<PAGE>

                       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, 2001

                                       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)

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

203 West Main Street, Union, South Carolina                                               29379
---------------------------------------------                                        ---------------
(Address of principal executive offices)                                                (Zip Code)

Issuer's telephone number, including area code:                                     (864) 427-9000
                                                                                   -----------------

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

Securities registered pursuant to Section 12(g) of the Act:   Common Stock, par value $.01 per share
                                                              --------------------------------------
                                                                         (Title of Class)
</TABLE>

      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, 2001
were approximately $20,167,000.

      As of December 1, 2001, there were 1,928,125 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 December 1, 2001, was approximately $18,446,771 (1,778,002 shares at
$10.375 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, 2001 (Part II).
2.    Portions of the Proxy Statement for the 2002 Annual Meeting of
      Shareholders (Part III).

<PAGE>

                                      INDEX

<TABLE>
<CAPTION>
                                                      Part I

                                                                                                               Page
<S>                                                                                                           <C>
Item 1.  Description of Business............................................................................   1-23
Item 2.  Description of Properties..........................................................................     24
Item 3.  Legal Proceedings..................................................................................     24
Item 4.  Submission of Matters to a Vote of Securities Holders..............................................     24

                                                      Part II

Item 5.  Market for Common Equity and Related Stockholder Matters...........................................     25
Item 6.  Management's Discussion and Analysis or Plan of Operation..........................................     25
Item 7.  Financial Statements...............................................................................     25
Item 8.  Changes In and Disagreements with Accountants on Accounting and Financial
            Disclosure .....................................................................................     25

                                                     Part III

Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
            of the Exchange Act.............................................................................  25-26
Item 10. Executive Compensation.............................................................................     26
Item 11. Security Ownership of Certain Beneficial Owners and Management.....................................     26
Item 12. Certain Relationships and Related Transactions.....................................................     26
Item 13. Exhibits and Reports on Form 8-K...................................................................     27
</TABLE>

<PAGE>

                                     PART I

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

General

         Union Financial Bancshares, Inc. ("Union Financial") is the savings and
loan holding company for Provident Community Bank (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 federally-chartered, capital stock savings bank
headquartered in Union, South Carolina. The Bank's operations are conducted
through its main office and five full-service banking centers and a lending and
investment center, all of which are located in the upstate area of South
Carolina. The Bank is a member of the Federal Home Loan Bank ("FHLB") and its
deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").

         The business of the Bank consists primarily of attracting deposits from
the general public and originating mortgage loans on residential properties
located in Laurens, Union and Fairfield counties in South Carolina. The Bank
also makes commercial real estate, construction and consumer loans and invests
in obligations of the federal government and its agencies and of state and local
municipalities. The Bank purchases both fixed and adjustable rate
mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. The
Bank has purchased fixed and variable rate mortgages originated by other
organizations. See "Lending Activities." 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 discussion and analysis contains certain "forward-looking
statements" within the meaning of the federal securities laws. These
forward-looking statements include, but are not limited to, estimates and
expectation 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 Union Financial and the Bank operate and 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.

Competition

         The Corporation faces competition in both the attraction of deposit
accounts and in the origination of mortgage 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. The Corporation 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 Corporation 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 Corporation's
competition for real estate loans comes principally from other thrift
institutions, commercial banks and mortgage banking companies.

         The Bank expects competition to increase in the future as a result of
legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Technological advances, for

                                        1

<PAGE>

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-depositing 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. As of September 30, 2001, a local commercial bank and an
office of a regional commercial bank were located in Union County, South
Carolina. The Corporation is the largest financial institution based in Union
County, South Carolina.

Recent Events

         On November 14, 2001, Union Financial established Union Financial
Statutory Trust I (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 $8.0 million 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 $8.2 million 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
indenture, 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 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 intends to use the proceeds of the offering for general
corporate purposes, to fund dividends to shareholders and for contributions to
the capital of the Bank.

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.

                                        2

<PAGE>

<TABLE>
<CAPTION>
                                                                                               Year Ended September 30,
                                                  -----------------------------------------------------------------------
                                                                  2001                                 2000
                                                  ------------------------------------ ----------------------------------
                                                                            Average                              Average
                                                  Average                    Yield        Average                 Yield
                                                  Balance        Interest     Cost        Balance     Interest     Cost
                                                  ------------- ----------- ---------- ------------- ---------- ---------
                                                                                              (Dollars in thousands)
<S>                                               <C>           <C>         <C>        <C>           <C>        <C>
Interest-earning assets:
   Loans receivable, net (1) ...............      $163,665     $14,487        8.85%     $183,692    $15,272        8.31%
   Mortgage-backed securities ..............        48,721       2,894        5.94        29,157      1,711        5.87
Investment securities:
   Taxable .................................        19,872       1,417        7.13        19,962      1,411        7.07
   Nontaxable ..............................         2,276         108        4.75         1,824         84        4.60
                                                  --------     -------      ------      --------    -------     -------
Total investment securities ................        22,148       1,525        6.88        21,786      1,495        6.86
   Overnight deposits ......................         5,526         112        2.03         3,411         77        2.25
                                                  --------     -------      ------      --------    -------     -------
         Total interest-earning assets .....       240,060      19,018        7.92       238,046     18,555        7.79
Non-interest-earning assets ................        21,998                                19,794
                                                  --------                              --------
         Total assets ......................      $262,058                              $257,840
                                                  ========                              ========

Interest-bearing liabilities:
                                                  $ 15,354         279        1.82      $ 16,407        319        1.94
   Savings accounts ........................
   Negotiable order of withdrawal
      accounts .............................        31,779         604        1.90        28,519        474        1.66
   Certificate accounts ....................       140,576       7,939        5.65       139,621      7,574        5.42
   FHLB advances and other borrowings ......        47,169       2,791        5.92        49,517      2,808        5.67
                                                  --------     -------      ------      --------   --------     -------

         Total interest-bearing
          liabilities ......................       234,878      11,613        4.94       234,064     11,175        4.77
   Non-interest-bearing liabilities ........         4,907                                 3,657
                                                  --------                              --------
         Total liabilities .................       239,785                               237,721
   Shareholders' equity ....................        22,273                                20,119
                                                  --------                              --------
         Total liabilities and
            shareholders' equity ...........       262,058                               257,840
                                                  ========                              ========

Net interest income ........................                   $ 7,405                              $ 7,380
                                                               =======                              =======
Interest rate spread (2) ...................                                  2.98%                                3.02%

Net interest margin (3) ....................                      3.08%                                3.10%

Ratio of average interest-earing assets to..
   average interest-bearing liabilities ....          1.02x                                 1.02x

<CAPTION>

                                                  ----------------------------------
                                                                  1999
                                                  ----------------------------------
                                                                            Average
                                                  Average                    Yield
                                                  Balance        Interest     Cost
                                                  ------------- ----------- --------
<S>                                             <C>           <C>         <C>
Interest-earning assets:
   Loans receivable, net (1) ...............      $142,020      $11,420       8.03%
   Mortgage-backed securities ..............        23,663        1,480       6.31
Investment securities:
   Taxable .................................        14,197        1,027       7.23
   Nontaxable ..............................           769           36       4.68
                                                  --------      -------     ------
Total investment securities ................        14,966        1,063       7.10
   Overnight deposits ......................         3,079           83       2.70
                                                  --------      -------     ------
         Total interest-earning assets .....       183,728       14,046       7.65
Non-interest-earning assets ................        14,478
                                                  --------
         Total assets ......................      $198,206
                                                  ========

Interest-bearing liabilities:
                                                  $ 12,681          207       1.63
   Savings accounts ........................
   Negotiable order of withdrawal
      accounts .............................        30,392          410       1.34
   Certificate accounts ....................        96,733        5,089       5.26
   FHLB advances and other borrowings ......        39,452        1,992       5.04
                                                  --------      -------     ------

         Total interest-bearing
          liabilities ......................       179,258        7,698       4.29
   Non-interest-bearing liabilities ........         3,652
                                                  --------
         Total liabilities .................       182,910
   Shareholders' equity ....................        15,296
                                                  --------
         Total liabilities and
            shareholders' equity ...........      $198,206
                                                  ========

Net interest income ........................                    $ 6,348
                                                                =======
Interest rate spread (2) ...................                                  3.36%

Net interest margin (3) ....................                       3.46%

Ratio of average interest-earing assets to..
   average interest-bearing liabilities ....          1.02x
</TABLE>

_________________________
(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.

                                        3

<PAGE>
Lending Activities

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

<TABLE>
<CAPTION>
                                                                At September 30,
                            --------------------------------------------------------------------------------------------------
                                   2001                 2000               1999              1998               1997
                            ------------------  ------------------  ------------------  ------------------  ------------------
                             Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent
                            -------- ---------  -------- ---------  -------- ---------  -------- ---------  -------- ---------
<S>                         <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
First mortgage loans:
   Conventional ........... $101,530    64.23%  $121,579    72.45%  $108,266    72.47%  $114,383    80.44%  $105,242    80.98%
   Construction loans .....   12,259     7.76     12,335     7.35     17,039    11.40     12,838     9.03     13,508    10.39
   Participation loans
    purchased .............      353     0.22        366     0.22        377     0.25        665     0.47      1,002     0.77
                            --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
    Total mortgage loans ..  114,142    72.21    134,280    80.02    125,682    84.12    127,886    89.94    119,752    92.14
                            --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
Second mortgage loans .....   10,163     6.43      9,848     5.87      8,499     5.69      5,857     4.12      4,478     3.45
Consumer and
   installment loans ......   20,653    13.06     20,336    12.12     16,388    10.97     10,679     7.51     10,440     8.03
Commercial loans ..........   19,955    12.63     10,719     6.39      7,748     5.19      3,539     2.49      2,550     1.97
Savings account loans .....    2,009     1.27      1,971     1.17      1,435     0.96      1,551     1.09        183     0.14
                            --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
    Total loans ...........  166,922   105.60    177,154   105.57    159,752   106.93    149,512   105.15    137,403   105.73
                            --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
Less:
   Undisbursed loans
    in process ............   (6,108)   (3.86)    (5,445)   (3.24)    (9,964)   (6.67)    (6,625)   (4.66)    (6,598)   (5.08)
   Loan discount
    unamortized ...........   (1,922)   (1.22)    (2,718)   (1.62)        --       --         --       --         --       --
   Allowance for loan
    losses ................   (1,080)   (0.68)    (1,360)   (0.81)      (836)   (0.56)      (827)   (0.59)      (928)   (0.71)
   Deferred loan fees .....      251     0.16        176     0.10        449     0.30        142     0.10         80     0.06
                            --------   ------   --------   ------   --------   ------   --------   ------   --------   ------

   Net loans receivable.... $158,063   100.00%  $167,807   100.00%  $149,401   100.00%  $142,202   100.00%  $129,957   100.00%
                            ========   ======   ========   ======   ========   ======   ========   ======   ========   ======
</TABLE>

         The following table sets forth, at September 30, 2001, 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.

<TABLE>
<CAPTION>
                                                                                Due After
                                                                      Due        1 Year
                                                                     Within      Through     Due After
                                                                    One Year     5 Years      5 Years       Total
                                                                   ----------  -----------  -----------   ---------
<S>                                                                <C>         <C>          <C>           <C>
First mortgage loans:
   Conventional loans...........................................    $   819      $ 2,785      $ 97,926    $101,530
   Construction loans (1).......................................     12,259           --            --      12,259
   Participation loans purchased................................         --           --           353         353
Second mortgage loans...........................................         --           --        10,163      10,163
Consumer and installment loans..................................      4,375       15,994           284      20,653
Commercial loans................................................      7,248       11,088         1,619      19,955
Savings account loans...........................................      2,009           --            --       2,009
                                                                    -------      -------      --------    --------
      Total.....................................................    $26,710      $29,867      $110,345    $166,922
                                                                    =======      =======      ========    ========
</TABLE>

_________________________________
(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 Corporation the right to declare a loan
immediately due and payable in the event, among other things, that 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.

                                       4

<PAGE>

         The following table sets forth the dollar amount of loans due after
September 30, 2002 which have fixed rates of interest and which have adjustable
rates of interest (in thousands).

                                                Fixed      Adjustable    Total
                                              ----------   ----------  ---------


Mortgage loans..............................  $   67,386   $   33,325  $ 100,711

Consumer and other loans....................      26,720       12,781     39,501
                                              ----------   ----------  ---------
     Total..................................  $   94,106   $   46,106  $ 140,212
                                              ==========   ==========  =========



         Real Estate Loans. The primary lending activity of the Corporation is
the origination of conventional mortgage loans to enable borrowers to purchase
existing single family homes or to construct new homes. The Corporation's
residential real estate loan portfolio also includes loans on multi-family
dwellings (more than five units). At September 30, 2001, approximately $116.3
million, or 73.6% of the Corporation's total loan portfolio consisted of loans
secured by residential real estate (net of undisbursed principal).

         Office of Thrift Supervision regulations limit the amount which
federally chartered savings institutions 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 80% for all
other real estate loans. The Corporation'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
Corporation 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 Corporation have generally reflected a policy of making less than
the maximum loan permissible under applicable regulations, market conditions,
and underwriting standards established by the Corporation. Mortgage loans made
by the Corporation are generally long-term loans (15-30 years), amortized on a
monthly basis, with principal and interest due on each month. In the
Corporation'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 Corporation offers a full complement of mortgage lending products
with both fixed and adjustable rates. Due to the nature of the Corporation's
marketplace, only a small percentage of "local" loans are adjustable-rate loans.
The majority of adjustable-rate loans in the portfolio are originated outside of
Union, Fairfield, and Laurens County by third party originators. The Corporation
has established a network of third party loan brokers who originate loans for
the Corporation, as well as other originators, throughout the state of South
Carolina. These loans are originated and underwritten using the same terms and
conditions as loans originated by the Corporation. The Corporation 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, 2001, the
Corporation had approximately $37.9 million of ARMs, or 24.1% of the
Corporation's total loans receivable.

         At September 30, 2001, 40.4% of the Corporation's loan portfolio
consisted of long-term, fixed-rate real estate loans. Because of this high
concentration of fixed-rate loans, the Corporation is more vulnerable to a
reduction in net interest income during periods of increasing market interest
rates. 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.

         The Corporation sells a portion of its loan production to Freddie Mac.
The Corporation sells fixed-rate loans with maturities ranging from ten to 30
years. This activity is one method used by the Corporation to reduce its
interest rate risk exposure. The loans are sold without recourse and the
Corporation retains 25 basis points for servicing these loans. During the year
ended September 30, 2001, the Corporation sold approximately $32.9 million of
its fixed-rate mortgage loans. During the fourth quarter of fiscal 2000, the
Corporation sold approximately $250 million or

                                        5

<PAGE>

approximately 80% of the loan servicing portfolio. As a result of this sale, the
Corporation phased its wholesale mortgage unit during the third quarter of the
current fiscal year.

         The Corporation purchases participation interests from other financial
institutions on a selected basis. These purchased interests are on
adjustable-rate loans and are collateralized by either residential or commercial
real estate. At September 30, 2001, these interests totaled approximately
$353,000.

         Commercial real estate loans constituted approximately $1.9 million, or
1.2%, of the Corporation's loan portfolio at September 30, 2001. Commercial real
estate loans consist of permanent loans secured by multi-family properties,
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 have been
originated and purchased for inclusion in the Corporation's portfolio. These
loans generally have 20 to 30 year amortization schedules and are callable or
have balloon payments after five to ten years. Typically, the loan documents
provide for adjustment of the interest rate every one to three years. Fixed-rate
loans secured by multi-family residential and commercial properties have terms
ranging from 20 to 25 years.

         Loans secured by commercial properties may involve greater risk than
single-family residential loans. Such loans generally are substantially larger
than single-family residential loans. 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 Corporation engages in construction lending
that is primarily secured by single family residential real estate and, to a
much lesser extent, commercial real estate. These loans are made for a maximum
12-month construction period and require monthly interest payments. In some
cases these loans automatically convert to a permanent loan requiring monthly
principal and interest payments. The Corporation also 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 Corporation's primary source for construction
loans. The loan broker sends the Corporation 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 Corporation 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: (i) the concentration of principal among
relatively few borrowers and development projects; (ii) the increased difficulty
at the time the loan is made of estimating the building costs and selling price
of the residence to be built; (iii) the increased difficulty and costs of
monitoring the loan; (iv) the higher degree of sensitivity to increases in
market rates of interest; and (v) the increased difficulty of working out loan
problems. Speculative construction loans have the added risk associated with
identifying an end-purchaser for the finished home.

         At September 30, 2001, the Corporation had approximately $6.2 million
outstanding in construction loans, including approximately $6.1 million in
undisbursed proceeds. Of the $6.2 million in construction loans at September 30,
2001, approximately $1.2 million were "speculative," meaning that, at the time
the loan was made, there was no sales contract or permanent loan in place for
the finished home. Substantially all of these loans were secured by one- to
four-family residences.

         Consumer Loans. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of the
institution's assets. In addition, a federal thrift institution has lending
authority above the 35% category for certain consumer loans, such as home equity
loans, property improvement loans,

                                        6

<PAGE>

mobile home loans and loans secured by savings accounts. The Corporation's
consumer loan portfolio consists primarily of automobile loans on new and used
vehicles, mobile home loans, boat loans, home equity loans, property improvement
loans, loans secured by savings accounts and unsecured loans. As of September
30, 2001, consumer loans amounted to $20.6 million, or 13.1% of the
Corporation's total loan portfolio. The Corporation makes consumer loans to
serve the needs of its customers and as a way to improve the interest-rate
sensitivity of the Corporation'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 Corporation makes commercial business loans
primarily in its market area to small businesses. The Corporation 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 Corporation considers the financial
statements of the borrower, the borrower's payment history of both corporate and
personal debt, the debt service capabilities of the borrower, the projected cash
flows of the business, the viability of the industry in which the customer
operates and the value of the collateral. Commercial loans are generally secured
by a variety of collateral, primarily accounts receivable, inventory and
equipment, and are generally supported by personal guarantees. Depending on the
collateral used to secure the loans, commercial loans are made in amounts of up
to 80% of the value of the collateral securing the loan. The Corporation's
largest commercial loan relationship was a $2.5 million loan secured by
assignment of real estate mortgages located in Greenville, South Carolina. This
loan was performing according to its original terms at September 30, 2001.

         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 Corporation 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 Corporation 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 $150,000 in unsecured credit. The
Board of Directors has appointed an Executive Loan Committee comprised of four
senior executive Bank officers. This Committee has the authority to approve all
loan requests up to and including $500,000 in secured credit and up to and
including $150,000 in unsecured credit. A quorum of two members is required for
any action. The Board of Directors has also 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 up to the Bank's
legal lending limit with the exception of a single loan request exceeding
$1,000,000 in secured credit and

                                        7

<PAGE>

exceeding $300,000 in unsecured credit. Single loan requests exceeding
$1,000,000 in secured credit and $300,000 in unsecured credit require approval
of the entire Board of Directors.

         Loan applicants are promptly notified of the decision of the
Corporation 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 Corporation. The Corporation also issues a
commitment letter to the potential borrower which typically remains in effect
for 60 days. The Corporation's experience is that very few commitments go
unfunded. See "Loan Commitments." The borrower is required to pay all costs of
the Corporation's origination cost, as well as his/her own costs, incurred in
connection with the particular loan closing.

         The Board of Directors has appointed a second review loan committee to
review all denied loan applications. This committee reviews the rationale used
to deny credit and reviews denied applications for the possibility of being able
to supply credit under a different loan program, or under different terms and
conditions. Every attempt is made to supply credit to creditworthy applicants in
a manner consistent with their needs.

         Loan Originations, Purchases and Sales. The Corporation may sell a
portion of its current long-term, fixed-rate loan production to Freddie Mac on a
servicing-retained basis. These are cash sales with no recourse provisions. The
Corporation receives 25 basis points for servicing these loans.

         Mortgage operations purchases the loans from mortgage brokers primarily
located in South Carolina. The loan types purchased are primarily adjustable
rate residential loans. In addition, construction/permanent loans are also
purchased. Mortgage operations had total purchases through the broker network of
$30.8 million with loan sales of $32.8 million in fiscal 2001. The Corporation
reduced broker loan purchases during fiscal 2001 in order to provide an
increased capital allocation for consumer and commercial lending. At September
30, 2001 the Bank was servicing $65.9 million of loans for others.

         The Corporation 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.

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

<TABLE>
<CAPTION>
                                                               Year Ended September 30,
                                                   -------------------------------------
                                                     2001           2000         1999
                                                   --------      ---------     ---------
<S>                                                <C>           <C>           <C>
Loans originated:
   First mortgage loans:
      Loans on existing property................    $28,795        $34,321      $153,665
      Construction loans........................     11,726         16,526        17,635
                                                    -------        -------      --------
         Total mortgage loans originated .......     40,521         50,847       171,300
                                                    -------        -------
Consumer and other loans........................     42,826         28,880        29,208
                                                    -------        -------      --------
         Total loans originated.................    $83,347        $79,727      $200,508
                                                    =======        =======      ========

Loans purchased.................................     30,851         44,102       108,962
Loans sold......................................    $32,868        $43,508      $108,746
</TABLE>


         Loan Commitments. The Corporation's commitments to make conventional
mortgage loans on existing residential dwellings are normally made for periods
of up to 30 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 Corporation 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

                                        8

<PAGE>

terms and conditions. The Corporation does not receive origination fees on
broker loans, but does receive a $150 review fee. The Corporation also offers
loan products that require no origination fees to walk-in customers. Other fees
collected include late charges applied to delinquent payments and fees collected
in connection with loan modifications. The Corporation 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 Corporation's
portfolio where applicable. The 5% late charge is calculated on the delinquent
monthly principal and interest payment amount. 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, 2001, the Corporation had net deferred
loan fees of approximately $251,000.

         Problem Assets. When a borrower fails to make a required payment on a
loan, the Corporation 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 Corporation's normal collection
procedures, or an acceptable arrangement is not worked out with the borrower,
the Corporation 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 4 of Notes to Consolidated Financial
Statements.

         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 non accrual 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.

         Real estate acquired by the Corporation as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned below. 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.

                                        9

<PAGE>

     The following table sets forth information with respect to the
Corporation's non-performing assets for the periods indicated (dollars in
thousands). It is the policy of the Corporation to cease accruing interest on
loans 90 days or more past due. As of and for the years ended September 30, 2001
and 2000, loans totaled $121,075 and $55,951 respectively, that were classified
within the meaning of Statement of Financial Accounting Standards ("SFAS") No.
15. 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:

<TABLE>
<CAPTION>
                                                                                 At September 30,
                                                              ------------------------------------------------------
                                                               2001        2000        1999        1998        1997
                                                              ------      ------      ------      ------      ------
<S>                                                           <C>         <C>         <C>         <C>         <C>
Loans accounted for on a nonaccrual basis:
   Real estate:
     Residential ........................................       $626      $  763        $ 43        $581        $751
     Commercial .........................................        160         247          --          --          --
   Consumer .............................................          9         106         141         115          27
                                                                ----      ------        ----        ----        ----
     Total ..............................................        795       1,116         184         696         778
                                                                ----      ------        ----        ----        ----

Accruing loans which are contractually
   past due 90 days or more .............................         --          --          --          --          --
Real estate owned, net ..................................         77         459         241          35           1
                                                                ----      ------        ----        ----        ----
       Total non-performing assets ......................       $872      $1,575        $425        $731        $779
                                                                ====      ======        ====        ====        ====

Percentage of loans receivable net ......................       0.56%       0.94%       0.28%       0.55%       0.60%
                                                                ====      ======        ====        ====        ====
</TABLE>

     Interest income that would have been recorded for the year ended September
30, 2001 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $90,000. There was no interest included in
interest income on such loans for the year ended September 30, 2001.

     Allowance for Loan Losses. In originating loans, the Corporation 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 Corporation 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 Corporation 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 loan categories increase and decrease in
balance, the provision for loan loss calculation will adjust accordingly.

     While the Corporation 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 Corporation's loan
portfolio, will not request the Corporation 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

                                       10

<PAGE>

may adversely affect the Corporation's financial condition and results of
operations. Management periodically evaluates the adequacy of the allowance
based upon historical delinquency rates, the size of the Corporation's loan
portfolio and various other factors. See Notes 1 and 4 of Notes to Consolidated
Financial Statements for information concerning the Corporation's provision and
allowance for possible loan losses.

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

<TABLE>
<CAPTION>
                                                                                       At September 30,
                                                           ----------------------------------------------------------------
                                                             2001          2000          1999           1998          1997
                                                           -------       -------       -------        -------       -------
<S>                                                        <C>           <C>           <C>            <C>           <C>
Balance at beginning of year .......................        $1,360        $  836         $ 827          $ 928         $ 799
                                                            ------        ------        ------          -----         -----
Loans charged off:
   Real estate:
      Residential ..................................          (180)          (85)           --             --            --
      Commercial ...................................          (211)           --            --             --            --
   Consumer ........................................          (176)         (129)         (106)          (127)         (165)
                                                            ------        ------         -----          -----         -----
         Total charge-offs .........................          (567)         (214)         (106)          (127)         (165)
                                                            ------        ------         -----          -----         -----
Recoveries:
   Real estate:
      Residential ..................................             4            --            --             --            --
      Commercial ...................................             8            --            --             --            --
   Consumer ........................................            35            64            10             26            51
                                                            ------        ------         -----          -----         -----
         Total recoveries ..........................            47            64            10             26            51
                                                            ------        ------         -----          -----         -----
Net charge-offs ....................................          (520)         (150)          (96)          (101)         (114)
                                                            ------        ------         ------         -----
Merger additions ...................................            --           449            --             --            --
Provision for loan losses (1) ......................           240           225           105             --           243
                                                            ------        ------         -----          -----         -----
Balance at end of year .............................        $1,080        $1,360         $ 836          $ 827         $ 928
                                                            ======        ======         =====          =====         =====

Ratio of net charge-offs to average gross
   loans outstanding during the period .............          0.32%         0.08%         0.07%          0.07%         0.09%
                                                            ======        ======         =====          =====         =====
</TABLE>

______________________
(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 Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $520,000 in fiscal 2001 compared to $150,000 for fiscal 2000. The
increase in bad debt charge-offs over the previous year includes approximately
$210,000 from two commercial loan customers that filed for bankruptcy. The
allowance for loan losses to total loans ratio at the end of fiscal 2001 was
 .67% compared to .80% at the end of fiscal 2000. Nonperforming assets which
includes repossessed assets and loans on non accrual decreased to $872,000 at
September 30, 2001 from $1,575,000 at September 30, 2000.

                                       11

<PAGE>

     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):

<TABLE>
<CAPTION>
                                                                    At September 30,
                       -------------------------------------------------------------------------------------------------------------
                              2001                   2000                   1999                 1998                    1997
                       -------------------   --------------------   ------------------------------------------   -------------------
                               % of Loans             % of Loans            % of Loans             % of Loans            % of Loans
                                 in Each                in Each               in Each                in Each               in Each
                               Category to            Category to           Category to            Category to           Category to
                       Amount  Total Loans   Amount   Total Loans   Amount  Total Loans   Amount   Total Loans   Amount  Total Loans
                       ------  -----------   ------   -----------   ------  -----------   ------   -----------   ------  -----------
<S>                    <C>     <C>           <C>      <C>           <C>     <C>           <C>      <C>           <C>     <C>
Real estate:
   Residential ......  $  400      73.55%    $  600       79.76%      $400       80.77%     $400       85.90%      $400     83.49%
   Commercial .......     100       1.23        200        2.89         75        2.12       100        2.90        162      4.88
Consumer ............     500      25.22        500       17.35        311       17.11       277       11.20        266     11.63
Unallocated .........      80        N/A         60         N/A         50         N/A        50         N/A        100       N/A
                       ------    -------     ------     -------       ----     -------      ----     -------       ----   -------
Total allowance
   for loan losses ..  $1,080     100.00%    $1,360      100.00%      $836      100.00%     $827      100.00%      $928    100.00%
                       ======    =======     ======     =======       ====     =======      ====     =======       ====   =======
</TABLE>

     The Corporation 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 4 of Notes to Consolidated Financial
Statements.

     Asset Classification. The OTS requires savings institutions to classify
problem assets. Under this classification system, problem assets of insured
institutions are classified as "substandard," "doubtful" or "loss," depending on
the presence of certain characteristics. An asset is considered "substandard" if
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 OTS which can order the
establishment of additional general or specific loss allowances.


                                       12

<PAGE>

     The following tables set forth the number and amount of classified loans at
September 30, 2001 (dollars in thousands):


<TABLE>
<CAPTION>

                                 Loss                  Doubtful            Substandard       Special Mention
                           ------------------  --------------------  --------------------  -------------------
                           Number     Amount     Number     Amount     Number     Amount     Number     Amount
                           ------------------  --------------------  --------------------  -------------------
<S>                        <C>        <C>      <C>          <C>      <C>          <C>      <C>         <C>
Real estate:

   Residential............     --    $    --         --     $   --         21      $  734        61     $2,440

   Commercial.............     --         --         --         --          2       1,117         3        177

Consumer..................     --         --         --         --         12         242        24        915

                           ------    -------     ------     ------     ------      ------    ------     ------
   Total..................     --    $    --         --     $   --         35      $2,093        88     $3,532
                           ======    =======     ======     ======     ======      ======    ======     ======
</TABLE>

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." The Corporation currently does not use or maintain a
trading account. Such securities are reported at fair value, and unrealized
gains and losses on such securities would be included in earnings. 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):

<TABLE>
<CAPTION>

                                                                        At September 30,
                                          --------------------------------------------------------------------------
                                                   2001                     2000                     1999
                                          -----------------------  -----------------------  ------------------------
                                          Carrying   Percent of    Carrying    Percent of   Carrying    Percent of
                                           Value     Portfolio      Value      Portfolio      Value     Portfolio

                                          ---------- ------------  ----------  -----------  ----------  ------------
<S>                                      <C>         <C>           <C>         <C>          <C>         <C>
Available for sale:
   Investment securities:
      U.S. Agency obligations............  $13,494       17.35%       $15,286     52.28%      $13,930       50.96%
      Municipal securities...............    9,726       12.50          1,669      5.71         1,576        5.76
                                           -------      ------        -------    ------       -------      ------
         Total investment securities.....   23,220       29.85         16,955     57.98        15,506       56.72
                                           -------      ------        -------    ------       -------      ------
   Mortgage-backed and
         related securities..............   54,582       70.15         12,285     42.02        11,829       43.28
                                           -------      ------        -------    ------       -------      ------
         Total available for sale........  $77,802      100.00%       $29,240    100.00%      $27,335      100.00%
                                           =======      ======        =======    ======       =======      ======

Held to Maturity:
   Investment securities:
      U.S. Agency obligations............  $   950        8.40%       $ 2,477      6.58%      $     -           -%
      Mortgage-backed and related
         securities......................   10,365       91.60         35,175     93.42         5,586      100.00
                                           -------      ------        -------    ------       -------      ------
         Total held to maturity..........  $11,315      100.00%       $37,652    100.00%      $ 5,586      100.00%
                                           =======      ======        =======    ======       =======      ======
</TABLE>

          During the quarter ended December 31, 2000 the Corporation
reclassified approximately $24,000,000 in mortgage backed securities from 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 adjustable-rate Small
Business Administration securities that are backed by the full faith and credit
of the U.S. government.

                                       13

<PAGE>

     The Corporation also purchases mortgage derivative securities in the form
of collateralized mortgage obligations ("CMOs") and structured notes. While
these securities possess minimal credit risk due to the Federal guarantee
backing the U. S. government agencies, they do posses liquidity risk and
interest rate risk. The amortized cost of the CMOs at September 30, 2001 was
approximately $13.6 million with a fair value of $13.2 million. The Corporation
has purchased structured notes for investment purposes. These include step-up
bonds, single-index floaters and dual-index floaters. While all financial
instruments are subject to interest rate risk and liquidity risk, structured
notes are more sensitive to changes in interest rates and differing note
structures (call provision, rate adjustments, etc.). The Corporation had
approximately $1.1 million in structured notes as of September 30, 2001 with a
fair value of approximately $1.2 million as of that date. See Note 3 of Notes to
Consolidated Financial Statements for more information regarding investment and
mortgage-backed securities.

                                       14

<PAGE>

     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, 2001 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                          Amount Due or Repricing within:
                                             ---------------------------------------------------------------------------------------
                                                  One Year             Over One to          Over Five to              Over
                                                  or Less              Five Years            Ten Years              Ten Years
                                             -------------------  -------------------- --------------------  -----------------------
                                                       Weighted              Weighted             Weighted                Weighted
                                             Carrying  Average    Carrying    Average   Carrying   Average    Carrying     Average
                                              Value     Yield      Value      Yield      Value      Yield       Value      Yield
                                             --------- ---------  --------  ---------  ---------- --------   ----------  ---------
<S>                                          <C>       <C>        <C>       <C>        <C>        <C>        <C>         <C>
Available for Sale:
   Investment securities:
      U.S. Agency obligations .............  $      --        --% $ 1,826        5.96%    $    --       --%   $  10,600       6.98%
      Municipal securities (1) ............         --        --      201        6.03          --       --        9,687       6.28
                                             --------- ---------  -------   ---------  ----------  -------    ---------  ---------
        Total investment securities .......         --        --    2,027        5.97          --       --       20,287       6.65
   Mortgage-backed and related
        securities ........................        104      6.99%      --          --       3,726     5.94%      51,658       6.04
                                             --------- ---------  -------   ---------  ----------  -------    ---------  ---------
        Total available for sale ..........  $     104      6.99% $ 2,027        5.97%    $ 3,726     5.94%   $  71,945       6.21%
                                             ========= =========  =======   =========  ==========  =======    =========  =========

Held to Maturity:
   Investment securities:
      U.S. Agency obligations .............  $     250      7.04% $   706        5.86%    $    --       --%   $      --         --%
      Mortgage-backed and related
        securities ........................         --        --       --          --          --       --       10,359       5.86
                                             --------- ---------  -------   ---------  ----------  -------    ---------  ---------
        Total held to maturity ............  $     250      7.04% $   706        5.86%         --       --    $  10,359       5.86%
                                             ========= =========  =======   =========  ==========  =======    =========  =========

<CAPTION>
                                                                     -------------------------

                                                                               Total
                                                                     -------------------------
                                                                                      Weighted
                                                                         Carrying      Average
                                                                           Value        Yield
                                                                     -------------   ---------
<S>                                                                  <C>              <C>
Available for Sale:
   Investment securities:
      U.S. Agency obligations ....................................       $  12,426      6.83%
      Municipal securities (1) ...................................           9,888      6.27
                                                                         ---------  --------
        Total investment securities ..............................          22,314      6.58
   Mortgage-backed and related securities ........................          55,488      6.04
                                                                         ---------  --------
        Total available for sale .................................       $  77,802      6.19%
                                                                         =========  ========

Held to Maturity:
   Investment securities:
      U.S. Agency obligations ....................................       $     956      6.17%
      Mortgage-backed and related securities .....................          10,359      5.86
                                                                         ---------  --------
         Total held to maturity ..................................       $  11,315      5.89%
                                                                         =========  ========
</TABLE>

____________________________
(1)  Yields are presented on a fully taxable equivalent basis.

                                       15

<PAGE>

          At September 30, 2001, approximately $8.6 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 2001, the Corporation experienced a net increase in deposits of
approximately $6.1 million due to the result of various deposit promotion
programs with continued emphasis on increasing core deposits. The Corporation
borrowed funds to support the remaining growth experienced in fiscal 2001.

          Deposits. Local deposits are, and traditionally have been, the primary
source of the Corporation's funds for use in lending and for other general
business purposes. The Corporation 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 Corporation adjusts the interest rates offered on its deposit
accounts as necessary so as to remain competitive with other financial
institutions in Union, Laurens and Fairfield County.

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

<TABLE>
<CAPTION>
                                                                          At September 30,
                                                             --------------------------------------
                                                                2001          2000           1999
                                                             ----------     --------       --------
          <S>                                                <C>            <C>            <C>
          Up to 4.0%......................................    $ 18,152      $    440       $    558
          4.01% to 6.0%...................................      98,064        53,052         95,163
          6.01% to 8.0%...................................      24,187        88,666          5,972
                                                              --------      --------       --------

                Total savings certificates................    $140,403      $142,158       $101,693
                                                              ========      ========       ========
</TABLE>

The following table sets forth the maturities of time deposits at September 30,
2001 (in thousands):

                                                             Amount
                                                            --------

          Within three months.............................  $ 48,668
          After three months but within six months........    31,756
          After six months but within one year............    36,339
          After one year but within three years...........    22,313
          After three years but within five years.........     1,278
          After five years but within ten years...........        49
                                                            --------
                Total.....................................  $140,403
                                                            ========

          Certificates of deposit with maturities of less than one year
decreased from $118.8 million at September 30, 2000 to $116.8 million at
September 30, 2001. 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.



                                       16

<PAGE>

The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of September 30,
2001 (in thousands). Jumbo certificates of deposit are certificates in amounts
of $100,000 or more.

                        Maturity Period                     Amount
                        ---------------                     ------

          Three months or less ...........................   $  13,129
          Over three through six months ..................       8,627
          Over six months through 12 months ..............       9,753
          Over 12 months. ................................       6,002
                                                             ---------
               Total jumbo certificates ..................   $  37,511
                                                             =========

          See Note 7 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 and security repurchase
agreements) 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):

<TABLE>
<CAPTION>
                                                                    At September 30,
                                                   ---------------------------------------------------
                                                        2001               2000               1999
                                                   -------------      -------------      -------------
<S>                                                <C>                <C>                <C>
Balance outstanding at end of period:
   FHLB advances and other borrowings...........      $57,007            $47,687            $46,503

Weighted average rate paid on:
   FHLB advances and other borrowings...........         5.92%              6.28%              5.17%

                                                                Year Ended September 30,
                                                   ---------------------------------------------------
                                                        2001               2000               1999
                                                   -------------      -------------      -------------

Maximum amount of borrowings
   outstanding at any month end:
     FHLB advances and other borrowings.........      $57,007            $55,852            $46,503

Approximate average short-term borrowings
   outstanding with respect to:
     FHLB advances and other borrowings.........       47,169             17,927             39,452

Approximate weighted average rate paid on:
     FHLB advances and other borrowings.........         5.41%              6.57%              5.05%
</TABLE>

          At September 30, 2001, the Corporation had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $15 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, 2001, the Corporation had
unused lines of credit with the FHLB of Atlanta totaling $29 million.

Subsidiary Activities

          Under OTS regulations, the Bank generally may invest up to 3% of its
assets in service corporations, provided that at least one-half of the
investment in excess of 1% is used primarily for community, inner-city and
community development projects. In 1997, the Bank formed Provident Financial
Services, Inc. for the purpose of engaging in securities brokerage activities
for the benefit of the Bank's customers.



                                       17

<PAGE>

Employees

          The Corporation has 70 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

          As a savings and loan holding company, Union Financial is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Bank is subject to extensive regulation, examination
and supervision by the OTS, as its primary federal regulator, and the FDIC, as
the deposit insurer. The Bank is a member of the FHLB and its deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The Bank
must file reports with the OTS 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 savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. 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 OTS, the
FDIC or the Congress, could have a material adverse impact on Union Financial,
the Bank and their operations. Certain of the regulatory requirements applicable
to the Bank and to Union Financial are referred to below or elsewhere herein.
The description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this report does not
purport to be a complete description of such statutes and regulations and their
effects on Union Financial and the Bank.

Holding Company Regulation

          Union Financial is a nondiversified unitary savings and loan holding
company within the meaning of federal law. Under prior law, a unitary savings
and loan holding company, such as the Company, was not generally restricted as
to the types of business activities in which it may engage, provided that the
Bank continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation-QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test.
The Company does qualify for the grandfathered activities. Upon any
non-supervisory acquisition by Union Financial of another savings institution or
savings bank that meets the qualified thrift lender test and is deemed to be a
savings institution by the OTS, Union Financial would become a multiple savings
and loan holding company (if the acquired institution is held as a separate
subsidiary) and would generally be limited to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject
to the prior approval of the OTS, and certain activities authorized by OTS
regulation.

          A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.

          The OTS may not approve any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in

                                       18

<PAGE>

another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.

          Although savings and loan holding companies are not subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the OTS 30 days before declaring any dividend to Union Financial. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.

          Acquisition of the Company. Under the Federal Change in Bank Control
act ("CIBCA"), a notice must be submitted to the OTS if any person (including a
company), a group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the Office of Thrift Supervision has
found that the acquisition will not result in a change in control of the
Company. Under the CIBCA, the OTS 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. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.

Federal Savings Institution Regulation

          Business Activities. The activities of federal savings institutions
are governed by federal law and regulations. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
association, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.

          Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) 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 standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier I
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank.

          The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary 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%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is 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 components of
supplementary capital currently 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 values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.

          The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk component. At September 30, 2001, the
Bank met each of its capital requirements.

                                       19

<PAGE>

          The following table presents the Bank's capital position at September
30, 2001.

<TABLE>
<CAPTION>
                                                                                          Capital
                                                                            ----------------------------------
                          Actual           Required           Excess             Actual           Required
                          Capital          Capital            Amount             Percent          Percent
                    ------------------  --------------  ------------------  ----------------  ----------------
                                                      (Dollars in thousands)
<S>                 <C>                 <C>             <C>                 <C>               <C>
Tangible           $17,812              $  4,086             $13,726                6.54%           1.50%
Core (Leverage)     17,812                10,896               6,916                6.54            4.00
Risk-based          18,892                11,864               7,028               12.74            8.00
</TABLE>

          Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier I (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier I capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings 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 OTS 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 OTS within 45 days of the date a savings 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 OTS 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 presently
insured by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.

          The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what
insurance assessment rates will be in the future.

          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. During 2000,
FICO payments for SAIF members approximated 2.07 basis points.

          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 FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.

                                       20

<PAGE>

          Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
September 30, 2001, the Bank's limit on loans to one borrower was $2.7 million,
and the Bank's largest aggregate outstanding balance of loans to one borrower
was $2 million.

          QTL Test. Federal law requires savings institutions to meet a
qualified thrift lender test. Under the test, a savings association is required
to either qualify as a "domestic building and loan association" under the
Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total
assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least nine months out of each 12 month period.

          A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2001, the Bank met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."

          Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. Under the regulations, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
safety and soundness, compliance and Community Reinvestment Act examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution if, like the Bank, it is a subsidiary of a holding company. If the
Bank's capital fell below its regulatory requirements or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

          Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank in the fiscal year
ended September 30, 2001 totaled $64,343.

          Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings 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 federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.

          The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms

                                       21

<PAGE>

substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. An exception exists 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. The law limits both the individual and aggregate amount of
loans the Bank may make to insiders based, in part, on the Bank's capital
position and requires certain board approval procedures to be followed.

          Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including 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, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.

          Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.

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-Atlanta, is required to acquire and
hold shares of capital stock in the Federal Home Loan Bank-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-Atlanta, whichever is greater. The Bank was in compliance with this
requirement with an investment in Federal Home Loan Bank stock at September 30,
2001, of $2.6 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.

Federal Reserve System

          The Federal Reserve Board 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: a
3% reserve ratio is assessed on net transaction accounts over $5.7 million to
and including $41.3 million and a 10% reserve ratio is applied above $41.3
million. The first $5.7 million of otherwise reservable balances are exempted
from the reserve requirements. The Bank complies with the foregoing
requirements.

                                       22

<PAGE>

                           FEDERAL AND STATE TAXATION

Federal Taxation

          General. Union Financial and the Bank report their income on a fiscal
year, consolidated basis and the accrual method of accounting, and are subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to Union Financial or the Bank. For its 2001 taxable year, Union Financial is
subject to a maximum federal income tax rate of 34%.

          Bad Debt Reserves. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code were permitted to use certain
favorable provisions to calculate their deductions from taxable income for
annual additions to their bad debt reserve. A reserve could be established for
bad debts on qualifying real property loans (generally secured by interests in
real property improved or to be improved) under (i) the percentage of taxable
income method or (ii) the experience method. The reserve for nonqualifying loans
was computed using the experience method.

          Congress repealed the reserve method of accounting for bad debts for
tax years beginning after 1995 and required savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. Thrift institutions eligible to be treated as "small banks" (assets of
$500 million or less) are allowed to use the experience method applicable to
such institutions, while thrift institutions that are treated as large banks
(assets exceeding $500 million) are required to use only the specific charge-off
method. Thus, the percentage of taxable income method of accounting for bad
debts is no longer available for any financial institution.

          A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Internal Revenue Service. Any Section 481(a) adjustment required to be taken
into income with respect to such change generally will be taken into income
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995, subject to a 2-year suspension if the "residential loan
requirement" is satisfied.

          Under the residential loan requirement provision, the required
recapture will be suspended for each of two successive taxable years, beginning
with the Bank's 1996 taxable year, in which the Bank originates a minimum of
certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding its current
taxable year.

          Distributions. If the Bank makes "non-dividend distributions" to Union
Financial, such distributions will be considered to have been made from the
Bank's unrecaptured tax bad debt reserves (including the balance of its reserves
as of December 31, 1987) to the extent thereof, and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in its income.

          The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to Union Financial, approximately one and one-half times the amount
of such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.

                                       23

<PAGE>

State Taxation

          South Carolina. The Bank is subject to tax under South Carolina law.
South Carolina law allows a savings and loan association to use the federal bad
debt deduction method for the purpose of computing net income subject to state
tax, and the present South Carolina tax rate on taxable income is 6%. In order
to calculate taxable income for South Carolina taxation purposes, a corporation
begins with its federal taxable income and then modifies it to take into account
certain adjustments. Adjustments which would be common to most financial
institutions include an addition for state taxes deducted on the federal return,
and a subtraction for interest on certain federal obligations and securities.
South Carolina income tax is deductible for federal income tax purposes. In
addition, Union Financial is subject to South Carolina taxes as a regular
corporation and pays taxes based on its shareholders' equity.

          Delaware. As a Delaware holding company not earning income in
Delaware, Union Financial is exempted from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.

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

          The Corporation owns its main office, located at 203 West Main Street
in Union, South Carolina, which was opened in 1977. At September 30, 2001, the
Corporation also owned a banking center which opened in April 1989, located at
508 North Duncan By-Pass, Union, South Carolina, a branch office, acquired in
1997, in Laurens, South Carolina, a lending and investment center located in
Union, South Carolina and a branch office in Jonesville, South Carolina. As a
result of the merger with South Carolina Community Bancshares in November 1999,
the Corporation acquired two branch locations in Winnsboro, South Carolina. The
net book value of the Corporation's investment in premises and equipment totaled
approximately $7.2 million at September 30, 2001. See Note 5 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, 2001.

                                       24

<PAGE>

                                     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.

                                    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.

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:

                             Position as of
Name                Age(1)   September 30, 2001
----                ------   ------------------

Dwight V. Neese       51     President, Chief Executive Officer and Director
Richard H. Flake      53     Executive Vice President - Chief Financial Officer
Anthony E. Lawton     38     Senior Vice President - Chief Credit Officer
Wanda J. Wells        45     Vice President - Corporate Secretary

-------------
(1)       At September 30, 2001.

          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 Provident Community Bank and the Corporation, 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.

                                       25

<PAGE>

          Anthony E. Lawton joined Union Financial in January 2000. Prior to
          joining Union Financial, Mr. Lawton was Senior Vice President for
          Anchor Bank in Clinton, 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.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

          (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.

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.

                                       26

<PAGE>

                                     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(4)
            10(b)   Employment Agreement with Richard H. Flake(2)
            10(c)   Union Financial Bancshares, Inc. 1995 Stock Option Plan(5)
            10(d)   Union Financial Bancshares, Inc. 2000 Stock Option Plan(6)
            13      2001 Annual Report to Shareholders
            21      Subsidiaries of the Registrant
            23      Consent of Independent Auditor

       (b)  There were no reports on Form 8-K filed during the fourth quarter
            of fiscal 2001.

----------
(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 Union Financial's Form 10-KSB for the
       year ended September 30, 1996.
(5)    Incorporated herein by reference to Exhibit A to Union Financial's Proxy
       Statement for its 1996 Annual Meeting of Stockholders.
(6)    Incorporated herein by reference to Appendix A to Union Financial's Proxy
       Statement for its 2000 Annual Meeting of Stockholders.

                                       27

<PAGE>


                                   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 18, 2001                   By:    /S/ Dwight V. Neese
                                                  -----------------------------
                                                  Dwight V. Neese
                                                  President and Chief Executive
                                                  Officer
                                                  Duly Authorized
                                                  Representative

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



By:      /s/ Dwight V. Neese               By:    /s/ Carl L. Mason
         -----------------------------            -----------------------------
         Dwight V. Neese                          Carl L. Mason
         (Principal Executive Officer)            Director

Date:    December 18, 2001                 Date:  December 18, 2001

By:      /s/ Richard H. Flake              By:    /s/ John S. McMeekin
         --------------------------               -----------------------------
         Richard H. Flake                         John S. McMeekin
         (Principal Financial and                 Director
         Accounting Officer)
                                           Date:  December 18, 2001
Date:    December 18, 2001
                                           By:    /s/ Philip C. Wilkins
By:      /s/ Mason G. Alexander                   -----------------------------
         --------------------------               Philip C. Wilkins
         Mason G. Alexander                       Director
         Director
                                           Date:  December 18, 2001
Date:    December 18, 2001

By:      /s/ James W. Edwards
         --------------------------
         James W. Edwards
         Director

Date:    December 18, 2001

By:      /s/ William M. Graham
         --------------------------
         William M. Graham
         Director


Date:    December 18, 2001

By:      /s/ Louis M. Jordan
         --------------------------
         Louis M. Jordan
         Director

Date:    December 18, 2001