<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-QSB

(Mark One)

  X   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-----
      ACT OF 1934
      For the quarterly period ended December 31, 2002
                                     -----------------

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


                          COMMISSION FILE NUMBER 1-5735


                        UNION FINANCIAL BANCSHARES, INC.
                        --------------------------------
        (Exact name of small business issuer as specified in its charter)

<TABLE>
<S>                                                    <C>
Delaware                                                        57-1001177
------------------------------------------------------------------------------------------
(State or other Jurisdiction of Incorporation)         (I.R.S. Employer Identification No.)


203 West Main Street, Union, South Carolina                                      29379
-------------------------------------------                                 -------------
(Address of Principal Executive Offices)                                       (Zip Code)
</TABLE>

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

The Corporation had 1,963,252 shares, $0.01 par value, common stock issued and
outstanding as of January 27, 2003.

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.

                                      INDEX

<TABLE>
<CAPTION>
Part I.         Financial Information                                                   Page
                ---------------------                                                   ----
<S>                                                                                     <C>
            Item 1.  Consolidated Financial Statements (unaudited)

            Consolidated Balance Sheets as of December 31, 2002
            and September 30, 2002                                                         3

            Consolidated Statements of Income for the three months
            ended December 31, 2002 and 2001                                               4

            Consolidated Statements of Cash Flows for the three
            months ended December 31, 2002 and 2001                                        5

            Consolidated Statements of Shareholders' Equity for the
            three months ended December 31, 2002 and 2001                                  6

            Notes to Consolidated Financial Statements                                  7-10

            Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                                        11-17

            Item 3.  Controls and Procedures                                              17

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

            Item 1. Legal Proceedings                                                     18

            Item 2. Changes in Securities                                                 18

            Item 3. Defaults Upon Senior Securities                                       18

            Item 4. Submission of Matters to a Vote of Security Holders                   18

            Item 5. Other Information                                                     18

            Item 6. Exhibits and Reports on Form 8-K                                      18

            Signatures                                                                    19

            Certifications                                                             20-21
</TABLE>

<PAGE>

Item 1.    Financial Statements
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 (unaudited) and September 30, 2002

<TABLE>
<CAPTION>
                                                                                   December 31,  September 30,
ASSETS                                                                                 2002          2002
                                                                                   ------------  -------------
                                                                                        (DOLLARS IN THOUSANDS)
<S>                                                                                <C>           <C>
Cash                                                                               $    1,996    $   1,346
Short term interest-bearing deposits                                                    4,943        7,385
                                                                                   ----------    ---------
Total cash and cash equivalents                                                         6,939        8,731
Investment and mortgage-backed securities                                             140,324      117,633
Loans , net                                                                           159,354      161,576
Office properties and equipment, net                                                    6,469        6,523
Federal Home Loan Bank Stock, at cost                                                   3,835        2,900
Accrued interest receivable                                                             1,957        1,728
Intangible assets                                                                       5,484        5,643
Cash surrender value of life insurance                                                  4,786        4,724
Other assets                                                                            2,444        1,510
                                                                                   ----------    ---------
TOTAL ASSETS                                                                       $  331,592    $ 310,968
                                                                                   ==========    =========

LIABILITIES

Deposit accounts                                                                   $  200,422    $ 200,303
Advances from the Federal Home Loan Bank and other borrowings                          76,700       57,000
Securities sold under agreements to repurchase                                         17,000       17,000
Corporate obligated floating rate capital securities                                    8,000        8,000
Accrued interest on deposits                                                              439          427
Advances from borrowers for taxes and insurance                                            61          414
Other liabilities                                                                       1,165          626
                                                                                   ----------    ---------
TOTAL LIABILITIES                                                                     303,787      283,770
                                                                                   ----------    ---------

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 - 1,963,252 shares at 12/31/02 and 1,958,069 at 9/30/02          20           20
Additional paid-in capital                                                             11,621       11,573
Accumulated other comprehensive gain                                                    1,726        1,421
Retained earnings, substantially restricted                                            14,438       14,184
                                                                                   ----------    ---------
TOTAL SHAREHOLDERS' EQUITY                                                             27,805       27,198
                                                                                   ----------    ---------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                         $  331,592    $ 310,968
                                                                                   ==========    =========
</TABLE>

See notes to consolidated financial statements.

                                       3

<PAGE>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended December 31, 2002 (unaudited) and 2001 (unaudited)

<TABLE>
<CAPTION>
                                                                                        Three Months Ended
                                                                      December 31,         December 31,
                                                                          2002                 2001
                                                                ---------------------- ----------------------
                                                                (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S>                                                              <C>                    <C>
Interest Income:
  Loans                                                             $     2,908        $       3,168
  Deposits and federal funds sold                                             6                    6
  Mortgage-backed securities                                                939                  949
  Interest and dividends on
   investment securities                                                    474                  446
                                                                    -----------        -------------
Total Interest Income                                                     4,327                4,569
                                                                    -----------        -------------

Interest Expense:
  Deposit accounts                                                        1,229                1,776
  Trust preferred corporate obligation                                      113                   17
  Advances from the FHLB and other borrowings                               941                  779
                                                                    -----------        -------------
Total Interest Expense                                                    2,283                2,572
                                                                    -----------        -------------

Net Interest Income                                                       2,044                1,997
  Provision for loan losses                                                 180                   90
                                                                    -----------        -------------
Net Interest Income After
   Provision for Loan Losses                                              1,864                1,907
                                                                    -----------        -------------

Non-Interest Income:
  Fees for financial services                                               447                  333
  Loan servicing costs                                                      (67)                 (69)
  Net gains on sale of investments                                           60                   --
                                                                    -----------        -------------
Total Non-Interest Income                                                   440                  264
                                                                    -----------        -------------

Non-Interest Expense:
  Compensation and employee benefits                                        749                  690
  Occupancy and equipment                                                   407                  392
  Deposit insurance premiums                                                  9                    9
  Professional services                                                     112                   68
  Advertising/Public relations                                               42                   52
  Real estate operations                                                     21                    7
  Deposit premium intangible                                                159                   83
  Goodwill amortization                                                      --                   82
  Other                                                                     196                  223
                                                                    -----------        -------------
Total Non-Interest Expense                                                1,695                1,606
                                                                    -----------        -------------

Income Before Income Taxes                                                  609                  565
Income tax expense                                                          157                  137
                                                                    -----------        -------------
Net Income                                                          $       452        $         428
                                                                    ===========        =============

Basic Net Income Per Common Share                                   $      0.23        $        0.22
                                                                    ===========        =============

Diluted Net Income Per Common Share                                 $      0.22        $        0.21
                                                                    ===========        =============

Weighted Average Number of
  Common Shares Outstanding

Basic                                                                 1,960,527            1,926,896
Diluted                                                               2,048,138            1,995,896
</TABLE>

See notes to consolidated financial statements.

                                       4

<PAGE>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31, 2002 (unaudited) and 2001 (unaudited)

<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                       December 31,         December 31,
                                                                           2002                 2001
                                                                       -------------       --------------
                                                                      (IN THOUSANDS)       (IN THOUSANDS)
<S>                                                                   <C>                  <C>
OPERATING ACTIVITIES:

Net income                                                             $       452          $       428
Adjustments to reconcile net income to
  net cash provided by operating activities:
  Provision for loan losses                                                    180                   90
  Amortization of intangibles                                                  159                  165
  Depreciation expense                                                         240                  216
  Recognition of deferred income, net of costs                                 (54)                 (12)
  Deferral of fee income, net of costs                                          53                   58
  Changes in operating assets and liabilities:
  Increase in accrued interest receivable                                     (229)                (160)
  Increase in other assets                                                    (996)                (256)
  Increase (decrease) in other liabilities                                     186               (1,238)
  Increase (decrease) in accrued interest payable                               12                  (17)
                                                                       ------------         ------------

Net cash provided by (used by) operating activities                              3                 (726)
                                                                       ------------         ------------

INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
   Held to maturity                                                             --               (5,157)
   Available for sale                                                      (38,596)             (19,263)
Proceeds from sale of investment and mortgage-
    backed securities                                                        5,059                   --
Proceeds from maturity of investment and mortgage-
    backed securities:
   Available for sale                                                            4                3,530
Principal repayments on mortgage-backed securities:
   Held to maturity                                                             --                  180
   Available for sale                                                       10,842                2,534
Net (increase) decrease in loans                                             2,348                 (471)
Purchase of FHLB stock                                                        (935)                  --
Redemption of FHLB stock                                                        --                   --
Purchase of office properties and equipment                                   (186)                 (75)
                                                                       ------------         ------------

Net cash used by investing activities                                     ($21,464)            ($18,722)
                                                                       ------------         ------------

FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan                                    29                   29
Dividends paid in cash ($0.10 per share -2002
and $0.10 per share - 2001)                                                   (198)                (163)
Proceeds from the exercise of stock options                                     19                    8
Proceeds from term borrowings                                               19,700               14,695
Proceeds from issuance of trust preferred corporate obligations                 --                8,000
Increase (Decrease) in deposit accounts                                        119               (2,236)
                                                                       ------------         ------------

Net cash  provided by financing activities                                  19,669               20,333
                                                                       ------------         ------------

NET (DECREASE)\INCREASE IN CASH
   AND CASH EQUIVALENTS                                                     (1,792)                 885

CASH AND CASH EQUIVALENTS
   AT BEGINNING OF PERIOD                                                    8,731                6,608
                                                                       ------------         ------------

CASH AND CASH EQUIVALENTS
   AT END OF PERIOD                                                     $    6,939          $     7,493
                                                                       ============         ============

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
  Income taxes                                                         $       104          $     1,106
  Interest                                                                   2,271                2,589

Non-cash transactions:
  Loans foreclosed                                                     $       113          $       162
</TABLE>

See notes to consolidated financial statements.

                                       5

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
            THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001 (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         Retained       Accumulated
                                                                         Additional      Earnings          Other           Total
                                                       Common Stock       Paid-in     Substantially    Comprehensive   Shareholders'
                                                    Shares     Amount     Capital       Restricted         Income          Equity
                                                    ------     ------     -------       ----------         ------          ------
                                                                           (In Thousands, Except Share Data)
<S>                                               <C>          <C>       <C>          <C>              <C>             <C>
BALANCE AT SEPTEMBER 30, 2001                     1,924,478    $   20    $   11,321   $     13,217            ($182)   $     24,376

Net income                                                                                     428                              428

  Other comprehensive income
   Unrealized losses on securities:
    Unrealized holding losses arising during
    period
  Comprehensive income                                                                                         (239)           (239)
                                                                                                               ----            ----
                                                                                                                                189
Options exercised                                       660                       6                                               6

Dividend reinvestment plan contributions              2,987                      29                                              29

Cash dividend ($.10 per share)                                                                (192)                            (192)

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

BALANCE AT DECEMBER 31, 2001                      1,928,125        20        11,356         13,453             (421)         24,408
                                                  ==================================================================================

BALANCE AT SEPTEMBER 30, 2002                     1,958,069        20        11,573         14,184            1,421          27,198

Net income                                                                                     452                              452

 Other comprehensive income
  Unrealized gains on securities:
   Unrealized holding gains arising during
    period                                                                                                      305             305
                                                                                                                                ---
  Comprehensive income                                                                                                          757

Options exercised                                     3,000                      19                                              19

Dividend reinvestment plan contributions              2,183                      29                                              29

Cash dividend ($.10 per share)                                                                (198)                            (198)

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

BALANCE AT DECEMBER 31, 2002                      1,963,252    $   20    $   11,621   $     14,438     $      1,726    $     27,805
                                                  ==================================================================================
</TABLE>

                                       6

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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

     The accompanying unaudited consolidated financial statements of Union
     Financial Bancshares, Inc. (the "Corporation" or "Union Financial") were
     prepared in accordance with instructions for Form 10-QSB and, therefore, do
     not include all disclosures necessary for a complete presentation of
     consolidated financial condition, results of operations, and cash flows in
     conformity with generally accepted accounting principles. However, all
     adjustments which are, in the opinion of management, necessary for the fair
     presentation of the interim consolidated financial statements have been
     included. All such adjustments are of a normal and recurring nature. The
     consolidated financial statements include the Corporation's wholly owned
     subsidiaries, Provident Community Bank (the "Bank"), a federally charted
     stock savings bank, and Union Financial Statutory Trust I (the "Trust"), a
     statutory trust created under the laws of the state of Connecticut. The
     results of operations for the three months ended December 31, 2002 are not
     necessarily indicative of the results which may be expected for the entire
     fiscal year. The consolidated balance sheet as of September 30, 2002 has
     been derived from the Corporation's audited financial statements presented
     in the annual report to shareholders. Certain amounts in the prior year's
     financial statements have been reclassified to conform with current year
     classifications.

     Recently Issued Accounting Standards

     In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other Intangible
                                                  -----------------------------
     Assets. This SFAS addresses how goodwill and other intangible assets should
     ------
     be accounted for at their acquisition (except for those acquired in a
     business combination) and after they have been initially recognized in the
     financial statements. The statement is effective for all fiscal years
     beginning after December 15, 2001. The Corporation adopted this process
     effective for the current fiscal year. The adoption did not have a material
     effect on the financial position of the Corporation.

     In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
                                                    --------------------------
     Compensation--Transition and Disclosure--an amendment of FASB Statement No.
     --------------------------------------------------------------------------
     123. This Statement amends 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. In addition, this Statement amends the
     disclosure requirements of Statement 123 to require prominent disclosures
     in both annual and interim financial statements about the method of
     accounting for stock-based employee compensation and the effect of the
     method used on reported results. The Company adopted this standard
     effective December 31, 2002. The disclosures

                                        7

<PAGE>

     required by this standard will be included in the Company's next quarterly
     filing. SFAS No. 148 had no impact upon adoption as the Company has not
     elected the fair value treatment of stock-based compensation.

     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.

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

     Basic income per share amounts for the three months ended December 31, 2002
     and 2001 were computed based on the weighted average number of common
     shares outstanding during the period. Diluted income per share adjusts for
     the dilutive effect of outstanding common stock options during the periods.

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

     Approximately $59,754,000 and $24,063,000 of debt securities at December
     31, 2002 and September 30, 2002, respectively, were pledged by the Bank as
     collateral to secure deposits of the State of South Carolina, and Union and
     Laurens Counties. The Bank pledges as collateral for Federal Home Loan Bank
     advances the Bank's Federal Home Loan Bank stock and has entered into a
     blanket collateral agreement with the Federal Home Loan Bank whereby the
     Bank maintains, free of other encumbrances, qualifying mortgages (as
     defined) with unpaid principal balances equal to, when discounted at 75% of
     the unpaid principal balances, 100% of total advances. The Bank will also
     pledge securities to cover additional advances from the Federal Home Loan
     Bank that exceed the qualifying mortgages balance along with security
     repurchase lines with various brokerage houses.

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

     The Bank 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.
     These instruments expose the Bank to credit risk in excess of the amount
     recognized on the balance sheet.

     The Bank's exposure to credit loss in the event of nonperformance by the
     other party to the financial instrument for commitments to extend credit is
     represented by the contractual amount of those instruments. The Bank uses
     the same credit policies in making commitments and conditional obligations
     as it does for on-balance-sheet instruments. Total credit exposure at
     December 31, 2002 related to these items is summarized below:

<TABLE>
<CAPTION>
         Loan Commitments:                                       Contract Amount
         ----------------                                        ---------------
         <S>                                                     <C>
               Approved loan commitments                           $     169,000
               Unadvanced portions of loans and credit lines          15,770,000
                                                                   -------------
               Total loan commitments                              $  15,939,000
                                                                   =============
</TABLE>

                                        8

<PAGE>

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

     Commitments outstanding at December 31, 2002 consist of fixed and
     adjustable rate loans provided above at rates ranging from 5.0% to 6.5%.
     Commitments to originate loans generally expire within 30 to 60 days.

     Commitments to fund credit lines (principally variable rate, consumer lines
     secured by real estate and overdraft protection) totaled approximately
     $42,026,000 at December 31, 2002. Of these lines, the outstanding loan
     balances totaled approximately $26,256,000. The Bank also has commitments
     to fund warehouse lines of credit for various mortgage banking companies
     totaling $3,000,000, which had an outstanding balance at December 31, 2002
     of approximately $2,327,000.

5.   Corporation 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.

     A summary of the Trust securities issued and outstanding follows:

<TABLE>
<CAPTION>
                                   Amount
                               Outstanding at
                                December 31,                                                        Distribution
                              -----------------                 Prepayment                             Payment
       Name                    2002       2001       Rate      Option Date          Maturity          Frequency
-------------------------   ---------- ----------  --------  -----------------  -----------------  ---------------
<S>                         <C>        <C>         <C>       <C>                <C>                <C>
Union Financial Statutory
       Trust I              $8,000,000 $8,000,000    5.01%   December 18, 2006  December 18, 2031     Quarterly
</TABLE>

     The stated maturity of the Debentures is December 18, 2031. In addition,
the Debentures are

                                        9

<PAGE>

     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 (to the extent payment of such
     interest would be legally enforceable) at the applicable distribution rate,
     compounded quarterly.

                                       10

<PAGE>

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

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

         Management's discussion and analysis of financial condition and results
         of operations and other portions of this Form 10-Q contain certain
         "forward-looking statements" concerning the future operations of the
         Corporation and the Bank. These forward-looking statements are
         generally identified by the use of the words "believe," "expect,"
         "intend," "anticipate," "estimate," "project," or similar expressions.
         Management intends to take advantage of the "safe harbor" provisions of
         the Private Securities Litigation Reform Act of 1995 and is including
         this statement for the express purpose of availing the Corporation of
         the protections of such safe harbor with respect to all
         "forward-looking statements" contained in this report to describe
         future plans and strategies. Management's ability to predict results or
         the effect of future plans or strategies is inherently uncertain.
         Factors which could effect actual results include interest rate trends,
         the general economic climate in the Corporation's and the Bank's market
         area and the country as a whole, the ability of the Corporation and the
         Bank to control costs and expenses, competitive products and pricing,
         loan delinquency rates, 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.

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

         Assets
         ------

         Total assets of the Corporation increased $20,624,000, or 6.63%, to
         $331,592,000 at December 31, 2002 from $310,968,000 at September 30,
         2002. Investments and mortgage-backed securities increased
         approximately $22,691,000, or 19.29%, from September 30, 2002 to
         December 31, 2002, due to the purchase of mortgage backed securities
         and municipal securities that was funded with additional borrowings.
         The securities purchases offset lower loan demand and provided
         additional balance sheet growth.

         Loans decreased $2,222,000, or 1.38%, to $159,354,000 at December 31,
         2002. The Corporation continues to focus on consumer and commercial
         lending with reduced emphasis on residential mortgage loans. Consumer
         and commercial loans outstanding during this period increased
         $6,955,000, or 11.25%, while outstanding residential mortgage loans
         decreased $9,177,000 or 8.90%.

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

         Total liabilities increased $20,017,000, or 7.05%, to $303,787,000 at
         December 31, 2002 from $283,770,000 at September 30, 2002.

                                       11

<PAGE>

         Borrowings from the Federal Home Loan Bank (FHLB) increased
         $19,700,000, or 34.56%, to $76,700,000 at December 31, 2002 from
         $57,000,000 at September 30, 2002. The increases in borrowings from the
         FHLB were utilized to fund additional growth for the Corporation. Other
         liabilities increased $539,000, or 86.06%, to $1,165,000 at December
         31, 2002 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
         --------------------

         Shareholders' equity increased $607,000, or 2.23%, to $27,805,000 at
         December 31, 2002 from $27,198,000 at September 30, 2002 due to net
         income year to date, along with an increase in unrealized gains in
         securities available for sale, offset by the payment of $0.10 per share
         quarterly dividends.

         Trust Preferred Securities
         --------------------------

         On November 14, 2001, the Corporation 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, with
         an initial rate of 5.60%. 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 trust preferred securities generally rank
         equal to the trust common securities in priority of payment, but will
         rank prior to the trust common securities if and so long as Union
         Financial fails to make principal or interest payments on the
         Debentures. Concurrently with the issuance of the Debentures and the
         trust preferred and common securities, Union Financial issued a
         guarantee related to the trust securities for the benefit of the
         holders.

         The Debentures, the common securities issued by the Trust, and the
         related income effects are eliminated within Union Financial's
         financial statements. Union Financial's obligations under the
         Debentures, the related debenture, the trust agreement relating to the
         trust securities, and the guarantee constitute a full and unconditional
         guarantee by Union Financial of the obligations of the Trust under the
         trust preferred 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 Union Financial, subject to prior regulatory

                                       12

<PAGE>

     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 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.

     Union Financial used the proceeds of the offering for general corporate
     purposes, to fund dividends to shareholders and for contributions to the
     capital of the Bank.

     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 repayments, borrowings, maturity of securities and interest payments.

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

     During the three months ended December 31, 2002, the Corporation's loan
     originations totaled $19,200,000. At December 31, 2002, the Corporation's
     investment in investment and mortgage-backed securities totaled
     $140,300,000. Additionally, outstanding loan commitments (including
     commitments to fund credit lines) totaled $15,900,000 at December 31, 2002.
     Management of the Corporation anticipates that it will have sufficient
     funds available to meet its current loan commitments.

     During the three months ended December 31, 2002, total deposits increased
     $119,000. Deposit flows are affected by the overall level of interest
     rates, the interest rates and products offered by the Corporation and its
     local competitors and other factors. The Corporation closely monitors its
     liquidity position on a daily basis. Certificates of deposit, which are
     scheduled to mature in one year or less from December 31, 2002, totaled
     $58,900,000. 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,

                                       13

<PAGE>

     management believes that, although it is not possible to predict future
     terms and conditions upon renewal, a significant portion of such deposits
     will remain with the Corporation. If the Corporation requires funds beyond
     its ability to generate them internally, additional sources of funds are
     available through FHLB advances and securities sold under agreements to
     repurchase. At December 31, 2002, the Corporation had $76,700,000 of FHLB
     borrowings and $17,000,000 of securities sold under agreements to
     repurchase.

     Capital Resources

     The capital requirement of the Bank consists of three components: (1)
     tangible capital, (2) core capital and (3) risk based capital. Tangible
     capital must equal or exceed 1.5% of adjusted total assets. Core capital
     must be a minimum of 4% of adjusted total assets and risk based capital
     must be a minimum of 8% of risk weighted assets.

     As of December 31, 2002, the Bank's capital position, as calculated under
     regulatory guidelines, exceeds these minimum requirements as follows
     (dollars in thousands):

<TABLE>
<CAPTION>
                                                                 Requirement    Actual     Excess
---------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>        <C>
     Tangible capital                                              $ 4,882     $26,435    $21,553
     Tangible capital to adjusted total assets                        1.50%       8.12%      6.62%

     Core capital                                                  $13,216     $26,435    $13,219
     Core capital to adjusted total assets                            4.00%       8.12%      4.12%

     Risk based capital                                            $12,738     $27,941    $15,203
     Risk based capital to risk weighted assets                       8.00%      17.55%      9.55%
</TABLE>

     Results of operations for the three months ended December 31, 2002 and 2001
     ---------------------------------------------------------------------------

     General
     -------

     Net income increased $24,000, or 5.61%, to $452,000 for the three months
     ended December 31, 2002 as compared to the same period in 2001. Increases
     in net interest income and non- interest income were partially offset by an
     increase in the provision for loan losses and increases in non-interest
     expense.

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

     Interest income decreased $242,000, or 5.30%, for the three months ended
     December 31, 2002 as compared to the same period in 2001. Interest income
     on loans decreased by 8.21%, or $260,000, to $2,908,000 for the three
     months ended December 31, 2002 from $3,168,000 for the three months ended
     December 31, 2001, due primarily to declining market interest rates along
     with a smaller average balance of loans. Interest and dividends on
     investment and

                                       14

<PAGE>

     mortgage-backed securities increased $18,000, or 1.29%, for the three
     months ended December 31, 2002 to $1,413,000 from $1,395,000 during the
     same period in 2001. The increase was due primarily to increased
     investments in mortgage-backed securities and municipal securities.

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

     Interest expense decreased $289,000, or 11.24%, for the three months ended
     December 31, 2002 as compared to the three months ended December 31, 2001,
     due primarily to lower deposit rates from a declining market interest rate
     environment. Interest expense on deposit accounts decreased $547,000, or
     30.80%, to $1,229,000 for the three months ended December 31, 2002 from
     $1,776,000 during the same period in 2001. Interest expense on borrowings
     increased $162,000, or 20.80%, for the three months ended December 31, 2002
     as compared to the same period in the previous year due to a higher level
     of borrowings offset by lower market interest rates during the period. The
     Corporation has also extended borrowing terms during this period to improve
     interest rate risk exposure. The Corporation also recorded $113,000 for the
     three months ended December 31, 2002 compared to $17,000 for the three
     months ended December 31, 2001 for interest expense on the trust preferred
     securities that were issued on December 18, 2001.

     Provision for Loan Loss
     -----------------------

     During the three months ended December 31, 2002, the provision for loan
     losses was $180,000 as compared to $90,000 for the same period in the
     previous year. The increase in the provision reflects the implementation of
     a risk weighted loan loss reserve methodology that is intended to more
     closely track the level of risk of different types of loans. During this
     same period, non-accrual loans increased $337,000 from $1,866,000 at
     September 30, 2002 to $2,203,000 at December 31, 2002. The increased
     provision also reflects the Corporation's continued movement from longer
     term, fixed rate residential mortgage loans to shorter term, floating rate
     consumer and commercial loans. Consumer and commercial loans carry higher
     risk weighted rates in the reserve calculation as compared to residential
     mortgage loans. Management believes the Bank's loan loss allowance is
     adequate to absorb future loan losses inherent in the portfolio. The Bank's
     loan loss allowance at December 31, 2002 was approximately .93% of the
     Bank's outstanding loan portfolio and 68.32% of non-performing loans
     compared to .71% of the Bank's outstanding loan portfolio and 107.42% of
     non-performing loans at December 31, 2001.

     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 loan categories
     increase and decrease in balance, the provision for loan loss calculation
     will adjust accordingly.

                                       15

<PAGE>

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

     Balance at beginning of quarter                   $1,371
     Provision for loan losses                            180
     (Charge-offs) recoveries, net                        (46)
                                                       ------
     Balance at end of quarter                         $1,505
                                                       ======

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

<TABLE>
<CAPTION>
                                                        December 31, 2002    September 30, 2002
                                                        -----------------    ------------------
     <S>                                                <C>                  <C>
     Non-accruing loans which are
     contractually past due 90 days
     or more:

     Real Estate                                               $1,036               $   916
     Commercial                                                   925                   524
     Consumer                                                     242                   426
                                                               ------               -------
     Total                                                     $2,203               $ 1,866
                                                               ======               =======

     Percentage of loans receivable, net                         1.38%                 1.15%
                                                               ======               =======

     Percentage of allowance for loan losses
     to total loans receivable, net                              0.93%                 0.85%
                                                               ======               =======

     Allowance for loan losses                                 $1,505               $ 1,371
                                                               ======               =======

     Real estate acquired through
      foreclosure and repossessed
      assets, net of allowances                                $  356               $   356
                                                               ======               =======
</TABLE>

     Non-accrual loans increased $337,000 to $2,203,000 for the period ending
     December 31, 2002 from $1,866,000 at September 30, 2002. The increase in
     commercial loans was the result of the classification of one local loan
     that is well supported by commercial real estate. These loans are supported
     by mortgages, equipment, and automobiles that should reduce the risk of
     loss for the Corporation.

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

     Total non-interest income increased $176,000, or 66.67%, to $440,000 for
     the three months ended December 31, 2002 from $264,000 for the same period
     in the previous year. Fees from financial services increased $114,000, or
     34.23%, to $447,000 for the three months ended

                                      -16-

<PAGE>

     December 31, 2002 from $333,000 for the same period in the previous year.
     The increase was due primarily to the development of new fee income
     programs that were implemented during the first quarter of the 2003 fiscal
     year. Gain on the sale of investments was $60,000 for the three months
     ended December 31, 2002 as the Corporation sold investments with higher
     price volatility. The sale will improve interest rate exposure for the
     Corporation.

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

     For the three months ended December 31, 2002, total non-interest expense
     increased $89,000, or 5.54%, to $1,695,000 from $1,606,000 for the same
     period in 2001. Compensation and employee benefits increased $59,000, or
     8.55%, to $749,000 for the three month period ended December 31, 2002 from
     $690,000 for the same period in 2001 due primarily to staff additions
     resulting from a new branch opening that is scheduled for completion in the
     third quarter of the current fiscal year. Occupancy and equipment expense
     increased $15,000, or 3.83%, to $407,000 for the three months ended
     December 31, 2002 from $392,000 for the same period in 2001, due to higher
     depreciation and equipment expense. Professional services expense increased
     $44,000, or 64.71%, to $112,000 for the three months ended December 31,
     2002 from $68,000 for the same period in 2001 due to higher legal and audit
     expenses. Advertising and public relations expense decreased $10,000, or
     19.23%, to $42,000 for the three months ended December 31, 2002 from
     $52,000 for the same period in 2001 due to reductions in advertising
     expenses. Real estate operations expense increased $14,000, or 200.00%, to
     $21,000 for the three months ended December 31, 2002 from $7,000 for the
     same period in 2001 due to higher disposition costs for loan foreclosures
     and asset repossessions. Other expense decreased $27,000, or 12.11%, to
     $196,000 for the three months ended December 31, 2002 from $223,000 for the
     same period in 2001 due primarily to lower telephone expense that resulted
     from reductions in long distance usage.

     Item 3. Controls and Procedures

     (a) Evaluation of disclosure controls and procedures. The Corporation
         -------------------------------------------------
     maintains controls and procedures designed to ensure that information
     required to be disclosed in the reports that the Corporation files or
     submits under the Securities Exchange Act of 1934 is recorded, processed,
     summarized and reported within the time periods specified in the rules and
     forms of the Securities and Exchange Commission. Based upon their
     evaluation of those controls and procedures performed within 90 days of the
     filing date of this report, the chief executive officer and the chief
     financial officer of the Corporation concluded that the Corporation's
     disclosure controls and procedures were adequate.

     (b) Changes in internal controls. The Corporation made no significant
         -----------------------------
     changes in its internal controls or in other factors that could
     significantly affect these controls subsequent to the date of the
     evaluation of those controls by the chief executive officer.

                                       17

<PAGE>

PART II  - OTHER INFORMATION

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

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

Item 2.  Changes in Securities
         ---------------------

               The Corporation has the right, at one or more times, unless an
               event of default exists under the floating rate junior
               subordinated deferrable interest debentures due December 18, 2031
               (the "Debentures"), to defer interest payments on the Debentures
               for up to 20 consecutive quarterly periods. During this time, the
               Corporation will be prohibited from declaring or paying cash
               dividends on its common stock.

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

               Not applicable.

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

               None

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

               None

Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------

               Exhibits
               --------

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

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

               Reports on Form 8-K
               -------------------

               None

                                       18

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                        UNION FINANCIAL BANCSHARES, INC.
                                  (Registrant)

Date: February 4, 2003                             By: /s/ Dwight V. Neese
      ----------------                                 -------------------------
                                                       Dwight V. Neese, CEO

Date: February 4, 2003                             By: /s/ Richard H. Flake
      ----------------                                 -------------------------
                                                       Richard H. Flake, CFO

                                       19

<PAGE>

                                  CERTIFICATION

I, Dwight V. Neese, certify that:

     1.   I have reviewed this report on Form 10-QSB 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 quarterly 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
          quarterly report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and have:

          a.   designed such disclosure controls and procedures 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
               quarterly report is being prepared;

          b.   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c.   presented in this quarterly report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a.   all significant deficiencies in the design or operation of the
               internal controls which could adversely affect the registrant's
               ability to record process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b.   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6.   The registrant's other certifying officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.

Date:   February 4, 2003                   /s/Dwight V. Neese
                                           -------------------------------------
                                           Dwight V. Neese
                                           President and Chief Executive Officer

                                       20

<PAGE>

                                  CERTIFICATION

I, Richard H. Flake, certify that:

     1.   I have reviewed this report on Form 10-QSB 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 quarterly 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
          quarterly report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and have:

          a.   designed such disclosure controls and procedures 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
               quarterly report is being prepared;

          b.   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c.   presented in this quarterly report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a.   all significant deficiencies in the design or operation of the
               internal controls which could adversely affect the registrant's
               ability to record process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b.   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6.   The registrant's other certifying officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.

Date:   February 4, 2003                           /s/ Richard H. Flake
                                                   -----------------------------
                                                   Richard H. Flake
                                                   Executive Vice President and
                                                   Chief Financial Officer

                                       21