsel), finding that in the good faith opinion of such Board the Executive was guilty of conduct described above and specifying the particulars thereof.

e. Certain Regulatory Events.

i. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. ss.ss. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected.

ii. If the Bank is in default (as defined in Section 3(x)(1) of FDIA), all obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights of the parties shall not be affected.

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iii. If a notice served under Sections 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Executive from participating in the conduct of the Bank’s affairs, the Bank’s obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank shall, (x) pay the Executive all or part of the compensation withheld while its contract obligations were suspended, and (y) reinstate (in whole or in part) any of its obligations which were suspended.

f. Voluntary Termination by Executive. In addition to his other rights to terminate under this Agreement, the Executive may voluntarily terminate employment with the Bank and the Company during the term of this Agreement upon at least sixty (60) days prior written notice to each Board, in which case the Executive shall receive only his compensation, vested rights and employee benefits up to the date of his termination.

g. Without Just Cause or With Good Reason.

i. In addition to termination pursuant to Sections 10(a) through 10(f), (x) the Board of the Company or the Bank, respectively, may, by written notice to the Executive, immediately terminate his employment with the Company or the Bank, respectively, at any time for a reason other than Just Cause (a termination “Without Just Cause”) and (y) the Executive may, by written notice to the Boards of the Company and the Bank, immediately terminate this Agreement at any time within ninety (90) days following an event constituting “Good Reason” as defined below (a termination “With Good Reason”).

ii. Subject to Section 11 hereof, in the event of termination under this Section 10(g), the Executive shall be entitled to receive his base salary for the remaining term of the Agreement, including any renewals or extensions thereof (determined at the highest annual rate of base salary in effect pursuant to Section 4 of this Agreement for any of the twelve (12) months immediately preceding the date of such termination), plus annual cash bonuses for each year (prorated in the event of partial years) remaining under such term (determined by reference to the highest annual cash bonus received by the Executive in any of the three (3) calendar years preceding the termination). The sum due under this Section 10(g) shall be paid in one lump sum within ten (10) calendar days of such termination. Also, in such event, (i) the Executive shall, within ten (10) days of his termination date, receive a lump sum payment equal to the value of the benefits he would have received in each of the three calendar years following the year in which his termination occurs under any tax-qualified or non-tax-qualified retirement programs in which the Executive participated prior to his termination (with the amount of

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the benefits determined by reference to the benefits received by the Executive under such programs during the twelve (12) months preceding his termination date, or, if applicable, the accruals made on the Executive’s behalf during such period and without regard to whether such programs were or are actually maintained after his termination date) and (ii) the Executive shall, for a thirty six (36) month period, continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), life or disability insurance, or similar coverage upon terms no less favorable than the most favorable terms provided to senior executives of the Bank during such period. In the event that the Company or the Bank is unable to provide the coverage referred to in the preceding clause (ii) by reason of the Executive no longer being an employee, the Company and the Bank shall provide the Executive with comparable coverage on an individual policy or, if individual coverage is not available, provide a cash payment equivalent to the value of such coverage.

iii. “Good Reason” shall exist if, without Executive’s express written consent, the Company or the Bank materially breach any of its respective obligations under this Agreement. Without limitation, such a material breach shall be deemed to occur upon any of the following:

(1) A material reduction in the Executive’s responsibilities or authority, or a requirement that the Executive report to any person or group other than the Boards of the Company and the Bank (or any other effective reduction in reporting responsibilities) in connection with his employment with the Company or the Bank;

(2) Assignment to the Executive of duties of a non-executive nature or duties for which he is not reasonably equipped by his skills and experience;

(3) A reduction in salary or benefits contrary to the terms of this Agreement, or, following a Change in Control as defined in Section 11 of this Agreement, any reduction in salary or material reduction in benefits below the amounts to which he was entitled prior to the Change in Control;

(4) Termination of incentive and benefit plans, programs or arrangements, or reduction of the Executive’s participation to such an extent as to materially reduce their aggregate value below their aggregate value as of the Effective Date; or

(5) Following a Change in Control only, a requirement that the Executive relocate his principal business office or his principal place of

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residence outside of the area consisting of a thirty five (35) mile radius from the current main office and any branch of the Bank, or the assignment to the Executive of duties that would reasonably require such a relocation.

iv. Notwithstanding the foregoing, a reduction in base salary or a reduction or elimination of the Executive’s participation or benefits under one or more benefit plans maintained by the Company or the Bank as part of a good faith, overall reduction in salary or reduction or elimination of such plan or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of the Company or the Bank or any company that controls either of them under a plan or plans in or under which the Executive is not entitled to participate.

(v). Notwithstanding anything in this Agreement to the contrary, during the twelve (12) month period beginning on the effective date of a Change in Control (as defined in Section 11(a)) and continuing through the first anniversary of such date, the Executive may voluntarily terminate his employment under this Agreement for any reason and such termination shall constitute termination With Good Reason.

h. Continuing Covenant Not to Compete or Interfere with Relationships. Regardless of anything herein to the contrary, following a termination by the Company, the Bank or the Executive pursuant to Section 10(g) and continuing until the first anniversary of the effective date of such termination, the Executive shall not serve as an officer, director or employee of any bank holding company, bank, savings association, savings and loan holding company, or mortgage company which offers products or services competing with those offered by the Company or the Bank from any office in any city, town or county where Bank maintains an office as of the date of the Executive’s termination and shall not interfere with the relationship of the Company or the Bank and any of its employees, agents, or representatives.

11. Termination in Connection with a Change in Control.

a. For purposes of this Agreement, a “Change in Control” shall be deemed to occur on the earliest of:

i. The acquisition by any entity, person or group (other than the acquisition by a tax-qualified retirement plan sponsored by the Company or the Bank) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 25% of the outstanding

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capital stock of the Company or the Bank entitled to vote for the election of directors (“Voting Stock”);

ii. The commencement by any entity, person, or group (other than the Company or the Bank, a subsidiary of the Company or the Bank, or a tax-qualified retirement plan sponsored by the Company or the Bank) of a tender offer or an exchange offer for more than 25% of the outstanding Voting Stock of the Company or the Bank;

iii. The effective time of (x) a merger or consolidation of the Company or the Bank with one or more other corporations as a result of which the holders of the outstanding Voting Stock of the Company or the Bank immediately prior to such merger exercise voting control over less than 51% of the Voting Stock of the surviving or resulting corporation, or (y) a transfer of substantially all of the property of the Company or the Bank other than to an entity of which the Company or the Bank owns at least 51% of the Voting Stock; and

iv. At such time that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of the Company or the Bank (the “Continuing Directors”) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director.

b. If within the period ending two years after a Change in Control, (i) the Company or the Bank shall terminate the Executive’s employment Without Just Cause, or (ii) the Executive shall voluntarily terminate his employment With Good Reason, the Company or the Bank shall, within ten (10) calendar days of the termination of the Executive’s employment, make a lump-sum cash payment to him equal to three (3) times the sum of the Executive’s (x) current base salary (determined at the highest annual rate of base salary in effect pursuant to Section 4 of this Agreement for any of the twelve (12) months immediately preceding the effective date of the Change in Control or, if higher, the rate in effect on the Executive’s termination date) and (y) the highest cash bonus paid to the Executive or accrued on the Executive’s behalf with respect to any of the three (3) most recently completed fiscal years of the Bank preceding the effective date of the Change in Control. Also, in such event, (i) the Executive shall, within ten (10) days of his termination date, receive a lump sum payment equal to the value of the benefits he would have received in each of the three calendar years following the year in which his termination occurs under any tax-qualified or non-tax-qualified retirement programs in which the Executive participated prior to his termination (with the amount of the benefits determined by reference to the benefits received by the Executive under such programs during the

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twelve (12) months preceding the Change in Control or, if applicable, the accruals made on the Executive’s behalf during such period and without regard to whether such programs were or are actually maintained after the Change in Control) and (ii) the Executive shall, for a thirty six (36) month period, continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), life or disability insurance, or similar coverage upon terms no less favorable than the most favorable terms provided to senior executives of the Bank during such period. In the event that the Company or the Bank is unable to provide the coverage referred to in the preceding clause (ii) by reason of the Executive no longer being an employee, the Company and the Bank shall provide the Executive with comparable coverage on an individual policy or, if individual coverage is not available, provide a cash payment equivalent to the value of such coverage. The cash payments and benefits provided under this Section 11 shall be paid or provided in lieu of any payments or benefits also required under Section 10(g) of this Agreement because of a termination in such period. Upon the Executive’s termination pursuant to this Section 11(b), the Bank shall (i) transfer title to the Executive of his Bank-provided automobile and (ii) transfer to the Executive the office furniture and desktop and laptop computers used by the Executive prior to his termination. Such transfers shall be subject to appropriate tax reporting. The Executive’s rights under Section 10(g) are not otherwise affected by this Section 11.

12. Indemnification and Liability Insurance.

a. Indemnification. The Company and the Bank agree to indemnify the Executive (and his heirs, executors, and administrators), and to advance expenses related thereto, to the fullest extent permitted under applicable law and regulations against any and all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his having been a director or Executive of the Company or the Bank or any of their subsidiaries (whether or not he continues to be a director or Executive at the time of incurring any such expenses or liabilities) such expenses and liabilities to include, but not be limited to, judgements, court costs, and attorney’s fees and the cost of reasonable settlements, such settlements to be approved by the Board of the Company or the Bank, if such action is brought against the Executive in his capacity as an Executive or director of the Company or the Bank or any of their subsidiaries. Indemnification for expense shall not extend to matters for which the Executive has been terminated for Just Cause. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. Notwithstanding anything herein to the contrary, the obligations of this Section 12 shall survive the term of this Agreement by a period of six (6) years.

b. Insurance. During the period in which indemnification of the Executive is required under this Section, the Company or the Bank shall provide the Executive (and his heirs, executors, and administrators) with coverage under a directors’ and

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Executives’ liability policy at the expense of the Company or the Bank, at least equivalent to such coverage provided to directors and senior Executives of the Company or the Bank, whichever is more favorable to the Executive.

13.   Reimbursement of Executive’s Expenses to Enforce this Agreement. The Company or the Bank shall reimburse the Executive for all out-of-pocket expenses, including, without limitation, reasonable attorney’s fees, incurred by the Executive in connection with successful enforcement by the Executive of the obligations of the Company or the Bank to the Executive under this Agreement. Successful enforcement shall mean the grant of an award of money or the requirement that the Company or the Bank take some action specified by this Agreement (i) as a result of court order; or (ii) otherwise by the Company or the Bank following an initial failure of the Company or the Bank to pay such money or take such action promptly after written demand therefor from the Executive stating the reason that such money or action was due under this Agreement at or prior to the time of such demand.

14. Adjustment of Certain Payments and Benefits.

(a) Tax Indemnification. Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment, benefit or distribution made or provided by the Company or the Bank to or for the benefit of the Executive (whether made or provided pursuant to the terms of this Agreement or otherwise) (each referred to herein as a “Payment”), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) or any interest or penalties are incurred by the Executive with respect to such excise tax (the excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

(b) Determination of Gross-Up Payment. Subject to the provisions of Section 14(c), all determinations required to be made under this Section 14, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payments and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company, the Bank and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been Payments, or such earlier time as is requested by the Company and the Bank. All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Bank. Any Gross-Up Payment, as determined pursuant to this Section 14,

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shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payments of any Excise Tax, and (ii) the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code, at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company and the Bank should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company and the Bank exhaust their remedies pursuant to Section 14(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

(c) Treatment of Claims. The Executive shall notify the Company and the Bank in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company and the Bank of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company and the Bank of the nature of such claims and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company and the Bank (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company and the Bank notify the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

(i) give the Company and the Bank any information reasonably request by the Company and the Bank relating such claim,

(ii) take such action in connection with contesting such claim as the Company and the Bank shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and the Bank,

(iii) cooperate with the Company and the Bank in good faith in order effectively to contest such claim, and

(iv) permit the Company and the Bank to participate in any proceedings relating to such claim; provided, however, that the Company and the Bank shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and indemnity and hold the Executive harmless, on an after-tax basis, for an Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of

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such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 14(c), the Company and the Bank shall control all proceedings taken in connection with such contest and, at its sole options, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole options, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company and the Bank shall determine; provided, however, that if the company directs the Executive to pay such claim and sue for a refund, the Company and the Bank shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount. Furthermore, the Company’s and the Bank’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority.

(d) Adjustments to the Gross-Up Payment. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 14(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 14(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 14(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

15.   Injunctive Relief. If there is a breach or threatened breach of Section 10(h) of this Agreement, the Company or the Bank and the Executive agree that there is no adequate remedy at law for such breach, and that the Company and the Bank each shall be entitled to injunctive relief restraining the Executive from such breach or threatened breach, but such relief shall not be the exclusive remedy hereunder for such breach. The parties hereto likewise agree that the Executive, without limitation, shall be entitled to injunctive relief to enforce the obligations of the Company and the Bank under Section 11 of this Agreement.

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16. Successors and Assigns.

a. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company or the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Company or the Bank.

b. Since the Bank and the Company are contracting for the unique and personal skills of the Executive, the Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank and the Company.

17.   No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment.

18.   Notices. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee:

a. If to the Company or the Bank:

Union Financial Bancshares, Inc.

Provident Community Bank

P.O. Box 866

Union, South Carolina 29379

Copy to:        Corporate Secretary

b. If to the Executive:

Dwight V. Neese

1527 Cureton Drive

Rock Hill, SC 29732

19.   Joint and Severally Liability; Payments by the Company and the Bank. To the extent permitted by law, except as otherwise provided herein, the Company and the Bank shall be jointly and severally liable for the payment of all amounts due under this Agreement. The Company hereby agrees that it shall be jointly and severally liable with the Bank for the payment of all amounts due under this Agreement and shall guarantee the performance of the Bank’s obligations thereunder, provided that the Company shall not be required by this Agreement to pay to the Executive a salary or any bonuses or any other cash payments, except in the event that the Bank does not fulfill the obligations to the Executive hereunder for such payments.

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20.   No Plan Created by this Agreement. The Executive, the Company and the Bank expressly declare and agree that this Agreement was negotiated among them and that no provision or provisions of this Agreement are intended to, or shall be deemed to, create any plan for purposes of the Employee Retirement Income Security Act or any other law or regulation, and the Company, the Bank and the Executive each expressly waives any right to assert the contrary. Any assertion in any judicial or administrative filing, hearing, or process by or on behalf of the Executive or the Company or the Bank that such a plan was so created by this Agreement shall be deemed a material breach of this Agreement by the party making such an assertion.

21.   Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided.

22.   Applicable Law. Except to the extent preempted by Federal law, the laws of the State of South Carolina shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

23.   Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

24.   Headings. Headings contained herein are for convenience of reference only.

25.   Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, other than written agreements with respect to specific plans, programs or arrangements described in Sections 5 and 6. This Agreement supercedes and replaces in its entirety the Agreement dated July 27, 1995, as amended, between the Company, the Bank and the Executive.

26.   Status of Directorship. The Executive agrees that, in the event of his termination of employment pursuant to any provision of Section 10, if he is then serving as a director of the Bank, the Company or any subsidiary or affiliate thereof, he will submit his resignation from such directorship, effective as of his date of termination of employment.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above.

Attest:	UNION FINANCIAL BANCSHARES, INC.
/s/    Wanda J. Wells	By:	/s/    Carl L. Mason
Senior Vice President/Corporate Secretary	Title:	Chairman – Board of Directors

Attest:	PROVIDENT COMMUNITY BANK
/s/    Wanda J. Wells	By:	/s/    Carl L. Mason
Senior Vice President/Corporate Secretary	Title:	Chairman – Board of Directors
/s/    Wanda J. Wells	/s/    Dwight V. Neese
Witness	Executive

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EX-10.B

Exhibit 10(b)

EMPLOYMENT AGREEMENT

THIS AGREEMENT (the “Agreement”), made this 1st day of January, 2003, by and among UNION FINANCIAL BANCSHARES, INC., a Delaware corporation (“the Company”), PROVIDENT COMMUNITY BANK, a wholly owned subsidiary of the Company (the “Bank”), and Richard H. Flake (the “Executive”).

W I T N E S S E T H

WHEREAS, the Company and the Bank desires to retain the services of the Executive as the Executive Vice President and Chief Financial Officer of the Company and the Bank;

WHEREAS, the Company and the Bank have previously entered into an employment agreement with the Executive;

WHEREAS, the Executive and the respective Boards of Directors of the Bank and the Company desire to enter into an updated and revised agreement setting forth the terms and conditions of the continuing employment of the Executive and the related rights and obligations of each of the parties;

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed as follows:

1.     Employment. The Executive is employed as the Executive Vice President and Chief Financial Officer of the Company and the Bank, reporting directly to the President and Chief Executive Officer. The Executive shall have responsibility for the general management of the finances of the Company, the Bank, and their respective subsidiaries, and shall perform all duties and shall have all powers which are commonly incident to the offices of Executive Vice President and Chief Financial Officer or which, consistent with those offices, are delegated to him by the respective Boards.

2.     Location and Facilities. The Executive will be furnished with the working facilities and staff customary for executive officers with the title and duties set forth in Section 1 and as are necessary for him to perform his duties. The location of such facilities and staff shall be at the principal administrative offices of the Company and the Bank, or at such other site or sites customary for such offices.

3. Term.

a. The term of this Agreement shall be (i) the initial term, consisting of the period commencing on the date of this Agreement (the “Effective Date”) and ending on the third anniversary of the Effective Date, plus (ii) any and all extensions of the initial term made pursuant to this Section 3.

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b. Commencing on the Effective Date and on each day thereafter, the term under this Agreement shall be renewed automatically for an additional one (1) day period beyond the then effective expiration date without action by any party, provided that neither the Company, on the one hand, nor Executive, on the other, shall have given at least sixty (60) days written notice of its or his desire that the term not be renewed. In the case such notice is given by one party to the other, the term of this Agreement shall become fixed and shall end on the third anniversary of the date of written notice.

4. Base Salary.

a. The Bank agrees to pay the Executive during the term of this Agreement a base salary at the rate of $100,000 per annum, payable in accordance with the Bank’s customary payroll practices.

b. The Board of the Bank shall review annually the rate of the Executive’s base salary based upon factors they deem relevant, and may maintain or increase his salary, provided that no such action shall reduce the rate of salary below the rate in effect on the Effective Date. In addition, it is the intention of the parties to this Agreement that the Board of Directors of the Bank or a committee designated by the Board for such purpose shall also review this Agreement not less than annually to evaluate the provisions hereof and to determine whether the continuing extension of the term of the Agreement is appropriate.

c. In the absence of action by the Board of the Bank, the Executive shall continue to receive salary at the per annum rate specified on the Effective Date or, if another rate has been established under the provisions of this Section 4, the rate last properly established by action of the Board of the Bank under the provisions of this Section 4.

5.     Bonuses. The Executive shall be entitled to participate in any discretionary bonus or other incentive compensation programs that the Board of the Company or the Bank may establish from time to time for the benefit of the officers or employees of the Company or the Bank.

6.     Benefit Plans. The Executive shall be entitled to participate in such life insurance, medical, dental, pension, profit sharing, and retirement plans, stock compensation plans and other programs and arrangements as may be approved from time to time by the Company or the Bank for the benefit of their respective employees.

7.     Vacation and Leave. The Executive shall be entitled to vacations and other leave in accordance with Bank policy for senior executives, or otherwise as approved by the Board, but in any event, not less than four (4) weeks vacation per calendar year.

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8.     Expense Payments and Reimbursements. The Executive shall be reimbursed for all reasonable out-of-pocket business expenses that he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with applicable policies of the Company or the Bank.

9. Loyalty.

a. During the term of this Agreement the Executive: (i) shall devote all his time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, that from time to time, the Executive may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations which will not present any conflict of interest with the Company or the Bank or any of their subsidiaries or affiliates, unfavorably affect the performance of Executive’s duties pursuant to this Agreement, or violate any applicable statute or regulation and (ii) shall not engage in any business or activity contrary to the business affairs or interests of the Company or the Bank.

b. Nothing contained in this Agreement shall prevent or limit the Executive’s right to invest in the capital stock or other securities of any business dissimilar from that of the Company and the Bank, or, solely as a passive, minority investor, in any business.

10.   Termination and Termination Pay. Subject to Section 11 of this Agreement, the Executive’s employment under this Agreement may be terminated in the following circumstances:

a. Death. The Executive’s employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Executive’s estate shall be entitled to receive the compensation due to the Executive through the last day of the calendar month in which his death occurred.

b. Retirement. Notwithstanding anything in this Agreement to the contrary, this Agreement shall, unless otherwise extended by mutual agreement of the parties, terminate immediately upon the Executive’s attainment of age 65, unless prior to such date an event or occurrence which is reasonably likely to constitute a Change in Control has been announced by the Company or otherwise publicly disclosed. For all other purposes, the Executive’s termination of employment at age 65 shall be considered his retirement and the Executive’s termination of employment at retirement shall be treated in the same manner as if he voluntarily terminated employment pursuant to Section 10(f).

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c. Disability.

i. The Company, the Bank, or the Executive may terminate the Executive’s employment after having established the Executive’s Disability. For purposes of this Agreement, “Disability” means a physical or mental infirmity that impairs the Executive’s ability to substantially perform his duties under this Agreement and that results in the Executive’s becoming eligible for long-term disability benefits under the Company’s or the Bank’s long-term disability plan (or, if the Company or the Bank has no such plan in effect, that impairs the Executive’s ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Boards of the Company and the Bank shall determine whether or not the Executive is and continues to be permanently disabled for purposes of this Agreement in good faith, based upon competent medical advice and other factors that they reasonably believe to be relevant. As a condition to any benefits, such Board may require the Executive to submit to such physical or mental evaluations and tests as it deems reasonably appropriate.

ii. In the event of such Disability, the Executive’s obligation to perform services under this Agreement will terminate. In the event of such termination, the Executive shall continue to receive seventy-five (75) percent of his monthly base salary (at the annual rate in effect on his date of termination) through the earlier of the date of the Executive’s death, the date he attains age 65 or the date which is three (3) years after the Executive’s termination date. Such payments shall be reduced by the amount of any short- or long-term disability benefits payable to the Executive under any other disability program sponsored by the Company or the Bank. In addition, during any period of the Executive’s Disability in which he is receiving payments under this paragraph, the Executive and his dependents shall, to the greatest extent possible, continue to be covered under all benefit plans (including, without limitation, retirement plans and medical, dental and life insurance plans) of the Company and the Bank in which Executive participated prior to his Disability on the same terms as if Executive were actively employed by the Company and the Bank.

d. Just Cause.

i. The Board of the Company or the Bank may, by written notice to the Executive in the form and manner specified in this paragraph, immediately terminate his employment with the Company or the Bank, respectively, at any time, for Just Cause. The Executive shall have no right to receive compensation or other benefits for any period after termination for Just Cause except for vested benefits. Termination for “Just Cause” shall mean

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termination because of, in the good faith determination of the Company’s or the Bank’s Board, the Executive’s:

(1) Personal dishonesty;

(2) Incompetence;

(3) Willful misconduct;

(4) Breach of fiduciary duty involving personal profit;

(5) Intentional failure to perform duties under this Agreement;

(6) Willful violation of any law, rule or regulation (other than traffic violations or similar offenses) that reflects adversely on the reputation of the Bank, any felony conviction, any violation of law involving moral turpitude, or any violation of a final cease-and-desist order; or

(7) Material breach by the Executive of any provision of this Agreement.

ii. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Just Cause by the Company or the Bank unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the entire membership of the Board of the Company or the Bank at a meeting of such Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board with counsel), finding that in the good faith opinion of such Board the Executive was guilty of conduct described above and specifying the particulars thereof.

e. Certain Regulatory Events.

i. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. ss.ss. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected.

ii. If the Bank is in default (as defined in Section 3(x)(1) of FDIA), all obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights of the parties shall not be affected.

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iii. If a notice served under Sections 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Executive from participating in the conduct of the Bank’s affairs, the Bank’s obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank shall, (x) pay the Executive all or part of the compensation withheld while its contract obligations were suspended, and (y) reinstate (in whole or in part) any of its obligations which were suspended.

f. Voluntary Termination by Executive. In addition to his other rights to terminate under this Agreement, the Executive may voluntarily terminate employment with the Bank and the Company during the term of this Agreement upon at least sixty (60) days prior written notice to each Board, in which case the Executive shall receive only his compensation, vested rights and employee benefits up to the date of his termination.

g. Without Just Cause or With Good Reason.

i. In addition to termination pursuant to Sections 10(a) through 10(f), (x) the Board of the Company or the Bank, respectively, may, by written notice to the Executive, immediately terminate his employment with the Company or the Bank, respectively, at any time for a reason other than Just Cause (a termination “Without Just Cause”) and (y) the Executive may, by written notice to the Boards of the Company and the Bank, immediately terminate this Agreement at any time within ninety (90) days following an event constituting “Good Reason” as defined below (a termination “With Good Reason”).

ii. Subject to Section 11 hereof, in the event of termination under this Section 10(g), the Executive shall be entitled to receive his base salary for the remaining term of the Agreement, including any renewals or extensions thereof (determined at the highest annual rate of base salary in effect pursuant to Section 4 of this Agreement for any of the twelve (12) months immediately preceding the date of such termination), plus annual cash bonuses for each year (prorated in the event of partial years) remaining under such term (determined by reference to the highest annual cash bonus received by the Executive in any of the three (3) calendar years preceding the termination). The sum due under this Section 10(g) shall be paid in one lump sum within ten (10) calendar days of such termination. Also, in such event, (i) the Executive shall, within ten (10) days of his termination date, receive a lump sum payment equal to the value of the benefits he would have received in each of the three calendar years following the year in which his termination occurs under any tax-qualified or non-tax-qualified retirement programs in which the Executive participated prior to his termination (with the amount of

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the benefits determined by reference to the benefits received by the Executive under such programs during the twelve (12) months preceding his termination date, or, if applicable, the accruals made on the Executive’s behalf during such period and without regard to whether such programs were or are actually maintained after his termination date) and (ii) the Executive shall, for a thirty six (36) month period, continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), life or disability insurance, or similar coverage upon terms no less favorable than the most favorable terms provided to senior executives of the Bank during such period. In the event that the Company or the Bank is unable to provide the coverage referred to in the preceding clause (ii) by reason of the Executive no longer being an employee, the Company and the Bank shall provide the Executive with comparable coverage on an individual policy or, if individual coverage is not available, provide a cash payment equivalent to the value of such coverage.

iii. “Good Reason” shall exist if, without Executive’s express written consent, the Company or the Bank materially breach any of its respective obligations under this Agreement. Without limitation, such a material breach shall be deemed to occur upon any of the following:

(1) A material reduction in the Executive’s responsibilities or authority, or a requirement that the Executive report to any person or group other than the Boards of the Company and the Bank (or any other effective reduction in reporting responsibilities) in connection with his employment with the Company or the Bank;

(2) Assignment to the Executive of duties of a non-executive nature or duties for which he is not reasonably equipped by his skills and experience;

(3) A reduction in salary or benefits contrary to the terms of this Agreement, or, following a Change in Control as defined in Section 11 of this Agreement, any reduction in salary or material reduction in benefits below the amounts to which he was entitled prior to the Change in Control;

(4) Termination of incentive and benefit plans, programs or arrangements, or reduction of the Executive’s participation to such an extent as to materially reduce their aggregate value below their aggregate value as of the Effective Date; or

(5) Following a Change in Control only, a requirement that the Executive relocate his principal business office or his principal place of

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residence outside of the area consisting of a thirty five (35) mile radius from the current main office and any branch of the Bank, or the assignment to the Executive of duties that would reasonably require such a relocation.

iv. Notwithstanding the foregoing, a reduction in base salary or a reduction or elimination of the Executive’s participation or benefits under one or more benefit plans maintained by the Company or the Bank as part of a good faith, overall reduction in salary or reduction or elimination of such plan or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of the Company or the Bank or any company that controls either of them under a plan or plans in or under which the Executive is not entitled to participate.

(v). Notwithstanding anything in this Agreement to the contrary, during the twelve (12) month period beginning on the effective date of a Change in Control (as defined in Section 11(a)) and continuing through the first anniversary of such date, the Executive may voluntarily terminate his employment under this Agreement for any reason and such termination shall constitute termination With Good Reason.

h. Continuing Covenant Not to Compete or Interfere with Relationships. Regardless of anything herein to the contrary, following a termination by the Company, the Bank or the Executive pursuant to Section 10(g) and continuing until the first anniversary of the effective date of such termination, the Executive shall not serve as an officer, director or employee of any bank holding company, bank, savings association, savings and loan holding company, or mortgage company which offers products or services competing with those offered by the Company or the Bank from any office in any city, town or county where Bank maintains an office as of the date of the Executive’s termination and shall not interfere with the relationship of the Company or the Bank and any of its employees, agents, or representatives.

11. Termination in Connection with a Change in Control.

a. For purposes of this Agreement, a “Change in Control” shall be deemed to occur on the earliest of:

i. The acquisition by any entity, person or group (other than the acquisition by a tax-qualified retirement plan sponsored by the Company or the Bank) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 25% of the outstanding

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capital stock of the Company or the Bank entitled to vote for the election of directors (“Voting Stock”);

ii. The commencement by any entity, person, or group (other than the Company or the Bank, a subsidiary of the Company or the Bank, or a tax-qualified retirement plan sponsored by the Company or the Bank) of a tender offer or an exchange offer for more than 25% of the outstanding Voting Stock of the Company or the Bank;

iii. The effective time of (x) a merger or consolidation of the Company or the Bank with one or more other corporations as a result of which the holders of the outstanding Voting Stock of the Company or the Bank immediately prior to such merger exercise voting control over less than 51% of the Voting Stock of the surviving or resulting corporation, or (y) a transfer of substantially all of the property of the Company or the Bank other than to an entity of which the Company or the Bank owns at least 51% of the Voting Stock; and

iv. At such time that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of the Company or the Bank (the “Continuing Directors”) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director.

b. If within the period ending two years after a Change in Control, (i) the Company or the Bank shall terminate the Executive’s employment Without Just Cause, or (ii) the Executive shall voluntarily terminate his employment With Good Reason, the Company or the Bank shall, within ten (10) calendar days of the termination of the Executive’s employment, make a lump-sum cash payment to him equal to three (3) times the sum of the Executive’s (x) current base salary (determined at the highest annual rate of base salary in effect pursuant to Section 4 of this Agreement for any of the twelve (12) months immediately preceding the effective date of the Change in Control or, if higher, the rate in effect on the Executive’s termination date) and (y) the highest cash bonus paid to the Executive or accrued on the Executive’s behalf with respect to any of the three (3) most recently completed fiscal years of the Bank preceding the effective date of the Change in Control. Also, in such event, (i) the Executive shall, within ten (10) days of his termination date, receive a lump sum payment equal to the value of the benefits he would have received in each of the three calendar years following the year in which his termination occurs under any tax-qualified or non-tax-qualified retirement programs in which the Executive participated prior to his termination (with the amount of the benefits determined by reference to the benefits received by the Executive under such programs during the

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twelve (12) months preceding the Change in Control or, if applicable, the accruals made on the Executive’s behalf during such period and without regard to whether such programs were or are actually maintained after the Change in Control) and (ii) the Executive shall, for a thirty six (36) month period, continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), life or disability insurance, or similar coverage upon terms no less favorable than the most favorable terms provided to senior executives of the Bank during such period. In the event that the Company or the Bank is unable to provide the coverage referred to in the preceding clause (ii) by reason of the Executive no longer being an employee, the Company and the Bank shall provide the Executive with comparable coverage on an individual policy or, if individual coverage is not available, provide a cash payment equivalent to the value of such coverage. The cash payments and benefits provided under this Section 11 shall be paid or provided in lieu of any payments or benefits also required under Section 10(g) of this Agreement because of a termination in such period. Upon the Executive’s termination pursuant to this Section 11(b), the Bank shall (i) transfer to the Executive the office furniture and desktop and laptop computers used by the Executive prior to his termination. Such transfers shall be subject to appropriate tax reporting. The Executive’s rights under Section 10(g) are not otherwise affected by this Section 11.

12. Indemnification and Liability Insurance.

a. Indemnification. The Company and the Bank agree to indemnify the Executive (and his heirs, executors, and administrators), and to advance expenses related thereto, to the fullest extent permitted under applicable law and regulations against any and all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his having been a director or Executive of the Company or the Bank or any of their subsidiaries (whether or not he continues to be a director or Executive at the time of incurring any such expenses or liabilities) such expenses and liabilities to include, but not be limited to, judgements, court costs, and attorney’s fees and the cost of reasonable settlements, such settlements to be approved by the Board of the Company or the Bank, if such action is brought against the Executive in his capacity as an Executive or director of the Company or the Bank or any of their subsidiaries. Indemnification for expense shall not extend to matters for which the Executive has been terminated for Just Cause. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. Notwithstanding anything herein to the contrary, the obligations of this Section 12 shall survive the term of this Agreement by a period of six (6) years.

b. Insurance. During the period in which indemnification of the Executive is required under this Section, the Company or the Bank shall provide the Executive (and his heirs, executors, and administrators) with coverage under a directors’ and

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Executives’ liability policy at the expense of the Company or the Bank, at least equivalent to such coverage provided to directors and senior Executives of the Company or the Bank, whichever is more favorable to the Executive.

13.   Reimbursement of Executive’s Expenses to Enforce this Agreement. The Company or the Bank shall reimburse the Executive for all out-of-pocket expenses, including, without limitation, reasonable attorney’s fees, incurred by the Executive in connection with successful enforcement by the Executive of the obligations of the Company or the Bank to the Executive under this Agreement. Successful enforcement shall mean the grant of an award of money or the requirement that the Company or the Bank take some action specified by this Agreement (i) as a result of court order; or (ii) otherwise by the Company or the Bank following an initial failure of the Company or the Bank to pay such money or take such action promptly after written demand therefor from the Executive stating the reason that such money or action was due under this Agreement at or prior to the time of such demand.

14. Adjustment of Certain Payments and Benefits.

(a) Tax Indemnification. Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment, benefit or distribution made or provided by the Company or the Bank to or for the benefit of the Executive (whether made or provided pursuant to the terms of this Agreement or otherwise) (each referred to herein as a “Payment”), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) or any interest or penalties are incurred by the Executive with respect to such excise tax (the excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

(b) Determination of Gross-Up Payment. Subject to the provisions of Section 14(c), all determinations required to be made under this Section 14, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payments and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company, the Bank and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been Payments, or such earlier time as is requested by the Company and the Bank. All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Bank. Any Gross-Up Payment, as determined pursuant to this Section 14,

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shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payments of any Excise Tax, and (ii) the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code, at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company and the Bank should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company and the Bank exhaust their remedies pursuant to Section 14(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

(c) Treatment of Claims. The Executive shall notify the Company and the Bank in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company and the Bank of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company and the Bank of the nature of such claims and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company and the Bank (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company and the Bank notify the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

(i) give the Company and the Bank any information reasonably request by the Company and the Bank relating such claim,

(ii) take such action in connection with contesting such claim as the Company and the Bank shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and the Bank,

(iii) cooperate with the Company and the Bank in good faith in order effectively to contest such claim, and

(iv) permit the Company and the Bank to participate in any proceedings relating to such claim; provided, however, that the Company and the Bank shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and indemnity and hold the Executive harmless, on an after-tax basis, for an Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of

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such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 14(c), the Company and the Bank shall control all proceedings taken in connection with such contest and, at its sole options, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole options, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company and the Bank shall determine; provided, however, that if the company directs the Executive to pay such claim and sue for a refund, the Company and the Bank shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount. Furthermore, the Company’s and the Bank’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority.

(d) Adjustments to the Gross-Up Payment. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 14(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 14(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 14(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

15.   Injunctive Relief. If there is a breach or threatened breach of Section 10(h) of this Agreement, the Company or the Bank and the Executive agree that there is no adequate remedy at law for such breach, and that the Company and the Bank each shall be entitled to injunctive relief restraining the Executive from such breach or threatened breach, but such relief shall not be the exclusive remedy hereunder for such breach. The parties hereto likewise agree that the Executive, without limitation, shall be entitled to injunctive relief to enforce the obligations of the Company and the Bank under Section 11 of this Agreement.

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16. Successors and Assigns.

a. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company or the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Company or the Bank.

b. Since the Bank and the Company are contracting for the unique and personal skills of the Executive, the Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank and the Company.

17.   No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment.

18.   Notices. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows, or to such other address as shall have been designated in writing by the addressee:

a. If to the Company or the Bank:

Union Financial Bancshares, Inc.

Provident Community Bank

P.O. Box 866

Union, South Carolina 29379

Copy to:        Corporate Secretary

b. If to the Executive:

Richard H. Flake

2 Hunt Master Court

Irmo, SC 29063

19.   Joint and Severally Liability; Payments by the Company and the Bank. To the extent permitted by law, except as otherwise provided herein, the Company and the Bank shall be jointly and severally liable for the payment of all amounts due under this Agreement. The Company hereby agrees that it shall be jointly and severally liable with the Bank for the payment of all amounts due under this Agreement and shall guarantee the performance of the Bank’s obligations thereunder, provided that the Company shall not be required by this Agreement to pay to the

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Executive a salary or any bonuses or any other cash payments, except in the event that the Bank does not fulfill the obligations to the Executive hereunder for such payments.

20.   No Plan Created by this Agreement. The Executive, the Company and the Bank expressly declare and agree that this Agreement was negotiated among them and that no provision or provisions of this Agreement are intended to, or shall be deemed to, create any plan for purposes of the Employee Retirement Income Security Act or any other law or regulation, and the Company, the Bank and the Executive each expressly waives any right to assert the contrary. Any assertion in any judicial or administrative filing, hearing, or process by or on behalf of the Executive or the Company or the Bank that such a plan was so created by this Agreement shall be deemed a material breach of this Agreement by the party making such an assertion.

21.   Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided.

22.   Applicable Law. Except to the extent preempted by Federal law, the laws of the State of South Carolina shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

23.   Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

24.   Headings. Headings contained herein are for convenience of reference only.

25.   Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, other than written agreements with respect to specific plans, programs or arrangements described in Sections 5 and 6. This Agreement supercedes and replaces in its entirety the Agreement dated July 27, 1995, as amended, between the Company, the Bank and the Executive.

26.   Status of Directorship. The Executive agrees that, in the event of his termination of employment pursuant to any provision of Section 10, if he is then serving as a director of the Bank, the Company or any subsidiary or affiliate thereof, he will submit his resignation from such directorship, effective as of his date of termination of employment.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above.

Attest:	UNION FINANCIAL BANCSHARES, INC.
/s/    Wanda J. Wells	By:	/s/    Dwight V. Neese
Senior Vice President/Corporate Secretary	Title:	President – Chief Executive Officer

Attest:	PROVIDENT COMMUNITY BANK
/s/    Wanda J. Wells	By:	/s/    Dwight V. Neese
Senior Vice President/Corporate Secretary	Title:	President – Chief Executive Officer
/s/    Wanda J. Wells	/s/    Richard H. Flake
Witness	Executive

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EX-10.E

Exhibit 10(e)

AGREEMENT

THIS AGREEMENT is made effective as of April 17, 2003 by and between PROVIDENT COMMUNITY BANK (the”Bank”); UNION FINANCIAL BANCSHARES, INC. (the “Company”); and Lud W. Vaughn (“Executive”).

WHEREAS, Executive serves in the position of Executive Vice President and Chief Credit Officer of the Bank, a position of substantial responsibility; and

WHEREAS, the Bank recognizes the substantial contribution Executive has made to the Bank and wishes to protect her position therewith for the period provided for in this Agreement.

NOW, THEREFORE, in consideration of the foregoing and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows:

1.    Term of Agreement

a.)  The term of this Agreement shall be (i) the period commencing on April 17, 2003 (the “Effective Date”) and continuing for a period of twelve months thereafter; plus (ii) any and all extensions of the term made pursuant to this Section 1.

b.)  Commencing on the Effective Date and on each day thereafter, the term under this agreement shall be renewed automatically for an additional one (1)day period beyond the then effective expiration date without action by any party, provided that neither the Company, on the one hand, nor Executive, on the other, shall have given at least sixty (60) days written notice of its or her desire that the term not be renewed. In the case such notice is given by one party to the other, the term of this Agreement shall become fixed and shall end on the second anniversary of the date of written notice.

2.    Payments to Executive Upon a Change in Control.

a.)  Upon the occurrence of a Change in Control (as herein defined) followed within twenty-four (24) months of the effective date of a Change in Control by the voluntary or involuntary termination of Executive’s employment, other than Termination for Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall apply. For purposes of this Agreement, “voluntary termination” shall be limited to the circumstances in which, during the term of this Agreement, Executive elects to voluntarily terminate her employment within twelve (12) months of the effective date of a Change in Control following any demotion, loss of title, office of significant authority, reduction in her annual compensation or benefits (other than a reduction affecting the Bank’s personnel generally), or relocation of her principal place of employment by more than thirty-five (35)miles from its location immediately prior to the Change in Control.

b.)  A “Change in Control” of the Company of the Bank shall be deemed to occur if and when (a) an offeror other than the Company purchases shares of the common stock of the Company or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of the Company or the Bank representing 25% or more of the combined voting power of the Company’s then outstanding securities, (c) the membership of the board of directors of

the Company or the Bank changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four (24) month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Company or the Bank approve a merger, consolidation, sale of disposition of all or substantially all of the Company’s or the Bank’s assets, or a plan of partial or complete liquidation.

c.)  Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof upon Termination for Cause. The term “Termination for Cause” shall mean termination because of Executive’s intentional failure to perform stated duties, personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, willful violation of any law, rule regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of any material provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institution industry. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause.

3.    Termination

a.)  Upon the occurrence of a Change in Control, followed within twelve (12) months of the effective date of a Change in Control by the voluntary or involuntary termination of Executive’s employment other than for Termination for Cause, the Bank shall be obligated to pay Executive, or in the event of her subsequent death, her beneficiary or beneficiaries, or her estate, as the case may be, as severance pay, a sum equal to one (1) times Executive’s base salary as in effect on the effective date of a Change in Control. Such amount shall be paid to Executive in a lump sum no later than thirty (30) days after the date of her termination.

b.)  Upon the occurrence of a Change in Control of the Bank followed within twelve (12) months of the effective date of a Change in Control by Executive’s voluntary or involuntary termination of employment, other than for Termination for Cause, the Bank shall cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to her severance. Such coverage and payments shall cease upon expiration of twelve (12) months from the date of Executive’s termination.

c.)  Notwithstanding the preceding paragraphs of this Section 3, in the event that the aggregate payments or benefits to be made or afforded to Executive under this Section would be deemed to include an “excess parachute payment” under Section 280G of the Code, such payments or benefits shall be payable or provided to Executive in equal monthly installments over the minimum period necessary to reduce the present value of

2

such payments or benefits to an amount which is one dollar ($1.00) less than three (3) times Executive’s “base amount” as defined under Section 280G of the Code.

d.)  Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) and any regulations promulgated thereunder.

4.    Effect on Prior Agreements and Existing Benefit Plans

This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.

5.    No Attachment

a.)  Except required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void and of no effect.

b.)  This Agreement shall be binding upon, and inure to the benefit of, Executive, the Company, the Bank and their respective successors and assigns.

6.    Modification and Waiver

a.)  This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

b.)  No term or condition of this Agreement shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

7.    Required Provisions

a.)  The Bank may terminate Executive’s employment at any time, but any termination by the Bank, other than Termination for Cause, shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 2(c) herein.

b.)  If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the

3

Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. 1818(e)(3) and (g)(1)), the Bank’s obligations under the Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may, in its discretion, (i) pay Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations that were suspended.

c.)  If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under the Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

d.)  If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the parties.

e.)  All obligations under this Agreement may be terminated:, (I)by the Director of the Office of Thrift Supervision (the”Director”) or his or her designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA and (ii) by the Directors, or his or her designee at the time the Director or such designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not ve affected by such action.

8.    Severability

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.

9.    Headings for Reference Only

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

10.    Governing Law

The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of South Carolina, unless preempted by Federal law as now or hereafter in effect.

Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect.

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11.    Source of Payments

All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees all payments and the provision of all amounts and benefits due hereunder to Executive and, if such payments are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company.

12.    Payment of Legal Fees

All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation of this Agreement shall be paid or reimbursed by the Bank if Executive is successful on the merits pursuant to a legal judgement, arbitration or settlement.

13.    Successor to the Bank or the Company

The Bank and the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank’s or the Company’s obligations under this Agreement, in the same manner and to the same extent that the Bank or the Company would be required to perform if no such succession or assignment had taken place.

14.    Signatures

IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed by a duly authorized officer, and Executive has signed this Agreement, all on the day and date first above written.

ATTEST:	PROVIDENT COMMUNITY BANK
/s/ Wanda J. Wells	By:	/s/ Dwight V. Neese
		Dwight V. Neese
ATTEST:	UNION FINANCIAL BANCSHARES, INC.
/s/ Wanda J. Wells	By:	/s/ Dwight V. Neese
		Dwight V. Neese
WITNESS:	EXECUTIVE
/s/ Helaine M. Cody	By:	/s/ Lud W. Vaughn
		Lud W. Vaughn

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EX-13

Exhibit 13

Union Financial Bancshares, Inc.

2003 Supplemental Annual Report

TABLE OF CONTENTS

Business	1
Selected Financial and Other Data	2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Independent Auditor’s Report	14
Consolidated Financial Statements	15
Notes to Consolidated Financial Statements	20
Directors and Leadership Group	43
Corporate Information	44

BUSINESS

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

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

The business of the Bank consists primarily of attracting deposits from the general public and originating loans on properties located in South Carolina. In addition to residential mortgage loans, the Bank also makes consumer and commercial loans, commercial real estate loans, and construction loans, invests in federal government and agency obligations and purchases fixed and variable rate mortgage participation certificates. The principal sources of funds for the Bank’s lending and investing activities include deposits received from the general public and advances from the FHLB. The Bank’s principal expenses are interest paid on deposit accounts and other borrowings and expenses incurred in the operation of the Bank. The Bank’s operations are conducted through its main office and six full-service banking centers, all of which are located in the upstate area of South Carolina. During the third quarter of the fiscal year, the Corporation opened a new branch location in Rock Hill, South Carolina.

SELECTED FINANCIAL AND OTHER DATA

The following tables set forth selected financial data of the Corporation for the periods indicated.

Operations Data:

	Years Ended September 30,
	2003			2002			2001			2000			1999
	(In Thousands - Except Share Amounts)
Interest income	$	16,924		$	18,361		$	19,018		$	18,555		$	14,046
Interest expense		(8,702	)		(9,775	)		(11,613	)		(11,175	)		(7,698	)
Net interest income		8,222			8,586			7,405			7,380			6,348
Provision for loan losses		(725	)		(990	)		(240	)		(225	)		(105	)
Net interest income after provision for loan losses		7,497			7,596			7,165			7,155			6,243
Other income		2,211			1,308			1,149			2,580			1,192
Other expense		(7,278	)		(6,602	)		(6,250	)		(6,352	)		(4,814	)
Income before income taxes		2,430			2,302			2,064			3,383			2,621
Income tax expense		(571	)		(558	)		(721	)		(1,190	)		(945	)
Net income	$	1,859		$	1,744		$	1,343		$	2,193		$	1,676
Income per common share:
Net income per common share (Basic)	$	0.95		$	0.90		$	0.70		$	1.18		$	1.26
Net income per common share (Diluted)	$	0.90		$	0.86		$	0.68		$	1.16		$	1.19
Weighted average number of common shares outstanding (Basic)		1,963,775			1,939,084			1,918,431			1,855,706			1,328,305
Weighted average number of common shares outstanding (Diluted)		2,056,579			2,030,040			1,971,611			1,898,494			1,414,121

UNION FINANCIAL BANCSHARES, INC.

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Financial Condition:

	September 30,
	2003			2002			2001			2000			1999
	(Dollars In Thousands)
Total amount of:
Assets	$	341,305		$	310,968		$	277,752		$	260,564		$	205,294
Short-term interest-bearing deposits		3,290			7,385			5,694			4,500			2,781
Investment securities		78,790			28,913			24,170			19,432			15,506
Mortgage-backed securities		78,648			88,720			64,947			47,460			17,415
Loans (net)		152,921			161,576			158,063			167,807			149,401
Deposits		220,232			200,303			194,079			187,974			142,624
Advances from Federal Home Loan Bank and other borrowings		74,000			57,000			46,007			47,687			46,503
Securities sold under agreement to repurchase		11,000			17,000			11,000			—			—
Corporate obligated floating rate capital securities		8,000			8,000			—			—			—
Shareholders’ equity		26,216			27,198			24,376			21,924			14,738
Number of:
Real estate loans outstanding		1,147			1,503			1,783			2,216			1,411
Deposit accounts		19,557			19,506			20,499			22,418			18,865
Banking centers		7			6			6			7			5
Other Selected Data:
	Years Ended September 30,
	2003			2002			2001			2000			1999
Interest rate spread during the year		2.56	%		2.97	%		2.98	%		3.02	%		3.36	%
Net yield on average interest-earning assets		2.63	%		3.08	%		3.08	%		3.10	%		3.46	%
Return on average assets		0.55	%		0.59	%		0.51	%		0.85	%		0.85	%
Return on average shareholders’ equity		6.64	%		7.06	%		6.03	%		10.92	%		10.96	%
Dividend payout ratio		42.29	%		44.55	%		57.03	%		26.13	%		29.46	%
Operating expense to average assets		2.17	%		2.22	%		2.39	%		2.44	%		2.43	%
Ratio of average shareholders’ equity to average assets		8.34	%		8.31	%		8.50	%		7.78	%		7.44	%
Cash dividends declared and paid per share of common stock	$	0.40		$	0.40		$	0.40		$	0.40		$	0.37

UNION FINANCIAL BANCSHARES, INC.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

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

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

The Corporation believes the allowance for loan losses is a critical accounting policy that requires significant judgments and estimates used in the preparation of consolidated financial statements. Refer to the discussion under Allowance for Loan Losses section of this report for a detailed description of the Corporation’s estimation process and methodology related to the allowance for loan losses.

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other portions of this report contain certain “forward-looking statements” concerning the future operations of the Corporation. Management desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Corporation of the protections of such safe harbor with respect to all “forward-looking statements” contained in the Annual Report. The Corporation has used “forward-looking statements” to describe future plans and strategies. Forward looking statements are generally preceded by such terms as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Corporation’s market area and the country as a whole, the ability of the Corporation to control costs and expenses, the products and pricing of its competitors, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the “forward-looking statements” and undue reliance should not be placed on such statements.

Asset and Liability Management

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

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

The Corporation has more interest-rate sensitive liabilities than assets. Thus, it enjoys an increasing net interest rate spread during periods of falling interest rates. The Corporation experiences a shrinking net

UNION FINANCIAL BANCSHARES, INC.

4

interest rate spread in a rising interest rate environment. However, the Corporation continues to work to shorten the average life of its assets and to extend the term on its liabilities in an effort to help minimize the effects of rising interest rates.

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

At September 30, 2003, the Corporation’s exposure to interest rate risk, as measured by the impact of changing interest rates on the Net Portfolio Value (“NPV”), was as follows:

	Rate Environment
	Minus 100 Basis Points			Base		Plus 200 Basis Points
	(In Thousands)
Estimated Market Value of Assets	$	344,231		$	341,305	$	328,826
Estimated Market Value of Liabilities	$	319,462		$	315,089	$	307,724
NPV	$	24,769		$	26,216	$	21,102
Increase/(Decrease) in NPV	$	(1,447	)	$	—	$	(5,114	)

The analysis above indicates that the Corporation would be negatively affected by both an increase and a decrease in interest rates.

Yields Earned and Rates Paid

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

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

UNION FINANCIAL BANCSHARES, INC.

5

	At September 30,		Years Ended September 30
	2003		2003		2002		2001
Average yield on earnings assets:
Loans	6.46	%	6.94	%	7.58	%	8.85	%
Investments (1)	3.89	%	3.95	%	5.47	%	5.92	%
Mortgage-backed securities	3.50	%	3.78	%	4.52	%	5.94	%
Total interest-earning assets	5.05	%	5.41	%	6.58	%	7.92	%
Less:
Average rate paid on deposits	1.94	%	2.25	%	3.06	%	4.70	%
Average rate paid on borrowings	3.59	%	4.13	%	5.04	%	5.92	%
Average Cost of Funds	2.47	%	2.85	%	3.61	%	4.94	%
Average interest rate spread	2.58	%	2.56	%	2.97	%	2.98	%
Net yield on average interest-earning assets	2.80	%	2.63	%	3.08	%	3.08	%

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

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Corporation for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (changes in rate multiplied by prior volume); and (3) the total. The net change attributable to the combined impact of rate and volume has been allocated to rate and volume variances consistently on a proportionate basis.

UNION FINANCIAL BANCSHARES, INC.

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	Years Ended September 30,
	2003 vs. 2002									2002 vs. 2001
	Volume			Rate			Total			Volume		Rate			Total
	(Dollars in Thousands)
Change in interest income:
Loans	$	(593	)	$	(1,011	)	$	(1,604	)	$	126	$	(2,094	)	$	(1,968	)
Mortgage-backed securities		312			(1,334	)		(1,022	)		1,465		(346	)		1,119
Investments		1,617			(428	)		1,189			761		(569	)		192
Total interest income		1,336			(2,773	)		(1,437	)		2,352		(3,009	)		(657	)
Change in interest expense:
Deposits		343			(1,684	)		(1,341	)		397		(3,217	)		(2,820	)
Borrowings and other		1,157			(889	)		268			1,642		(660	)		982
Total interest expense		1,500			(2,573	)		(1,073	)		2,039		(3,877	)		(1,838	)
Change in net interest income	$	(164	)	$	(200	)	$	(364	)	$	313	$	868		$	1,181

RESULTS OF OPERATIONS

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

General

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

Interest Income

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

Interest Expense

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

UNION FINANCIAL BANCSHARES, INC.

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Provision for Loan Loss

Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for estimated loan losses based on management’s evaluation of the collectibility of the loan portfolio. The provision for loan loss calculation includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is risk rated for all loans including performing groups. The weight assigned to each performing group is developed from a three-year historical average loan loss experience ratio and as the loss experience changes, the category weight is adjusted accordingly. In addition to loan loss experience, management’s evaluation of the loan portfolio will include the market value of the underlying collateral, growth and composition of the loan portfolio, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically, and the allowance for loan losses is adjusted accordingly. The provision reflects the Corporation’s continued movement from longer term, fixed rate residential loans to shorter term, floating rate consumer and commercial loans. Consumer and commercial loans carry higher risk weighted rates in the reserve calculation as compared to residential mortgage loans. The provision for loan losses decreased from $990,000 in fiscal 2002 to $725,000 in fiscal 2003, which reflected in part the net decrease in the loan portfolio of $8,655,000, or 5.36%, from September 30, 2002 to September 30, 2003 and a reduction in net charge-offs. The net allowance for loan losses increased $471,000 to $1,842,000 at September 30, 2003 compared to $1,371,000 at September 30, 2002. Non-performing loans increased $1,188,000 from $1,866,000 at September 30, 2002 to $3,054,000 at September 30, 2003. The net increase for the current year includes one loan of $1,087,000 that is well secured by commercial real estate and improvements. At and for the years ended September 30, 2003 and 2002, impaired loans totaled $718,246 and $809,293 respectively. See Note 3 of consolidated financial statements for an analysis of loans.

The Corporation experienced bad debt charge-offs, net of recoveries, of approximately $254,000 in fiscal 2003 compared to $699,000 for fiscal 2002. The bad debt charge-offs from the previous year included approximately $500,000 from one commercial loan that was written down to the fair market value as a result of a reassessment of underlying collateral. The allowance for loan losses to total loans at the end of fiscal 2003 was 1.19% compared to .83% at the end of fiscal 2002. The allowance for loan losses to non-performing loans at the end of fiscal 2003 was 60.32% compared to 73.47% at the end of fiscal 2002.

Non-Interest Income

Non-interest income increased 69.03% to $2,211,000 for the year ended September 30, 2003 from $1,308,000 for the year ended September 30, 2002. Service charges and fees increased $259,000 to $1,771,000, primarily due to the development of new fee income programs. Loan servicing fee costs increased $45,000 to $(212,000) for the year ended September 30, 2003 from $(167,000) for the year ended September 30, 2002. Higher loan prepayments during fiscal years 2002 and 2003 resulted in servicing rights amortization expense exceeding service fee income. Gain (loss) on sale of investments increased $689,000 to $652,000 during the year ended September 30, 2003 from $(37,000) for the year ended September 30, 2002. The gain on sale of investments for the current year was the result of the sale of investments with higher interest rate sensitivity, which is expected to improve interest rate exposure for the Corporation.

Non-Interest Expense

Non-interest expense increased 10.24% to $7,278,000 in fiscal 2003 from $6,602,000 in fiscal 2002. The increase in non-interest expense reflects the startup costs for a new branch opening in Rock Hill, South Carolina during the third quarter of fiscal 2003. Compensation and employee benefits increased 15.96% or $457,000 from fiscal 2002 to fiscal 2003 due primarily to the staff additions as a result of the new branch opening. Occupancy and equipment expenses increased 15.10%, or $237,000, from fiscal 2002 to fiscal 2003 due to higher depreciation and equipment expense as a result of the new branch opening. Professional services expense increased 8.33%, or $29,000, from fiscal 2002 to fiscal 2003 due to higher audit and legal expenses. Advertising and public relations expense increased 61.83%, or $81,000, from fiscal 2002 to fiscal 2003 due to higher expenses required for the new branch opening. Other operating expense decreased 10.63%, or $106,000, from fiscal 2002 to fiscal 2003 due to reductions in general operating expenses.

UNION FINANCIAL BANCSHARES, INC.

8

Income Tax Expense

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

Comparison of Years Ended September 30, 2002 and September 30, 2001

General

Net income increased $401,000 from $1,343,000 in fiscal 2001 to $1,744,000 in fiscal 2002. Earnings per share were $.90 per share (basic) and $.86 per share (diluted) for the year ended September 30, 2002 compared to $.70 per share (basic) and $.68 per share (diluted) for the same period in 2001. The increase in net income was due to higher net interest income as a result of lower funding costs and higher fee income.

Interest Income

Total interest income decreased $657,000, or 3.45%, from $19,018,000 in fiscal 2001 to $18,361,000 in fiscal 2002. Interest income on loans decreased $1,968,000, or 13.58%, from $14,487,000 in fiscal 2001 to $12,519,000 in fiscal 2002 due primarily to the reduction of loan rates as a result of the declining interest rate environment that was experienced during the prior two fiscal years. The Corporation’s continued focus on variable and primed-based lending resulted in net growth in consumer/commercial loans of 46.31% while net residential mortgage loans declined 15.84%. Interest income on investment and mortgage-backed securities increased $1,311,000, or 28.93%, from $4,531,000 in fiscal 2001 to $5,842,000 in fiscal 2002. The increase was due primarily to purchases of investment and mortgage-backed securities made during the fiscal year, offset by lower rates due to a lower market interest rate environment.

Interest Expense

Interest expense decreased 15.83% to $9,775,000 for fiscal 2002 from $11,613,000 for fiscal 2001. Interest expense decreased $2,820,000 for deposits and increased $982,000 for other borrowings and trust preferred corporate obligations. Interest expense for deposits decreased due primarily to lower deposit rates from a declining interest rate environment. In addition, the Corporation increased lower-cost transaction account balances by 21.1% while traditional higher-cost certificate of deposit account balances declined 1.1%. Interest expense on other borrowings increased due to a higher level of borrowings that were utilized to fund growth, offset by lower interest rates during the fiscal year. The Corporation also extended borrowing terms during the fiscal year to improve interest rate risk. The Corporation also recorded $365,000 for the fiscal year for interest expense on the trust preferred securities that were issued on December 18, 2001.

Provision for Loan Loss

The provision for loan losses increased from $240,000 in fiscal 2001 to $990,000 in fiscal 2002. The increased provision reflects the Corporation’s continued movement from longer term, fixed rate residential loans to shorter term, floating rate consumer and commercial loans. The provision also reflects that during the fiscal year, non-performing loans increased $1,071,000 from $795,000 at September 30, 2001 to $1,866,000 at September 30, 2002. At and for the years ended September 30, 2002 and 2001, impaired loans totaled $809,293 and $121,075 respectively. The fiscal year 2002 total includes one commercial loan that was written down from the original loan balance of approximately $1,000,000 to $500,000 due to a reassessment of collateral values. See Note 3 of consolidated financial statements for an analysis of loans.

UNION FINANCIAL BANCSHARES, INC.

9

The Corporation experienced bad debt charge-offs, net of recoveries, of approximately $699,000 in fiscal 2002 compared to $520,000 for fiscal 2001. The increase in bad debt charge-offs over the previous year includes approximately $500,000 from one commercial loan that was written down to the current fair market value as a result of a reassessment of underlying collateral. The allowance for loan losses to total loans at the end of fiscal 2002 was .83% compared to .67% at the end of fiscal 2001. The allowance for loan losses to non-performing loans at the end of fiscal 2002 was 73.47% compared to 135.85% at the end of fiscal 2001.

Non-Interest Income

Non-interest income increased 13.84% to $1,308,000 for the year ended September 30, 2002 from $1,149,000 for the year ended September 30, 2001. Service charges and fees increased $584,000 to $1,512,000, primarily due to the development of new fee income programs that were implemented during the first quarter of the 2002 fiscal year. Loan servicing fee costs increased $64,000 to $(167,000) for the year ended September 30, 2002 from $(103,000) for the year ended September 30, 2001. Higher loan prepayments during fiscal years 2001 and 2002 resulted in servicing rights amortization expense exceeding service fee income. Gain (loss) on sale of loans and investments decreased $361,000 to $(37,000) during the year ended September 30, 2002 from $324,000 for the year ended September 30, 2001. The Corporation phased out its wholesale mortgage operation during the third quarter of fiscal year 2001. The loss on sale of investments for the year was the result of the sale of investments with higher interest rate sensitivity and therefore the sale will improve interest rate exposure for the Corporation.

Non-Interest Expense

Non-interest expense increased 5.63% to $6,602,000 in fiscal 2002 from $6,250,000 in fiscal 2001. Compensation and employee benefits decreased 1.45% or $42,000 from fiscal 2001 to fiscal 2002 due primarily to the staff reductions from the phase out of the wholesale mortgage operation that occurred during the third quarter of the previous fiscal year. Occupancy and equipment expenses increased 17.60%, or $235,000, from fiscal 2001 to fiscal 2002 due to higher depreciation and equipment expense as a result of a new branch opening in the fourth quarter of the previous year. In addition, the Corporation also implemented statement imaging that increased data processing costs while reducing postage costs. Professional services expense increased 27.70%, or $104,000, from fiscal 2001 to fiscal 2002 due to higher usage of external consultants for loan operations along with higher audit and legal expenses.

Income Tax Expense

The overall effective income tax rate for the Corporation was 24.24% for the twelve month period ended September 30, 2002 compared to 34.93% for the same period in 2001. The reduction was due to increased investments in government municipal securities totaling $14,597,000 at September 30, 2002 compared to $9,726,000 at September 30, 2001. The municipal securities as of September 30, 2001 were purchased in the fourth quarter of fiscal year 2001 and therefore did not reflect the reduction in the effective tax rate as compared to the current fiscal year.

Financial Condition, Liquidity and Capital Resources

Financial Condition

Assets

At September 30, 2003, the Corporation’s assets totaled $341,305,000, an increase of $30,337,000, or 9.76%, as compared to $310,968,000 at September 30, 2002. Investment and mortgage-backed securities increased $39,805,000 to $157,438,000 from $117,633,000 at September 30, 2002. All securities being purchased have adjustable features and will, therefore, have increasing interest rates in a rising market.

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Total loans, net, decreased $8,655,000, or 5.36%, to $152,921,000 from $161,576,000 at September 30, 2002. The net change in the loan portfolio balance includes a reduction in residential mortgage loans that reflects the Corporation’s movement toward higher yielding consumer and commercial loans that are intended to provide improvements in interest rate risk exposure. Consumer and commercial loans outstanding during this period increased $23,110,000, or 37.38%, while outstanding residential mortgage loans decreased $31,765,000 or 30.80%.

Liabilities

Total liabilities increased $31,319,000, or 11.04%, to $315,089,000 at September 30, 2003 from $283,770,000 at September 30, 2002.

Total deposits increased $19,929,000, or 9.95%, from $200,303,000 at September 30, 2002 to $220,232,000 at September 30, 2003. The growth was primarily a result of a new branch opening in Rock Hill, South Carolina in the third quarter of fiscal 2003. Borrowings from the Federal Home Loan Bank (FHLB) increased $17,000,000, or 29.82%, to $74,000,000 at September 30, 2003 from $57,000,000 at September 30, 2002. Securities sold under agreements to repurchase were $11,000,000 at September 30, 2003 compared to $17,000,000 at September 30, 2002. The net increase in borrowings from FHLB and securities sold under agreement to repurchase were utilized to fund additional growth for the Corporation. Other liabilities increased $557,000, or 88.98%, to $1,183,000 at September 30, 2003 from $626,000 at September 30, 2002 due to an increase in loan suspense as a result of a change in loan funding procedures.

Shareholders’ Equity

At September 30, 2003, the Corporation’s shareholder’s equity totaled $26,216,000, a decrease of $982,000, or 3.61%, as compared to $27,198,000 at September 30, 2002. During fiscal year 2003 the Corporation implemented a share repurchase program where the Corporation may repurchase up to 5% of outstanding shares. During fiscal 2003, the Corporation repurchased a total of 20,286 shares at a weighted average cost of $18.04 per share for a total of $366,073. In addition to $1,859,000 of net income and dividends of $788,000, available for sale securities mark to market, net of tax decreased $1,976,000 from $1,421,000 at September 30, 2002 to $(555,000) at September 30, 2003.

Corporate obligated floating rate capital securities

On November 14, 2001, Union Financial established the Trust as a business trust for the purpose of issuing trust preferred securities in a private placement conducted as part of a pooled offering sponsored by First Tennessee Capital Markets and Keefe Bruyette & Woods, Inc. On December 18, 2001, the Trust issued $8,000,000 in trust preferred securities in the form of floating rate capital securities and issued approximately $248,000 of trust common securities to Union Financial. The Trust used the proceeds of these issuances to purchase $8,248,000 of Union Financial’s floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the “Debentures”). The interest rate on the Debentures and the trust preferred securities is variable and adjustable quarterly at 3.60% over three-month LIBOR. A rate cap of 12.50% is effective through December 18, 2006. The Debentures are the sole assets of the Trust and are subordinate to all of Union Financial’s existing and future obligations for borrowed money, its obligations under letters of credit and certain derivative contracts, and any guarantees by Union Financial of any such obligations.

The Debentures, the common securities issued by the Trust, and the related income effects are eliminated within the Corporation’s consolidated financial statements.

The stated maturity of the Debentures is December 18, 2031. In addition, the Debentures are subject to redemption at par at the option of Union Financial, subject to prior regulatory approval, in whole or in part on

UNION FINANCIAL BANCSHARES, INC.

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any interest payment date after December 18, 2006. The Debentures are also subject to redemption prior to December 18, 2006 at 107.5% of par after the occurrence of certain events that would either have a negative tax effect on the Trust or Union Financial or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.

Liquidity

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

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The primary investing activities of the Corporation are the origination of residential one-to four-family mortgage loans, commercial and consumer loans, and the purchase of investment and mortgage-backed securities. These activities are funded primarily by principal and interest payments on loans and investment securities, deposit growth, securities sold under agreements to repurchase, and the utilization of FHLB advances. During the year ended September 30, 2003, the Corporation’s loan originations totaled $69,625,000. At September 30, 2003, the Corporation’s investment in investment and mortgage-backed securities totaled $157,438,000.

During the year ending September 30, 2003, total deposits increased $19,929,000. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Corporation and its local competitors and other factors. The Corporation closely monitors its liquidity position on a daily basis. Certificates of deposit, which are scheduled to mature in one year or less from September 30, 2003, totaled $103,700,000. The Corporation relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Corporation will also offer competitive special products to its customers to increase retention and to attract new deposits. Based upon the Corporation’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances and securities sold under agreements to repurchase. At September 30, 2003, the Corporation had $74,000,000 of FHLB borrowings and $11,000,000 of securities sold under agreements to repurchase. At September 30, 2003, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $15,000,000. These lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have reserved the right to withdraw these lines at their option. At September 30, 2003, the Corporation had unused lines of credit with the FHLB of Atlanta totaling $18,000,000.

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

At September 30, 2003, the Bank exceeded the Comptroller of the Currency’s (the “OCC”) capital requirements. See Note 16 to the consolidated financial statements for further discussion of these capital requirements.

Off-Balance Sheet Risk

Through the operations of the Corporation, contractual commitments to extend credit were made in the ordinary course of business activities. These commitments are legally binding agreements to lend money to

UNION FINANCIAL BANCSHARES, INC.

12

customers at predetermined interest rates for a specified period of time. Outstanding loan commitments (including commitments to fund credit lines) totaled $22,561,000 at September 30, 2003. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. Each customer’s credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on the credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The credit risk on these commitments is managed by subjecting each customer to normal underwriting and risk management processes.

At September 30, 2003, the undisbursed portion of construction loans was $1,392,000 and the unused portion of credit lines was $20,466,000. Funding for these commitments is expected to be provided from deposits, loan and mortgage-backed securities principal repayments, maturing investments and income generated from operations.

Impact of Inflation and Changing Prices

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

UNION FINANCIAL BANCSHARES, INC.

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[ELLIOTT DAVIS LETTERHEAD]

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Shareholders and Board of Directors

Union Financial Bancshares, Inc. and Subsidiaries

Union, South Carolina

We have audited the accompanying consolidated balance sheets of Union Financial Bancshares, Inc. and Subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended September 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

/s/ Elliott Davis LLC

Elliott Davis, LLC

Greenville, South Carolina

October 17, 2003

UNION FINANCIAL BANCSHARES, INC.

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UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,
	2003			2002
	(In Thousands)
Assets
Cash	$	1,727		$	1,346
Short term interest-bearing deposits		3,290			7,385
Total cash and cash equivalents		5,017			8,731
Investment and mortgage-backed securities		157,438			117,633
Loans, net		152,921			161,576
Federal Home Loan Bank Stock, at cost		3,900			2,900
Federal Reserve Stock, at cost		539			—
Office properties and equipment, net		6,366			6,523
Accrued interest receivable		1,927			1,728
Intangible assets		5,007			5,643
Cash surrender value of life insurance		4,971			4,724
Other assets		3,219			1,510
Total assets	$	341,305		$	310,968
Liabilities
Deposits	$	220,232		$	200,303
Advances from the Federal Home Loan Bank and other borrowings		74,000			57,000
Securities sold under agreements to repurchase		11,000			17,000
Corporate obligated floating rate capital securities		8,000			8,000
Accrued interest payable		364			427
Advances from borrowers for taxes and insurance		310			414
Other liabilities		1,183			626
Total liabilities		315,089			283,770
Commitments and contingencies - note 14
Shareholders’ equity
Serial preferred stock, no par value, authorized - 500,000 shares, issued and outstanding - None
Common stock - $0.01 par value, authorized - 2,500,000 shares issued and outstanding - 1,965,103 shares at September 30, 2003 and 1,958,069 shares at September 30, 2002		20			20
Additional paid-in capital		11,862			11,573
Accumulated other comprehensive income (loss)		(555	)		1,421
Retained earnings, substantially restricted		15,255			14,184
Treasury stock, at cost		(366	)		—
Total shareholders’ equity		26,216			27,198
Total liabilities and shareholders’ equity	$	341,305		$	310,968

See notes to consolidated financial statements.

UNION FINANCIAL BANCSHARES, INC.

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UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	For the Years Ended September 30,
	2003			2002			2001
	(In Thousands, Except Share Data)
Interest Income:
Loans	$	10,914		$	12,519		$	14,487
Deposits and federal funds sold		23			85			112
Securities available for sale:
State and municipal		881			731			108
Other investments		4,952			4,868			3,012
Securities held to maturity and FHLB/FRB stock dividends		154			158			1,299
Total interest income		16,924			18,361			19,018
Interest Expense:
Deposit accounts		4,660			6,001			8,822
Corporate obligated floating rate capital securities		415			365			—
Advances from the FHLB and other		3,627			3,409			2,791
Total interest expense		8,702			9,775			11,613
Net Interest Income		8,222			8,586			7,405
Provision for loan losses		725			990			240
Net interest income after provision for loan losses		7,497			7,596			7,165
Non Interest Income:
Fees for financial services		1,771			1,512			928
Loan servicing fees, (costs) net of servicing amortization		(212	)		(167	)		(103	)
Net gain (loss) on sale of investment transactions		652			(37	)		114
Gains on sale of loans		—			—			210
Total non interest income		2,211			1,308			1,149
Non Interest Expense:
Compensation and employee benefits		3,320			2,863			2,905
Occupancy and equipment		1,807			1,570			1,335
Deposit insurance premiums		35			34			33
Professional services		589			479			375
Intangible amortization		636			659			659
Other		891			997			943
Total non interest expense		7,278			6,602			6,250
Income before income taxes		2,430			2,302			2,064
Provision for income taxes		571			558			721
Net Income	$	1,859		$	1,744		$	1,343
Net Income per common share (Basic)	$	0.95		$	0.90		$	0.70
Net Income per common share (Diluted)	$	0.90		$	0.86		$	0.68
Cash dividends per common share	$	0.40		$	0.40		$	0.40
Weighted average number of common shares outstanding (Basic)		1,963,775			1,939,084			1,918,431
Weighted average number of common shares outstanding (Diluted)		2,056,579			2,030,040			1,971,611

See notes to consolidated financial statements.

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UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

	Common Stock				Additional Paid-In Capital			Retained Earnings Substantially Restricted			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount
	(In Thousands, Except Share Data)
Balance at September 30, 2000	1,911,005		$	20	$	11,314		$	12,640		$	(2,050	)	$	21,924
Net income	—			—		—			1,343			—			1,343
Other comprehensive income, net of tax
Equity reclassification												113			113
Unrealized holding gains arising during period	—			—		—			—			1,869			1,869
Less investment gains included in net income	—			—		—			—			(114	)		(114	)
Comprehensive income															3,211
Options exercised	200			—		2			—			—			2
Equity reclassification	—			—		(113	)		—			—			(113	)
Dividend reinvestment plan contributions	13,273			—		118			—			—			118
Cash dividend ($.40 per share)	—			—		—			(766	)		—			(766	)
Balance at September 30, 2001	1,924,478		$	20	$	11,321		$	13,217		$	(182	)	$	24,376
Net income	—			—		—			1,744			—			1,744
Other comprehensive income, net of tax
Unrealized holding gains arising during period	—			—		—			—			1,603			1,603
Comprehensive income															3,347
Options exercised	23,605			—		141			—			—			141
Dividend reinvestment plan contributions	9,986			—		111			—			—			111
Cash dividend ($.40 per share)	—			—		—			(777	)		—			(777	)
Balance at September 30, 2002	1,958,069		$	20	$	11,573		$	14,184		$	1,421		$	27,198
Net income	—			—		—			1,859			—			1,859
Other comprehensive income, net of tax
Unrealized holding losses arising during period	—			—		—			—			(1,976	)		(1,976	)
Comprehensive loss															(117	)
Options exercised	19,889			—		179			—			—			179
Dividend reinvestment plan contributions	7,431			—		110			—			—			110
Share repurchase program	(20,286	)		—		(366	)		—			—			(366	)
Cash dividend ($.40 per share)	—			—		—			(788	)		—			(788	)
Balance at September 30, 2003	1,965,103		$	20	$	11,496		$	15,255		$	(555	)	$	26,216

See notes to consolidated financial statements.

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UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended September 30,
	2003			2002			2001
	(In Thousands)
Operating activities:
Net income	$	1,859		$	1,744		$	1,343
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		725			990			240
Amortization expense		1,176			1,008			933
Depreciation expense		1,048			895			812
Recognition of deferred income, net of costs		(137	)		(115	)		(70	)
Deferral of fee income, net of costs		152			195			18
(Gain) loss on investment transactions		(652	)		37			(114	)
Loans originated for sale		—			—			(30,851	)
Proceeds from sale of loans		—			—			32,868
Gain on sale of loans held for sale		—			—			(210	)
(Increase) decrease in accrued interest receivable		(199	)		99			—
(Increase) decrease in other assets		(2,496	)		(91	)		1,121
(Decrease)increase in accrued interest payable		(63	)		23			75
(Decrease)increase in other liabilities		453			(846	)		(764	)
Net cash provided by operating activities	$	1,866		$	3,939		$	5,401

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UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

	For the Years Ended September 30,
	2003			2002			2001
	(In Thousands)
Investing activities:
Purchase of investment and mortgage-backed securities:
Available for sale	$	(165,521	)	$	(89,841	)	$	(46,278	)
Proceeds from maturity of investment and mortgage-backed securities:
Held to maturity		—			—			1,325
Available for sale		47,071			6,304			3,125
Proceeds from sale of investment and mortgage-backed securities:
Held to maturity		—			18,000			—
Available for sale		33,672			21,806			18,476
Principal repayments on mortgage-backed securities:
Held to maturity		—			605			1,294
Available for sale		42,997			14,610			1,816
Net (increase) decrease in loans		8,566			(3,513	)		7,727
Investment in life insurance contracts		—			—			(3,467	)
Net (increase) decrease in mortgage servicing rights		—			—			(672	)
Purchase of FHLB/FRB stock		(1,539	)		(275	)		—
Purchase of office properties and equipment		(890	)		(204	)		(1,531	)
Net cash used in investing activities		(35,644	)		(32,508	)		(18,185	)
Financing activities:
Proceeds from the exercise of stock options		179			141			2
Proceeds from dividend reinvestment plan		110			111			118
Dividends paid in cash		(788	)		(777	)		(766	)
Proceeds from term borrowings, net		11,000			16,993			9,320
Proceeds from issuance of corporate obligated floating rate securities		—			8,000			—
Share repurchase program		(366	)		—			—
Increase in deposit accounts		19,929			6,224			6,105
Net cash provided by financing activities		30,064			30,692			14,779
Net (decrease) increase in cash and cash equivalents		(3,714	)		2,123			1,995
Cash and cash equivalents at beginning of year		8,731			6,608			4,613
Cash and cash equivalents at end of year	$	5,017		$	8,731		$	6,608

See notes to consolidated financial statements.

UNION FINANCIAL BANCSHARES, INC.

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UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization - Union Financial Bancshares, Inc. (“Union Financial”) is the bank holding company for Provident Community Bank, N.A., a national bank (“the Bank”), and Union Financial Statutory Trust I (the “Trust”) (collectively, the “Corporation”). The Bank, founded in 1934, offers a complete array of financial services through seven full service banking centers in four counties in South Carolina, including checking, savings, time deposits, individual retirement accounts (IRAs), investment services, and secured and unsecured consumer loans. The Bank originates and services home loans and provides financing for small businesses and affordable housing. Provident Financial Services (“PFS”) is a wholly-owned subsidiary of the Bank that provides investment brokerage services. The Trust is a statutory trust created under the laws of the state of Connecticut for the purpose of issuing trust preferred securities in a private placement conducted as part of a pooled offering.

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

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

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

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

Purchases and sales of securities are accounted for on a trade date basis. Premiums and discounts on debt securities are amortized or accreted as adjustments to income over the estimated life of the security using a

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1. Summary of Significant Accounting Policies (Continued)

method approximating the level yield method. Gains or losses on the sale of securities are based on the specific identification method. The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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

The Corporation generally originates single-family residential loans within its primary lending area. The Corporation’s underwriting policies require such loans to be 80% loan to value based upon appraised values unless private mortgage insurance is obtained. These loans are secured by the underlying properties.

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by unearned discount and fees and an allowance for loan losses. Unearned interest on loans is amortized to income over the life of the loan, using the interest method. For all other loans, interest is accrued daily on the outstanding balances.

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

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

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

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

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

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1. Summary of Significant Accounting Policies (continued)

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

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes in to consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgement about information available to them at the time of their examinations.

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

A loan is impaired when its probable, based on current information events, the Corporation will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured on an individual basis for commercial and construction loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer residential loans for impairment disclosures.

The allowance for loan losses is based upon an evaluation of the loan portfolio. The evaluation considers such factors as the delinquency status of loans, current economic conditions, the net realizable value of the underlying collateral and prior loan loss experience. The allowance for loan loss calculation includes a segmentation of loan categories by residential mortgage, commercial and consumer loans. Each category is rated for all loans. The weights assigned to each performing group are developed from previous loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition, as the loan categories increase and decrease in balance, the provision for loan loss calculation will adjust accordingly.

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

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1. Summary of Significant Accounting Policies (continued)

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

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

At and for the years ended September 30, 2003 and 2002, impaired loans totaled $718,246 and $809,293 respectively, and the Corporation had recognized no interest income from impaired loans. The average balance in impaired loans was $763,769 in 2003 and $382,500 in 2002.

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

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

Securities Sold Under Agreements to Repurchase - The Corporation enters into sales of securities under agreements to repurchase. Fixed-coupon reverse repurchase agreements are treated as financings, with the obligations to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as an asset. The securities are delivered by appropriate entry by the Corporation’s safekeeping agent to the counterparties’ accounts. The dealers may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the Corporation substantially identical securities at the maturities of the agreements.

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

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1. Summary of Significant Accounting Policies (continued)

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

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

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

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

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

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

Loans - For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to four-family residential), credit-card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

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

Short-term borrowings - The carrying amounts of other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Long-term borrowings - The fair values of the Corporation’s long-term borrowings are estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

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1. Summary of Significant Accounting Policies (continued)

Accrued interest - The carrying amounts of accrued interest approximate their fair values.

Off-balance-sheet instruments - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties’ credit standings.

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

Per-Share Data - SFAS No. 128, “Earnings Per Share”, requires the dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of options outstanding under Union Financial’s stock option plan is reflected in diluted earnings per share by the application of the treasury stock method.

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

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

Core deposit intangible assets are amortized to expense using the interest method over the estimated remaining lives of the interest bearing assets acquired.

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

Interest Income - Interest on loans is accrued and credited to income monthly based on the principal balance outstanding and the contractual rate on the loan. The Corporation places loans on non-accrual status when they become greater than 90 days delinquent or when in the opinion of management, full collection of principal or interest is unlikely. The Corporation provides an allowance for uncollectible accrued interest on loans which are 90 days delinquent for all interest accrued prior to the loan being placed on non-accrual status. The loans are returned to an accrual status when full collection of principal and interest appears likely.

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

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1. Summary of Significant Accounting Policies (continued)

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

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

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

Reclassifications - Certain amounts in prior years’ financial statements have been reclassified to conform with current year classifications.

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

	Years Ended September 30,
	2003		2002		2001
Net income (in thousands)
As reported	$	1,859	$	1,744	$	1,343
Pro forma		1,805		1,698		1,301
Basic net income per common share
As reported		0.95		0.90		0.70
Pro forma		0.92		0.88		0.68
Diluted net income per common share
As reported		0.90		0.86		0.68
Pro forma		0.87		0.84		0.66

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

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Dividend yield	4%
Expected volatility	25%
Risk-free interest rate	5%
Expected lives	10 years

2. Investment And Mortgage-backed Securities

	September 30, 2003
	Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
Investment Securities:
U.S. Agency Obligations	$	49,938	$	—	$	(1,342	)	$	48,596
Municipal Securities		21,715		619		—			22,334
Other		7,747		113		—			7,860
Total Investment Securities		79,400		732		(1,342	)		78,790
Mortgage-backed Securities:
Fannie Mae		32,467		—		(58	)		32,409
Ginnie Mae		1,746		61		—			1,807
Freddie Mac		37,846		—		(139	)		37,707
Collateralized Mortgage Obligations		6,832		—		(107	)		6,725
Total Mortgage-backed Securities		78,891		61		(304	)		78,648
Total available for sale	$	158,291	$	793	$	(1,646	)	$	157,438

	September 30, 2002
	Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
Investment Securities:
U.S. Agency Obligations	$	10,427	$	172	$	—		$	10,599
Municipal Securities		14,041		556		—			14,597
Other		3,724		—		(7	)		3,717
Total Investment Securities		28,192		727		(7	)		28,913
Mortgage-backed Securities:
Fannie Mae		25,696		608		—			26,304
Ginnie Mae		25,522		376		—			25,898
Freddie Mac		32,618		457		—			33,075
Collateralized Mortgage Obligations		3,425		18		—			3,443
Total Mortgage-backed Securities		87,261		1,459		—			88,720
Total available for sale	$	115,453	$	2,186	$	(7	)	$	117,633

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2. Investment And Mortgage-backed Securities (continued)

The Corporation has no held to maturity securities at September 30, 2003 or September 30, 2002.

During the quarter ended June 30, 2002, management determined that a reclassification of the held to maturity securities was necessary in order to achieve certain interest rate risk management goals. This transfer was determined to be necessary due to the volatility in interest rates during the most recent 12-15 month period. Accordingly, management reclassified $9,500,000 (amortized cost) of mortgage-backed securities to available for sale in order to sell them and restructure the Corporation’s interest rate risk profile. In addition, management reclassified $8,500,000 (amortized cost) of additional securities as available for sale. This transfer was done to comply with the Financial Accounting Standards Board’s (FASB) position that following transfers of held to maturity securities for any purpose other than under unusual and unforeseen circumstances, any remaining held-to-maturity securities should be reclassified to available-for-sale. At the time of the reclassification, the net unrealized gain on the securities included in equity was $131,000.

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

	September 30,
	2003		2002			2001
Proceeds	$	80,743	$	46,110		$	21,601
Gross gains	$	652	$	—		$	114
Gross losses		—		(37	)		—
Net gain (loss)on investment transactions	$	652	$	(37	)	$	114

The maturities of available for sale securities at September 30, 2003 are as follows (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due in one year or less	$	285	$	288
Due after one year through five years		593		614
Due after five years through ten years		29,935		29,473
Due after ten years		127,478		127,063
Total investment and mortgage-backed securities	$	158,291	$	157,438

The mortgage-backed securities held at September 30, 2003 mature between one and thirty years. The actual lives of those securities may be significantly shorter as a result of principal payments and prepayments.

At September 30, 2003 and 2002, $40,635,000 and $24,063,000, respectively, of securities were pledged as collateral for certain deposits and borrowings.

At September 30, 2003, approximately $53,586,000 of mortgage-backed securities were adjustable rate securities. The adjustment periods range from monthly to annually and rates are adjusted based on the movement of a variety of indices.

Investments in collateralized mortgage obligations (“CMOs”) represent securities issued by agencies of the federal government. At September 30, 2003 approximately $6,832,000 was invested in CMOs.

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3. Loans, Net

Loans receivable consisted of the following (in thousands):

	September 30,
	2003			2002
Residential real estate loans:
Fixed rate residential	$	40,305		$	63,859
Adjustable rate residential		15,342			24,887
Home equity loans		10,607			10,696
Construction loans		2,170			5,514
Total real estate loans		68,424			104,956
Commercial loans:
Commercial loans		58,364			34,905
Commercial lines of credit		15,867			12,660
Total commercial loans		74,231			47,565
Consumer loans:
Consumer and installment loans		14,383			14,709
Consumer lines of credit		455			479
Total consumer loans		14,838			15,188
Total loans		157,493			167,709
Less:
Undisbursed portion of interim construction loans		(1,392	)		(3,204	)
Loan discount unamortized		(1,448	)		(1,685	)
Allowance for loan losses		(1,842	)		(1,371	)
Net deferred loan origination costs		110			127
Total, net	$	152,921		$	161,576
Weighted-average interest rate of loans		6.46	%		7.17	%

Under OCC regulations, the Bank may not make loans to one borrower in excess of 15% of unimpaired capital. This limitation does not apply to loans made before August 9, 1989. At September 30, 2003, the Bank had loans outstanding to one borrower ranging up to $3,000,000.

Servicing loans for others consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees received from the investors as well as certain charges collected from the borrowers, such as late payment fees. Loans sold and serviced by the Corporation at September 30, 2003 and 2002 were approximately $22,391,000 and $45,805,000, respectively. In connection with these loans serviced for others, the Corporation held borrowers’ escrow balances of $310,000 at September 30, 2003 and $414,000 at September 30, 2002.

Adjustable rate residential real estate loans (approximately $15,342,000 and $24,887,000 at September 30, 2003 and 2002, respectively) are subject to rate adjustments annually and generally are adjusted based on movement of the Federal Home Loan Bank National Monthly Median Cost of Funds rate or the Constant Maturity Treasury index. The maximum loan rates can be adjusted is 200 basis points in any one year with a lifetime cap of 600 basis points.

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3. Loans, Net (continued)

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

The amortization of servicing rights and excess servicing rights included in loan servicing fees amounted to $314,138, $350,371, and $281,729 in 2003, 2002, and 2001 respectively. The fair value of mortgage servicing rights at September 30, 2003 was approximately $165,000.

Nonrefundable loan fees and certain direct loan origination costs are deferred and recognized over the lives of the loans using the level yield method. Amortization of these deferrals is recognized as interest income. Deferred loan origination fees are included in loans held for investment on the balance sheet.

See Note 7 of consolidated financial statements for an analysis of qualifying mortgages pledged for FHLB advances.

At September 30, 2003 and 2002, loans which are accounted for on a non-accrual basis or contractually past due ninety days or more totaled approximately $3,054,000 and $1,866,000, respectively. The amount the Corporation will ultimately realize from these loans could differ materially from their carrying value because of future developments affecting the underlying collateral or the borrower’s ability to repay the loans. During the years ended September 30, 2003, 2002, and 2001, the Corporation recognized no interest income on loans past due 90 days or more, whereas, under the original terms of these loans, the Corporation would have recognized additional interest income of approximately $160,600, $111,500, and $90,000, respectively.

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

	Years Ended September 30,
	2003			2002			2001
Balance at beginning of year	$	1,371		$	1,080		$	1,360
Provision for loan losses		725			990			240
(Charge-offs) recoveries, net		(254	)		(699	)		(520	)
Balance at end of year	$	1,842		$	1,371		$	1,080

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

	Years Ended September 30,
	2003			2002			2001
Balance at beginning of year	$	1,301		$	1,132		$	1,545
Loans originated during the year		38			404			—
Loan repayments during the year		635	)		(235	)		(413	)
Balance at end of year	$	704		$	1,301		$	1,132

UNION FINANCIAL BANCSHARES, INC.

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4. Office Properties And Equipment

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

	September 30,
	2003			2002			2001
Land	$	884		$	884		$	884
Building and improvements		4,729			4,439			4,409
Office furniture, fixtures and equipment		5,180			4,774			4,640
Total		10,793			10,097			9,933
Less accumulated depreciation		(4,427	)		(3,574	)		(2,729	)
Office properties and equipment, net	$	6,366		$	6,523		$	7,204

Depreciation expense was $1,048,000, $895,000 and $812,000 for September 30, 2003, 2002 and 2001.

5. Intangible Assets

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

	Years Ended September 30,
	2003			2002			2001
Balance at beginning of year	$	5,643		$	6,299		$	7,042
Amortization/other		(636	)		(656	)		(743	)
Balance at end of year	$	5,007		$	5,643		$	6,299

6. Deposit Accounts

Deposit accounts at September 30, were as follows (in thousands):

	2003						2002
	Rate		Balance		%		Rate		Balance		%
Account Type
NOW accounts:
Commercial non interest-bearing			$	9,637	4.38	%			$	10,144	5.06	%
Noncommercial	0.75	%		22,317	10.13	%	1.34	%		26,504	13.23	%
Money market checking accounts	0.97	%		11,356	5.15	%	1.40	%		7,832	3.91	%
Regular savings	0.74	%		16,141	7.33	%	0.87	%		15,464	7.72	%
Total demand and savings deposits	0.66	%		59,451	26.99	%	1.00	%		59,944	29.92	%
Savings certificates:
Up to 3.00%				112,247	50.97	%				69,678	34.79	%
3.01 % - 4.00%				18,220	8.27	%				37,268	18.61	%
4.01 % - 5.00%				16,527	7.50	%				21,684	10.82	%
5.01 % - 6.00%				5,425	2.46	%				7,419	3.70	%
6.01 % - 7.00%				567	0.26	%				2,356	1.17	%
7.01 % - 8.00%				256	0.12	%				435	0.22	%
Total savings certificates	2.47	%		153,242	69.58	%	3.22	%		138,840	69.31	%
Sweep accounts	0.77	%		7,539	3.43	%	1.75	%		1,519	0.77	%
Total deposit accounts	1.94	%	$	220,232	100.00	%	2.54	%	$	200,303	100.00	%

UNION FINANCIAL BANCSHARES, INC.

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6. Deposit Accounts (continued)

As of September 30, 2003 and 2002, total deposit accounts include approximately $1,960,000 and $1,729,000, respectively, of deposits from the Corporation’s officers, directors, employees or parties related to them.

At September 30, 2003 and 2002, deposit accounts with balances of $100,000 and over totaled approximately $59,199,000 and $66,915,000, respectively.

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

	September 30,
Maturity Date	2003		2002
Within 1 year	$	103,684	$	96,590
After 1 but within 2 years		33,148		21,224
After 2 but within 3 years		9,499		11,241
After 3 but within 4 years		4,905		4,570
Thereafter		2,006		5,215
Total savings certificates	$	153,242	$	138,840

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

	Years Ended September 30,
Account Type	2003			2002			2001
NOW accounts and money market deposit accounts	$	277		$	426		$	724
Passbook and statement savings accounts		116			146			279
Certificate accounts		4,281			5,453			7,843
Early withdrawal penalties		(14	)		(24	)		(24	)
Total	$	4,660		$	6,001		$	8,822

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

At September 30, 2003 and 2002, the Bank had $74,000,000 and $57,000,000, respectively, of advances outstanding from the FHLB. The maturity of the advances from the FHLB is as follows (in thousands):

	September 30,
	2003		Wtd Avg Rt		2002		Wtd Avg Rt
Contractual Maturity:
Within one year - fixed rate	$	5,000	4.14	%	$	10,000	6.56	%
Within one year - adjustable rate		8,500	1.18	%		7,500	4.92	%
After one but within three years - fixed rate		15,000	3.95	%		5,000	4.14	%
After three but within five years - adjustable rate		16,000	1.98	%		—	—
Greater than five years - adjustable rate		29,500	4.66	%		34,500	4.89	%
Total Advances	$	74,000	3.36	%	$	57,000	4.86	%

UNION FINANCIAL BANCSHARES, INC.

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7. Advances From The Federal Home Loan Bank And Other Borrowings (continued)

The Bank pledges as collateral to the advances their FHLB Stock, and has entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying mortgages (as defined) with unpaid principal balances equal to, when discounted at 50% to 75% of the unpaid principal balances, 100% of total advances. The amount of qualifying loans was $56,922,000 and $66,083,000, respectively, at September 30, 2003 and 2002.

8. Securities Sold Under Agreements to Repurchase

The Company had $11,000,000 and $17,000,000 borrowed under agreements to repurchase at September 30, 2003 and 2002, respectively. The amortized cost of the securities underlying the agreements to repurchase at September 30, 2003 was $12,456,000 and $17,128,000 at September 30, 2002. The maximum amount outstanding at any month end during fiscal 2003 was $17,000,000 and $17,000,000 for fiscal 2002. The average amount of outstanding agreements for fiscal 2003 was $16,655,000 and $15,586,000 for fiscal 2002.

9. Corporate Obligated Floating Rate Capital Securities

On November 14, 2001, the Corporation sponsored the creation of the Trust. The Corporation is the owner of all of the common securities of the Trust. On December 18, 2001, the Trust issued $8,000,000 in the form of floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporation’s $248,000 capital contribution for the Trust’s common securities, were used to acquire $8,248,000 aggregate principal amount of the Corporation’s floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the “Debentures”), which constitute the sole asset of the Trust. The interest rate on the Debentures and the capital securities is variable and adjustable quarterly at 3.60% over the three-month LIBOR, with an initial rate of 5.60%. A rate cap of 12.50% is effective through December 18, 2006. The Corporation has, through the Trust agreement establishing the Trust, the Guarantee Agreement, the notes and the related Debenture, taken together, fully irrevocably and unconditionally guaranteed all of the Trust’s obligations under the capital securities.

The stated maturity of the Debentures is December 18, 2031. In addition, the Debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after December 18, 2006. The Debentures are also subject to redemption prior to December 18, 2006 at 107.5% of par after the occurrence of certain events that would either have a negative tax effect on the Trust or the Corporation or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.

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

UNION FINANCIAL BANCSHARES, INC.

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10. Income Taxes

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

	For the Years Ended September 30,
	2003			2002			2001
Current	$	912		$	747		$	1,829
Deferred		(341	)		(189	)		(1,108	)
Total income taxes	$	571		$	558		$	721

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

	For the Years Ended September 30,
	2003			2002			2001
Tax at federal income tax rate	$	826		$	783		$	702
Increase (decrease) resulting from:
State income taxes, net of federal benefit		110			54			77
Interest on municipal bonds		(300	)		(232	)		(20	)
Non-taxable life insurance income		(84	)		(88	)		(23	)
Other, net		19			41			(15	)
Total	$	571		$	558		$	721

UNION FINANCIAL BANCSHARES, INC.

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10. Income Taxes (continued)

The tax effects of significant items comprising the Corporation’s deferred taxes as of September 30, 2003 and 2002 are as follows (in thousands):

	September 30,
	2003		2002
Deferred tax assets:
Book reserves in excess of tax basis bad debt reserves arising after September 30, 1998	$	751	$	229
Book reserves and amortization in excess of tax on mortgage servicing rights		—		56
SFAS No. 115 mark to market adjustment		286		—
Difference between book and tax goodwill basis		154		211
Deferred Compensation		123		—
Other		75		20
Total deferred tax asset		1,389		516
Deferred tax liabilities:
SFAS No. 115 mark to market adjustment		—		758
Difference between book and tax property basis		244		245
Difference between book and tax Federal Home Loan Bank stock basis		100		100
Deferred loan fees		45		51
Tax mark to market adjustment on securities		55		83
Other		52		37
Total deferred tax liability		496		1,274
Net deferred tax asset (liability)	$	893	$	(758	)

A deferred tax asset (liability) of $893,000 and ($758,000) at September 30, 2003 and 2002, is included in other liabilities in the balance sheet.

Retained earnings at September 30, 2003 includes approximately $1,636,000 representing pre-1988 tax bad debt base year reserve amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse until indefinite future periods and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, dividend payments in excess of current year or accumulated tax earnings and profits, or other distributions in dissolutions, liquidations or redemption of the Bank’s stock.

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

11. Employee Benefits

The Corporation has a contributory profit-sharing plan which is available to all eligible employees. Annual employer contributions to the plan consist of an amount which matches participant contributions up to a maximum of 5% of a participant’s compensation and a discretionary amount determined annually by the Corporation’s Board of Directors. The annual contributions to the pension plan will be 5% of a participant’s compensation. Employer expensed contributions to the plans were $183,000, $187,000, and $177,000 for the years ended September 30, 2003, 2002 and 2001, respectively.

12. Financial Instruments

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

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

UNION FINANCIAL BANCSHARES, INC.

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12. Financial Instruments (continued)

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

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

	September 30,
	2003		2002
Fixed interest rate commitments to extend credit	$	703	$	768
Commitments to fund commercial and construction loans		1,392		3,204
Unused portion of credit lines (principally variable-rate consumer lines secured by real estate)		20,466		17,780
Total	$	22,561	$	21,752

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

The Corporation has not been required to perform on any financial guarantees during the past three years. The Corporation has not incurred any losses on its commitments in 2003, 2002 or 2001.

The estimated fair values of the Corporation’s financial instruments were as follows at September 30, 2003 (in thousands):

	September 30, 2003
	Carrying Amount			Fair Value
Financial assets
Cash and cash equivalents	$	5,017		$	5,017
Securities available for sale		157,438			157,438
Federal Home Loan Bank Stock, at cost		3,900			3,900
Federal Reserve Stock, at cost		539			539
Loans, net		152,921			158,594
Accrued interest receivable		1,927			1,927
Cash surrender value of life insurance		4,971			4,971
Financial liabilities
Deposits	$	220,232		$	220,230
Advances from FHLB and other borrowings		74,000			73,798
Securities sold under agreement to repurchase		11,000			11,125
Corporate obligated floating rate capital securities		8,000			8,058
Accrued interest payable		364			364
Off-balance-sheet assets (liabilities)
Commitments to extend credit	$	(22,561	)	$	(22,561	)

UNION FINANCIAL BANCSHARES, INC.

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12. Financial Instruments (continued)

The estimated fair values of the Corporation’s financial instruments were as follows at September 30, 2002 (in thousands):

	September 30, 2002
	Carrying Amount			Fair Value
Financial assets
Cash and cash equivalents	$	8,731		$	8,731
Securities available for sale		117,633			117,633
FHLB Stock		2,900			2,900
Loans		161,576			166,106
Accrued interest receivable		1,728			1,728
Cash surrender value of life insurance		4,724			4,724
Financial liabilities
Deposits	$	200,303		$	206,188
Advances from FHLB and other borrowings		57,000			60,215
Securities sold under agreement to repurchase		17,000			17,959
Corporate obligated floating rate securities		8,000			8,111
Accrued interest payable		427			427
Off-balance-sheet asset (liabilities)
Commitments to extend credit	$	(21,752	)	$	(21,752	)

13. Supplemental Cash Flow Disclosures

	For the Years Ended September 30,
	2003			2002		2001
Cash paid for:
Income taxes	$	488		$	2,593	$	476
Interest	$	8,702		$	9,775	$	11,613
Non-cash transactions:
Loans foreclosed	$	296		$	366	$	425
Unrealized gain (loss) on securities available for sale	$	(853	)	$	2,179	$	(280	)

UNION FINANCIAL BANCSHARES, INC.

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14. Commitments And Contingencies

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

Years Ended
2004	$	163,344
2005		163,344
2006		163,344
2007		163,344
2008		163,344
Thereafter	$	1,551,768

Total rent expense for the year ended September 30, 2003 and 2002 was $34,030 and $0, respectively.

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

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

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

15. Stock Option Plans

A summary of the status of the plan as of September 30, 2003 and 2002, and changes during the years ending on those dates is presented below (all shares have been adjusted for the 3:2 stock split in February 1998 and the 5% stock dividend in February 1999):

Grant Date	Shares Granted	Average Exercise Price Per Share	Expiration Date	Earliest Date Exercisable
October, 1995	104,750	5.79	October, 2005	October, 1995
January, 1996	1,890	5.79	January, 2006	January, 1996
April, 1996	4,400	6.67	April, 2006	April, 1997
May, 1998	24,574	15.83	May, 2008	May, 1998
October, 2000	6,200	8.75	October, 2010	October, 2000
January, 2001	31,790	9.06	January, 2011	January, 2001
January, 2002	24,133	10.36	January, 2012	January, 2002
April, 2002	5,000	13.00	April, 2012	April, 2002
Total Shares Granted	202,737

UNION FINANCIAL BANCSHARES, INC.

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15. Stock Option Plans (continued)

At September 30, 2003, the Corporation had the following options exercisable:

Fiscal Year	Range of exercise price		Weighted Average Remaining Contractual Life	Number Options Exercisable	Average Exercise Price
1995	$	5.79	2 years	104,750	$	5.79
1996	$	5.79-$6.67	3.3 years	6,290		6.41
1998	$	15.83	3.7 years	24,574		15.83
2000	$	8.75	7 years	6,300		8.75
2001	$	9.06-$10.36	7.7 years	47,777		9.50
2002	$	13.00-$13.25	8.6 years	3,833		13.03
	$	5.79-$13.25	5.4 years	193,524	$	8.15

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

For the Years Ended September 30,	Shares Exercised	Avg. Exercise Price Per Share
2003	19,889	$	9.00
2002	23,605	$	5.97
2001	200	$	8.75

Stock options for 6,087 shares at an average price of $11.54 were forfeited during the year ended September 30, 2003. Stock options for 14,023 shares at an average price of $11.75 were forfeited during the year ended September 30, 2002. Stock options for 8,518 shares at an average price of $12.46 were forfeited during the year ended September 30, 2001. At September 30, 2003, 82,017 shares were available for grant and 202,737 options at an average price of $8.35 were outstanding.

16. Liquidation Account, Dividend Restrictions And Regulatory Matters

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

UNION FINANCIAL BANCSHARES, INC.

39

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

The Bank is prohibited from declaring cash dividends on its common stock or repurchasing its common stock if the effect thereof would cause its net worth to be reduced below either the amount required for the liquidation account or the minimum regulatory capital requirement. In addition, the Bank is also prohibited from declaring cash dividends and repurchasing its own stock without prior regulatory approval if the total amount of all dividends and stock repurchases (including any proposed dividends and stock repurchases) for the applicable calendar year exceeds its current year’s net income plus its retained net income for the preceding two years.

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

At September 30, 2003 and 2002, the Bank had the following actual and required capital amounts and ratios (in thousands):

	September 30, 2003
	Tangible Capital			Core Capital			Risk-Based Capital
Actual Capital	$	33,166		$	33,166		$	33,166
Unrealized loss on available for sale securities		429			429			429
Goodwill and other intangible assets		(5,007	)		(5,007	)		(5,007	)
Allowances for loan losses (1)		—			—			1,842
Total Adjusted capital		28,588			28,588			30,430
Minimum Capital Requirement		5,123			13,662			13,410
Regulatory Capital Excess	$	23,465		$	14,926		$	17,020
Regulatory Capital Ratio		8.37	%		8.37	%		18.15	%

	September 30, 2002
	Tangible Capital			Core Capital			Risk-Based Capital
Actual Capital	$	32,743		$	32,743		$	32,743
Unrealized gain on available for sale securities		(1,421	)		(1,421	)		(1,421	)
Goodwill and other intangible assets		(5,643	)		(5,643	)		(5,643	)
Allowance for loan losses (1)		—			—			1,371
Total Adjusted capital		25,679			25,679			27,050
Minimum Capital Requirement		4,561			12,164			12,587
Regulatory Capital Excess	$	21,118		$	13,515		$	14,463
Regulatory Capital Ratio		8.44	%		8.44	%		17.19	%

(1) Limited to 1.25% of risk-weighted assets

UNION FINANCIAL BANCSHARES, INC.

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16. Liquidation Account, Dividend Restrictions And Regulatory Matters (Continued)

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a material adverse effect on the Corporation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. As of the most recent regulatory examination, the Bank was in compliance with the regulatory capital requirements. There are no conditions or events that management believes have changed the Bank’s compliance with the guidelines since that examination.

17. Recently Issued Accounting Standards

The FASB recently issued new accounting standards that will affect accounting, reporting, and disclosure of financial information by the Corporation. Adoption of these standards is not expected to have a material impact on financial condition or results of operations. The following is a summary of the standards and their required implementation date:

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-based Compensation—Transition and Disclosure”, an amendment of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board (“APB”) Opinion No. 28, “Interim Financial Reporting”, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending after December 15, 2002, and for financial reports containing condensed financial statements for interim period beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 which had no l impact on the financial condition or operating results of the Company.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 will not have a material impact on the financial condition or operating results of the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances.) Many of those instruments were previously classified as equity. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the financial condition or operating results of the Company.

In June 2003, the American Institute of Certified Public Accountants (“AICPA”) issued an exposure draft of a proposed Statement of Position (“SOP”), “Allowance for Credit Losses”. The proposed SOP addresses the recognition and measurement by creditors of the allowance for credit losses related to all loans, as that term is defined in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. The proposed SOP provides that the allowance for credit losses reported on a creditor’s balance sheet should consist only of (1) a component for individual loan impairment recognized and measured pursuant to FASB Statement No. 114 and (2) one or more components of collective loan impairment recognized pursuant to FASB Statement No. 5, “Accounting for Contingencies”, and measured in accordance with the guidance in the proposed SOP. The provisions of the proposed SOP would be effective for financial statements for fiscal years beginning after December 15, 2003, with earlier application permitted. The effect of initially applying the provisions of the

UNION FINANCIAL BANCSHARES, INC.

41

17. Recently Issued Accounting Standards (continued)

proposed SOP would be reported as a change in accounting estimate. Comments on the exposure draft are due by September 19, 2003. The effect on the financial condition or operating results of the Company related to the adoption of this proposed SOP have not been determined, but would most likely be immaterial.

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

18. Union Financial Bancshares, Inc. Financial Information (Parent Corporation Only)

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

Condensed Balance Sheets

	September 30,
	2003		2002
Assets:
Cash and cash equivalents	$	884	$	2,235
Investment in subsidiary		33,166		32,743
Other		180		236
Total Assets	$	34,230	$	35,214
Liabilities and Shareholders’ Equity:
Accrued interest payable	$	14	$	16
Corporate obligated floating rate capital securities		8,000		8,000
Shareholders’ Equity		26,216		27,198
Total Liabilities and Shareholders’ Equity	$	34,230	$	35,214

Condensed Statements of Income

	For Years Ended September 30,
	2003			2002			2001
Equity in undistributed earnings of subsidiary	$	2,399		$	2,210		$	1,440
Interest expense-trust preferred securities		(415	)		(365	)		—
Other expense, net		(125	)		(101	)		(97	)
Net income	$	1,859		$	1,744		$	1,343

Condensed Statements of Cash Flows

Operating Activities:
Net income	$	1,859		$	1,744		$	1,343
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiary		(2,399	)		(2,210	)		(1,440	)
(Increase) decrease in other assets		54			(134	)		(67	)
Net cash used in operating activities		(486	)		(600	)		(164	)
Financing Activities:
Proceeds from issuance of trust preferred corporate obligations		—			8,000			—
Capital contribution to subsidiary		—			(5,000	)		—
Dividends received from subsidiary		—			—			1,100
Dividend reinvestment plan contributions		110			111			118
Dividends paid		(788	)		(777	)		(766	)
Share repurchase program		(366	)		—			—
Proceeds from the exercise of stock options		179			141			2
Net cash provided by (used in) financing activities		(865	)		2,475			454
Net increase (decrease) in cash and cash equivalents		(1,351	)		1,875			290
Cash and cash equivalents at beginning of year		2,235			360			70
Cash and cash equivalents at end of year	$	884		$	2,235		$	360

UNION FINANCIAL BANCSHARES, INC.

42

BOARD OF DIRECTORS

UNION FINANCIAL BANCSHARES AND SUBSIDIARIES

Mason G. Alexander	Carl L. Mason
Director, Mid-South Management Company	Chairman
	Retired
James W. Edwards
Dean of Academics, USC-Union	Dwight V. Neese
	President and Chief Executive Officer
William M. Graham	Provident Community Bank
Owner, Graham’s Flowers
	Philip C. Wilkins, DMD
Louis M. Jordan	Dentist
President, Jordan’s Ace Hardware, Inc.

LEADERSHIP GROUP

PROVIDENT COMMUNITY BANK

Carolyn H. Belue	Dwight V. Neese
Vice President	President
Operational Administration Manager	Chief Executive Officer
Edward A. Brock	Lud W. Vaughn
Senior Vice President	Executive Vice President
York County Regional Executive	Chief Credit Officer
Richard H. Flake	Wanda J. Wells
Executive Vice President	Senior Vice President & Corporate Secretary
Chief Financial Officer	Shareholder Relations Officer
Lisa G. Morris	Gerald B. Wyatt
Vice President	Vice President
Human Resource Manager	Business Manager Director

UNION FINANCIAL BANCSHARES, INC.

43

CORPORATE INFORMATION

Common Stock Information

Union Financial Bancshares, Inc.’s common stock is quoted on the Nasdaq National Market under the symbol UFBS. As of September 30, 2003, there were 775 shareholders of record and 1,965,103 shares of common stock issued and outstanding. The following table contains the range of high and low bid information of Union Financial’s common stock as reported by the Nasdaq Stock Market and per share dividend as declared during each quarter of the last two fiscal years. See Note 16 to the financial statements for information regarding certain limitations imposed on the Bank’s ability to pay cash dividends to the holding company.

	High		Low		Dividend
Fiscal 2003
Fourth Quarter	$	18.45	$	16.75	$	.100
Third Quarter	$	17.19	$	14.44	$	.100
Second Quarter	$	15.85	$	13.51	$	.100
First Quarter	$	13.72	$	12.29	$	.100
	High		Low		Dividend
Fiscal 2002
Fourth Quarter	$	13.88	$	12.85	$	.100
Third Quarter	$	14.00	$	10.60	$	.100
Second Quarter	$	11.23	$	10.25	$	.100
First Quarter	$	10.60	$	10.00	$	.100

Dividend Reinvestment Plan

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

10-KSB Information

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

Annual Meeting of Shareholders

The Annual Meeting of Shareholders will convene at the Main Street Auditorium of the University of South Carolina, Union Campus, Union, South Carolina on January 28, 2004 at 2:00 p.m.

Additional Information

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

UNION FINANCIAL BANCSHARES, INC.

44

Corporate Offices

203 West Main Street

Union, South Carolina 29379

(888) 427-9002

Transfer Agent

Registrar & Transfer Company

10 Commerce Drive

Cranford, New Jersey 07016

(800) 456-0596

Independent Certified Public Accountants

Elliott Davis, LLC

200 East Broad Street

Greenville, SC 29601

Special Counsel

Muldoon Murphy & Faucette LLP

5101 Wisconsin Avenue, N.W.

Washington, D.C. 20016

General Counsel

Nelson Mullins Riley & Scarborough

104 South Main Street, Suite 900

Greenville, South Carolina 29601

Shareholder Relations Officer

Wanda J. Wells

Union Financial Bancshares, Inc.

203 West Main Street

Union, SC 29379

(864) 429-1861

Website

www.providentonline.com

UNION FINANCIAL BANCSHARES, INC.

45

EX-21

EXHIBIT NO. 21

Subsidiaries of Registrant

Subsidiaries	Percentage Owned		Jurisdiction or State of Incorporation
Union Financial Statutory Trust I	100	%	Connecticut
Provident Community Bank	100	%	United States
Provident Financial Services, Inc. (1)	100	%	South Carolina

(1) A wholly-owned subsidiary of Provident Community Bank.

EX-23

EXHIBIT NO. 23

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the 1987 Stock Option Plan, the 1995 Stock Option Plan and the 2001 Stock Option Plan of Union Financial Bancshares, Inc. and in the Registration on Form S-3 (No. 333-35319) pertaining to the Dividend Reinvestment Plan of Union Financial Bancshares, Inc. of our report dated October 17, 2003, with respect to the consolidated financial statements of Union Financial Bancshares, Inc. and subsidiaries incorporated by reference in the Annual Report on Form 10-KSB for the year ended September 30, 2003.

/s/ Elliott Davis LLC

December 16, 2003

Greenville, South Carolina

EX-31.A

EXHIBIT 31(a)

CERTIFICATION

I, Dwight V. Neese, certify that:

1. I have reviewed this annual report on Form 10-KSB of Union Financial Bancshares, Inc.;

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

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

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

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

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

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

Date:    December 16, 2003	/s/ Dwight V. Neese
	Dwight V. Neese
	President and Chief Executive Officer

EX-31.B

EXHIBIT 31(b)

CERTIFICATION

I, Richard H. Flake, certify that:

1. I have reviewed this annual report on Form 10-KSB of Union Financial Bancshares, Inc.;

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

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

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

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

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

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

Date:    December 16, 2003	/s/ Richard H. Flake
	Richard H. Flake
	Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Union Financial Bancshares, Inc. (the “Company”) on Form 10-KSB for the fiscal year ended September 30, 2003 as filed with the Securities and Exchange Commission (the “Report”), the undersigned certify, pursuant to 18 U.S.C. §1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Dwight V. Neese

Dwight V. Neese

President and Chief Executive Officer

/s/ Richard H. Flake

Richard H. Flake

Chief Financial Officer

Date:    December 16, 2003