<PAGE>

                                 EXHIBIT NO. 13

                       1999 Annual Report to Shareholders
<PAGE>

December 1999



Dear Fellow Shareholder:

As the twentieth century draws to a close, the Associates of Union Financial
Bancshares and Provident Community Bank are proud of our sixty-five-year
heritage of providing quality financial products and services in the upstate of
South Carolina. But more importantly, we are genuinely excited about the future
of our company as we turn the corner on Y2K and begin the new millennium.

Union Financial Bancshares and Provident Community Bank are stronger today than
ever before. We are strategically focused on enhancing shareholder value through
improved profitability and consistent growth. We believe, however, that Charles
Darwin was right when he observed, "It is not the strongest of the species that
survive, nor the most intelligent, but the one most responsive to change." All
the associates of Union Financial Bancshares and Provident Community Bank
enthusiastically embrace change as the key to our success in the new millennium.

Before going into depth about our initiatives to prepare for the future, I am
pleased to report on the current condition of our company and the progress made
during the last year. The Bank's net income increased from $1.550 million in
fiscal 1998 to $1.676 million in fiscal 1999, an increase of 8.13%. Earnings per
share of common stock in fiscal 1999 totaled $1.26, up 7.7% from the previous
year. Return on average assets for fiscal 1999 was 0.85%, down slightly from the
previous year. Return on average shareholders' equity, however, was up
significantly from 10.77% in fiscal 1998 to 10.96% in fiscal 1999. The Bank's
operating expense ratio fell from 2.52% at the end of 1998 to 2.43% at the end
of fiscal 1999. Total assets of $205.3 million at 1999 fiscal year end were up
$16 million over total assets of $189.3 million at 1998 fiscal year end, an
increase of 8.46%. The continued growth in total assets is primarily the result
of 5.06% growth in the Bank's loan portfolio. The Bank's total loans increased
$7.2 million while the consumer and commercial loan portfolio increased $10.5
million. In addition, Bank deposits increased $11.9 million.

The increased earnings and continued growth of Union Financial Bancshares and
Provident Community Bank are the result of continuous planning and hard work.
The company's rolling five-year Strategic Business Plan is reviewed, revised and
rewritten each year through a cooperative effort of the management team and
Board of Directors. The Plan not only provides the company with a clear vision
into its future, but it also establishes specific time-lines for meeting
strategic goals and objectives. The Plan provides flexibility for adjusting long
term goals and objectives to short-term needs as opportunities arise or changes
occur in the economic or regulatory environment. The five-year Strategic
Business Plan is the cornerstone of the company's planning process.

Two important initiatives started in the fall of 1998 were consummated in fiscal
1999. First, the acquisition of the deposits of CCB Financial's wholly-owned
subsidiary, American Federal Bank, FSB, (Union) was consummated in February
1999. This successful acquisition brought many new clients to Provident
Community Bank and allowed the Bank to increase its already leading market share
in Union County. Second, the construction of a new full-service Jonesville
Banking Center was completed and put into service in June 1999. The new design
features high-tech automation in a warm and friendly atmosphere. The Jonesville
Banking Center design will become the Bank's prototype for expansion in new
markets.


<PAGE>

Another upgrade completed in 1999 was the construction of the Duncan Bypass ATM
Park. Utilizing land the Bank already owned, this convenient new drive-up ATM is
a natural extension of Provident's existing Banking Center and the new Lending &
Investment Center one block to the north.

The most exciting initiative for calendar year 1999 was the announcement on July
1 that Union Financial Bancshares had entered into an agreement to acquire South
Carolina Community Bancshares, the parent company of Community Federal Savings
Bank, a $45 million savings bank in Winnsboro, South Carolina. Regulatory
approval was received quickly and the shareholders of both companies voted
overwhelmingly on November 9 to approve the merger. Because the closing on
November 12 occurred after Union Financial Bancshares' fiscal year ended on
September 30, 1999, the financial statements of the combined company will not be
reported until the first quarter of the new fiscal year ends on December 31,
1999.

The systems and operations conversions have been completed without complications
and we are now actively working on blending the corporate cultures of the two
companies. We are very pleased with the success of this merger and are already
experiencing the synergies expected from bringing two good companies together to
create an even better one.

The market for publicly traded bank and thrift stocks has only recently begun to
recover from the sell off that started in the summer of 1998. The officers and
Board of Directors of Union Financial Bancshares and Provident Community Bank
are continuously searching for ways to enhance the value of your investment in
our company. Early in the year the Board of Directors declared a 5% stock
dividend that was paid out in February 1999. Later in the year the Board of
Directors seized the opportunity created by the South Carolina Community
Bancshares merger to upgrade the stock listing of Union Financial Bancshares
from the NASDAQ SmallCap Market to the NASDAQ National Market System. Union
Financial's stock began trading on the National Market on November 15, 1999 and
continues to be traded under the ticker symbol "UFBS".

This has been an exciting year of improved profitability and growth for Union
Financial Bancshares. We are both pleased and proud to have you as a shareholder
in our company. Thank you for your continued interest and support.

Sincerely,


/s/ Dwight V. Neese
-------------------------------------
Dwight V. Neese
President and Chief Executive Officer


<PAGE>

                               Table of Contents
<TABLE>


            <S>                                                   <C>
             Business...........................................   3
             Selected Financial and Other Data..................   4
             Management's Discussion and Analysis of Financial
                 Condition and Results of Operations............   6
             Independent Auditor's Report.......................  12
             Consolidated Financial Statements..................  13
             Notes to Consolidated Financial Statements.........  18
             Directors and Leadership Group.....................  39
             Corporation Information............................  40

</TABLE>
                                ==============

                                    Business

      Union Financial Bancshares, Inc. ("Union Financial") is the savings and
      loan holding company for Provident Community Bank (formerly known as Union
      Federal Savings Bank), ("the Bank"). Union Financial has engaged in no
      significant activity other than holding the stock of the Bank and engaging
      in certain passive investment activities. Union Financial and the Bank are
      collectively referred to as "the Corporation" in this annual report.

      The Bank is a federally-chartered capital stock savings bank headquartered
      in Union, South Carolina. The Bank, originally chartered in 1934, is a
      member of the Federal Home Loan Bank System. Its deposits are insured to
      the maximum limits allowable by the Federal Deposit Insurance Corporation
      ("FDIC"). In August 1987, the Bank converted from a federal mutual savings
      and loan association to a federal capital stock savings and loan
      association. The Bank was known as Union Federal Savings and Loan
      Association until January 1992, when its shareholders approved a change to
      a federally chartered savings bank. In January, 1997, the Bank changed its
      name to Provident Community Bank.

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


<PAGE>

                       SELECTED FINANCIAL AND OTHER DATA

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


Operations Data:
----------------

<TABLE>
<CAPTION>
                                                                    Years Ended September 30,
                                              -------------------------------------------------------------
                                                  1999          1998          1997          1996           1995
                                                  ----          ----          ----          ----           ----
                                                       (Dollars In Thousands - Except Share Amounts)
<S>                                            <C>          <C>          <C>            <C>            <C>
Interest income                                $   14,046   $   13,405   $   11,855     $    9,004     $    9,265
Interest expense                                   (7,698)      (7,549)      (6,647)        (5,050)        (5,260)
                                               ----------   ----------   ----------     ----------     ----------
Net interest income                                 6,348        5,856        5,208          3,954          4,005
Provision for loan losses                            (105)          --         (243)            --           (105)
                                               ----------   ----------   ----------     ----------     ----------
Net interest income after
   provision for loan losses                        6,243        5,856        4,965          3,954          3,900
Other income                                        1,192        1,038          953            506            381
Other expense                                      (4,814)      (4,447)      (3,616)        (3,224)        (2,588)
                                               ----------   ----------   ----------     ----------     ----------

Income before income taxes                          2,621        2,447        2,302          1,236          1,693
Income tax expense                                   (945)        (897)        (858)          (374)          (639)
                                               ----------   ----------   ----------     ----------     ----------
Net income                                     $    1,676   $    1,550   $    1,444     $      862     $    1,054
                                               ----------   ----------   ----------     ----------     ----------

Income per common share: (1)
Net income per common                          $     1.26   $     1.17   $     1.12     $     0.67     $     0.84
 share (Basic)                                 ----------   ----------   ----------     ----------     ----------

Net income per common                          $     1.19   $     1.10   $     1.04     $     0.63     $     0.84
 share (Diluted)                               ----------   ----------   ----------     ----------     ----------

Weighted average number of
 common shares outstanding (Basic)              1,328,305    1,327,845    1,292,284      1,273,083      1,240,951
Weighted average number of
 common shares outstanding (Diluted)
                                                1,414,121    1,410,158    1,391,988      1,352,685      1,240,951
</TABLE>

(1) All share and per share amounts have been restated for the 2:1 stock split
    occurring in July 1996, the 3:2 stock split occurring in February 1998 and
    the 5% stock dividend occurring in February 1999.







________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -4-
<PAGE>


Financial Condition:
--------------------

<TABLE>
<CAPTION>
                                                                  September 30,
                                               ------------------------------------------------
                                               1999       1998      1997    1996      1995
                                               ----       ----      ----    ----      ----
                                                           (Dollars In Thousands)
<S>                                         <C>       <C>       <C>       <C>       <C>
Total amount of:
Assets                                      $205,294  $189,286  $171,244  $128,133  $120,879
Short-term interest-bearing deposits           2,421     1,124     6,213     1,938     3,552
Investment securities                         15,506     9,633    16,783    19,138    21,264
Mortgage-backed securities                    17,415    19,922     6,883    14,658    18,616
Loans (net)                                  149,401   142,202   129,957    85,997    73,431
Deposit accounts                             142,624   130,768   117,914    93,715    94,750
Shareholders' equity                          14,738    15,300    13,527    12,254    11,856

Number of:
Real estate loans outstanding                  1,411     1,651     1,706     1,615     1,641
Deposit accounts                              18,865    17,686    16,443    13,095    13,062
Banking centers                                    5         4         4         3         3
</TABLE>

Other Selected Data:
-------------------

<TABLE>
<CAPTION>
                                                          Years Ended September 30,
                                               ---------------------------------------------
                                                 1999     1998     1997     1996     1995
                                                 ----     ----     ----     ----     ----
<S>                                            <C>      <C>      <C>      <C>      <C>
Interest rate spread during the year             3.35%    3.09%    3.16%    3.01%    2.96%

Net yield on average interest-
 earning assets                                  3.46%    3.42%    3.44%    3.46%    3.27%

Return on average assets                         0.85%    0.87%    0.92%    0.73%    0.83%

Return on average shareholders' equity          10.96%   10.77%   11.21%    7.01%    9.38%

Dividend payout ratio                           29.46%   30.08%   30.13%   46.87%   37.40%

Operating expense to average assets              2.43%    2.52%    2.31%    2.73%    2.05%

Ratio of average shareholders'
 equity to average assets                        7.44%    8.12%    8.24%   10.41%    8.88%

Cash dividends declared and paid
 per share of common stock (1)                  $0.37    $0.35    $0.34    $0.33    $0.33
</TABLE>

(1) All share and per share amounts have been restated for the 2:1 stock split
    occurring in July 1996, the 3:2 stock split occurring in February 1998 and
    the 5% stock dividend occurring in February 1999.


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -5-
<PAGE>

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

Asset and Liability Management
------------------------------

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

The Corporation continues to work to shorten the average life of its assets and
to extend the term on its liabilities in an effort to help minimize the effects
of rising interest rates. The Corporation enjoys an increasing net interest rate
spread during periods of falling interest rates. The Corporation experiences a
shrinking net interest rate spread in a rising interest rate environment.

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

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

At September 30, 1999 the Corporation's exposure to interest rate risk, as
calculated by the OTS and measured by the impact of changing interest rates on
the Market Value of Portfolio Equity ("MVPE"), was as follows:

<TABLE>
<CAPTION>
                                                                 Rate Environment
                                                                 -----------------

                                         Minus 200 Basis Points       Flat           Plus 200 Basis Points
                                         ----------------------       ----           ----------------------
                                                                 (In Thousands)
<S>                                      <C>                     <C>                 <C>
Estimated Market Value of Assets                 $216,979          $203,385                $189,894

Estimated Market Value of Liabilities            $190,180          $183,972                $178,313

MVPE                                             $ 26,799          $ 19,413                $ 11,581

Increase/(decrease) in MVPE                      $  7,386          $      -                 ($7,832)
</TABLE>

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

Yields Earned and Rates Paid
----------------------------

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


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -6-
<PAGE>

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

<TABLE>
<CAPTION>
                                                        At September 30,          Years Ended September 30
                                                        ----------------          ------------------------
                                                              1999              1999        1998        1997
                                                              ----              ----        ----        ----
<S>                                                           <C>               <C>         <C>         <C>
Average yield on earnings assets:

    Loans                                                     7.85%             8.03%       8.10%       8.08%
    Investments (1)                                           7.15%             6.35%       5.89%       6.88%
    Mortgage-backed securities                                6.76%             6.31%       6.96%       6.76%

Total interest-earning assets                                 7.67%             7.65%       7.83%       7.83%
                                                              ----              ----        ----        ----

Less:

  Average rate paid on deposits                               3.92%             4.08%       4.45%       4.36%
  Average rate paid on borrowings                             5.17%             5.04%       5.70%       5.62%

Average Cost of Funds                                         4.23%             4.29%       4.74%       4.67%
                                                              ----              ----        ----        ----

Average interest rate spread                                  3.44%             3.35%       3.09%       3.16%
                                                              ----              ----        ----        ----

Net yield on average interest-
       earning assets                                         3.53%             3.46%       3.42%       3.44%
                                                              ----              ----        ----        ----
</TABLE>

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


Rate/Volume Analysis
--------------------

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




________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -7-
<PAGE>

<TABLE>
<CAPTION>
                                                   Years Ended September 30,
                                      --------------------------------------------------
                                             1999 vs. 1998           1998 vs. 1997
                                             -------------           -------------
                                       Volume   Rate    Total  Volume      Rate   Total
                                       ------   -----   -----  ------      -----  -----
                                                         (Dollars in Thousands)
<S>                                    <C>      <C>     <C>    <C>        <C>     <C>
Change in interest income:

Loans                                   ($352)   ($93)   ($445)  $2,100   $   18   $2,118
Mortgage-backed securities              1,036    (155)     881       36       18       54
Investments                               121      83      204     (463)    (159)    (622)
                                        -----   -----   ------   ------   ------   ------

Total interest income                     805    (165)     640    1,673     (123)   1,550
                                        -----   -----   ------   ------   ------   ------

Change in interest expense:

Deposits                                  681    (518)     162      758      120      878
Borrowings and other                      242    (256)     (13)      (2)      26       24
                                        -----   -----   ------   ------   ------   ------

Total interest expense                    923    (774)     149      756      146      902
                                        -----   -----   ------   ------   ------   ------

Change in net interest income           ($118)   $609     $491     $917    ($269)    $648
                                        =====   =====   ======   ======   ======   ======
</TABLE>


RESULTS OF OPERATIONS
---------------------

Comparison of Years Ended September 30, 1999 and September 30, 1998
-------------------------------------------------------------------

Net income increased $126,000 from $1,550,000 in fiscal 1998 to $1,676,000 in
fiscal 1999 primarily as a result of increased interest income from a higher
level of earning assets along with increased non-interest income. Earnings per
share (basic) increased $0.09 to $1.26 for the year ended September 30, 1999
from $1.17 for the same period in 1998.

Total interest income increased $641,000, or 4.78%, from $13,405,000 in fiscal
1998 to $14,046,000 in fiscal 1999 due to the increase in the average level of
interest-earning assets. The increase in average earning assets was due
primarily to the increases in mortgaged-backed securities and investment
securities. The increase in average earning assets was financed by increased
deposits and additional advances from the FHLB. Interest income on loans
decreased $445,000, or 3.75%, from $11,865,000 in fiscal 1998 to $11,420,000 in
fiscal 1999. The reduction in interest income on loans was due to high principal
prepayments on residential loans that resulted in an overall reduction in the
average balance of mortgage loans. Interest income on investment and mortgage-
backed securities increased $1,113,000, or 77.83%, from $1,430,000 in fiscal
1998 to $2,543,000 in fiscal 1999. This increase was due to a higher average
balance for investments and mortgage-backed securities as a result of additional
purchases made during the fiscal year.

Interest expense increased 1.97% to $7,698,000 for fiscal 1999 from $7,549,000
for fiscal 1998. Interest expense increased $162,000 for deposits and decreased
$13,000 for other borrowings. Interest expense for deposits increased due to
higher volumes (9.06% increase from fiscal 1998) offset by a reduction in the
costs of deposits. Interest expense on other borrowings decreased due to higher
volumes that was offset by lower interest rates on FHLB advances throughout
fiscal 1999 as compared to fiscal 1998.

Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. Provisions for loan losses increased from $0 in fiscal 1998
to $105,000 in fiscal


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -8-
<PAGE>

1999. The increase in the provision was made to provide a adequate level of
reserves to be consistent with the growth in the Corporation's loan portfolio.
The Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $98,000 in fiscal 1999 compared to $101,000 for fiscal 1998. The
loan reserves to total loans ratio for fiscal 1999 was .56% compared to .58% for
fiscal 1998.

Non-interest income increased 14.84% to $1,192,000 for the year ended September
30, 1999 from $1,038,000 for the year ended September 30, 1998. Service charges
and fees increased $114,000 to $905,000 primarily as a result of increased
deposit account fees. Loan servicing fees (net) increased $47,000 to $(64,000)
for the year ended September 30, 1999 from $(111,000) for the year ended
September 30, 1998. The improvement in loan servicing fees (net) was due to a
reduction in loan premium amortization along with higher loan service fees. Gain
on sale of loans decreased to $342,000 during the year ended September 30, 1999
from $358,000 for the year ended September 30, 1998.

Non-interest expense increased 8.25% to $4,814,000 in fiscal 1999 from
$4,447,000 in fiscal 1998. Compensation and employee benefits increased 2.91% or
$67,000 from fiscal 1998 to fiscal 1999 due to salary and employee benefits
inflationary increases. Occupancy and equipment expenses increased 16.56% or
$161,000 from fiscal 1998 to fiscal 1999 due to higher depreciation expense as a
result of facilities upgrades and equipment purchases along with higher data
processing expenses due to the growth of the Bank. Other operating expenses
increased 13.89% or $116,000 from fiscal 1998 to fiscal 1999 due primarily to
higher deposit premium amortization as a result of a branch purchase made during
the second quarter of fiscal 1999.

Comparison of Years Ended September 30, 1998 and September 30, 1997
-------------------------------------------------------------------

Net income increased $106,000 from $1,444,000 in fiscal 1997 to $1,550,000 in
fiscal 1998 primarily as a result of increased interest income from loans and
increased non-interest income. Earnings per share (basic) increased $0.06 to
$1.17 for the year ended September 30, 1998 from $1.11 for the same period in
1997.

Total interest income increased $1,550,000, or 13.07%, from $11,855,000 in
fiscal 1997 to $13,405,000 in fiscal 1998 due to the increase in the level of
interest-earning average assets that more than offset a slight decrease in
average yields. Average earning assets increased due primarily to higher loan
production from the Mortgage Division. The loan production was financed by
increased deposits and additional advances from the FHLB. Interest income on
loans increased $2,118,000, or 21.73%, from $9,747,000 in fiscal 1997 to
$11,865,000 in fiscal 1998. Interest income on investment and mortgage-backed
securities decreased $615,000, or 30.07%, from $2,045,000 in fiscal 1997 to
$1,430,000 in fiscal 1998. This reduction was due to a high level of security
calls that occurred during fiscal 1998 along with declining interest rates on
new securities.

Interest expense increased 13.57% to $7,549,000 for fiscal 1998 from $6,647,000
for fiscal 1997. Interest expense increased $878,000 for deposits and $24,000
for other borrowings, respectively. Interest expense for deposits increased due
to higher volumes (10.14% increase from fiscal 1997) along with a slight
increase in the costs of deposits. Interest expense on other borrowings
increased due to higher volumes and rates on FHLB advances throughout fiscal
1998 as compared to fiscal 1997.

Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. Provisions for loan losses decreased from $243,000 in fiscal
1997 to $0 in fiscal 1998. The decrease in the provision was due to the
reduction in the Bank loan portfolio that is held for investment , along with
the reduction in losses experienced in consumer loans. The Corporation
experienced bad debt charge-offs, net of recoveries, of approximately $101,000
in fiscal 1998 compared to $114,000 for fiscal 1997. The loan reserves to total
loans ratio excluding loans held for sale for fiscal 1998 was .79% compared to
 .80% for fiscal 1997.

Non-interest income increased 8.92% to $1,038,000 for the year ended September
30, 1998 from $953,000 for the year ended September 30, 1997. Service charges
and fees increased $81,000 to $791,000 primarily as a result of increased
deposit account fees. Loan servicing fees (net) decreased $199,000 to $(111,000)
for the year ended September 30, 1998 from $88,000 for the year ended September
30, 1997 primarily as a result of the establishment


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -9-
<PAGE>

of a $108,000 loss provision for the Bank's loan servicing portfolio. Gain on
sale of loans increased to $358,000 during the year ended September 30, 1998
from $96,000 for the year ended September 30, 1997 due to increased conventional
mortgage loan sales.

Non-interest expense increased 22.98% to $4,447,000 in fiscal 1998 from
$3,616,000 in fiscal 1997. The increase in non-interest expense is the result of
additional expenses absorbed with the purchase of the Laurens, S. C. branch
along with the startup of the Mortgage Division. Both operations were
established during the third quarter of fiscal 1997.

Year 2000
---------

The approach of the year 2000 ("Year 2000") presents significant issues for many
financial, information, and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999, appropriately, because
such systems allow only two digits to indicate the year in a date. The Year 2000
problems may occur in computer programs, computer hardware, or electronic
devices that utilize computer chips to process any information that contains
dates. Therefore, the issue is not limited to dates in computer programs but is
a complex combination of problems that may exist in computer programs, data
files, computer hardware, and other devices essential to the operation of the
business. Further, companies must consider the potential impact that Year 2000
may have on services provided by third parties.

Substantially all of the Year 2000 risk is related to the Bank's activities. The
Bank has a formal Year 2000 Plan which includes a Year 2000 Task Force. The Plan
has been reviewed by the senior management and the Board of Directors. Included
in the Plan is a listing of all systems (whether in-house or provided/supported
by third parties) which may be impacted by Year 2000 and a categorization of the
systems by their potential impact on Bank operations. The Task Force has
received Year 2000 plans from third parties identified during the assessment
phase of the Year 2000 Plan. For systems that have been classified as critical
to the operations of the Bank, contingency plans have been developed.
Contingency plans may include utilization of alternate third party vendors,
alternate processing methods and software, or manual processing. Specific
contingency plans have been developed regarding liquidity needs for the Bank.
The liquidity contingency plans include additional funding lines through the
Federal Reserve and other financial institutions. The plans have various
activation dates (e.g., the date on which a third party processor fails to meet
its Year 2000 compliance deadline). In addition to addressing its own Year 2000
issues, the Bank is in the process of assessing the impact of the Year 2000 on
significant commercial borrowers. The Bank's Year 2000 readiness is reviewed and
monitored by the Office of Thrift Supervision ("OTS").

The Bank's core processing systems are outsourced through a contract with The
BISYS Group, Inc. ("BISYS"). BISYS has developed a Year 2000 Plan and provides
the Bank with periodic updates. BISYS also has held Year 2000 workshops, whose
objectives have been to assist the Bank in the development of its Year 2000
Plan, to provide updates on the BISYS Year 2000 plan, and training on the use of
the BISYS Year 2000 test facility, whose function is to allow BISYS clients to
test their systems' compatibility with the BISYS system. BISYS completed all
program maintenance associated with Year 2000 prior to October 31, 1998, and
performed a full year of testing prior to January 1, 2000. Like the Bank, BISYS
Year 2000 activities are subject to OTS oversight.

The incremental cost associated with the Bank's compliance is expected to be
less than $50,000. The majority of all hardware upgrades began in 1995 as a
          -------
result of the Bank's plan to increase efficiencies and eliminate obsolescence of
some system components. Should the Bank or any of its third party service
providers fail to complete Year 2000 measures in a timely manner, it would
likely have a material adverse effect, which amount cannot be reasonably
estimated at this time.

Financial Condition, Liquidity and Capital Resources
----------------------------------------------------

At September 30, 1999, the Corporation's assets totaled $205,294,000, an
increase of $16,008,000, or 8.45%, as compared to $189,286,000 at September 30,
1998. Investment and mortgage-backed securities increased $3,366,000 to
$32,921,000 from $29,555,000 at September 30, 1998.The increase in securities
was a result of the Corporation's decision to increase investment holdings in
municipal securities. Total loans, net, increased


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -10-
<PAGE>

$7,199,000 or 5.06% to $149,401,000 from $142,202,000 at September 30, 1998.
Residential mortgage loans, net, decreased $5,536,000 from fiscal 1998 to fiscal
1999 while consumer and commercial loans, net, increased $10,453,000 during the
same period. The increase in consumer/commercial loans along with the reduction
in residential mortgage loans is more consistent with the liability structure of
the Corporation insofar as the shorter terms of these loans more closely match
the terms of the Corporation's deposits. The overall growth in total assets was
funded by increased deposits and additional advances from the Federal Home Loan
Bank. Total advances increased $5,062,000 from $41,441,000 at September 30, 1998
to $46,503,000 at September 30, 1999. Total deposits increased $11,856,000 from
$130,768,000 at September 30, 1998 to $142,624,000 on September 30, 1999 due to
the purchase of a branch located in Union County. During the second quarter of
fiscal 1999 the Corporation completed the acquisition of the CCB/American
Federal's Union, South Carolina branch, which was completed in the second
quarter of fiscal 1999.

The Bank's liquidity, as measured by the ratio of cash, cash equivalents (not
committed, pledged or required to liquidate specific liabilities) and investment
securities to total deposits was approximately 17.08% at September 30, 1999.
Assets that qualify as eligible liquidity are defined by applicable federal
regulation and include cash and cash equivalents and certain types of United
States Treasury and agency obligations, and other similar investments. The
required ratio of such liquid investments is currently 4% of certain of the
Bank's liabilities as defined by the OTS. The liquidity requirement is changed
periodically by the OTS to reflect economic conditions. The Bank has relied upon
deposit growth and loan repayments as its principal sources of liquidity. If
deposit growth and loan repayments do not generate sufficient liquid funds in
the future, the Bank may borrow additional funds from the FHLB or liquidate
short-term investments. These sources of funds are intended to provide a
secondary source of relatively liquid funds upon which the Bank may rely, if
necessary. Commitments to fund loans in the ordinary course of business at
September 30, 1999 were approximately $830,000. See Note 11 to the financial
statements for further information about commitments and contingencies.

As of September 30, 1999, the Bank exceeded the OTS's capital requirements. See
Note 13 to the financial statements for further discussion of these capital
requirements.

Impact of Inflation and Changing Prices
---------------------------------------

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

Subsequent Event
----------------

On November 12, 1999 Union Financial completed its acquisition of South Carolina
Community Bancshares, Inc. and its wholly owned subsidiary, Community Federal
Savings Bank. Union Financial issued a total of 526,290 shares and paid a total
of $3,582,081 to the shareholders of South Carolina Community Bancshares, Inc.
The transaction was accounted for under the purchase method of accounting. The
two offices of Community Federal Savings Bank became offices of Provident
Community Bank, the wholly owned subsidiary of Union Financial Bancshares. At
September 30, 1999, South Carolina Community Bancshares, Inc. had total assets
of $46.6 million, loans of $40.2 million and deposits of $35.9 million.


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                       -11-
<PAGE>

               [LETTERHEAD OF ELLIOTT, DAVIS & COMPANY, L.L.P.]
                         Certified Public Accountants

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Shareholders and Board of Directors
Union Financial Bancshares, Inc. and Subsidiary
Union, South Carolina

     We have audited the accompanying consolidated balance sheets of Union
Financial Bancshares, Inc. and Subsidiary as of September 30, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Union Financial Bancshares, Inc. and Subsidiary as of September 30, 1999 and
1998 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1999, in conformity
with generally accepted accounting principles.

                                                /s/ Elliot, Davis & Company, LLP

Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
October 29, 1999


<PAGE>

                UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                         -----------------------------

<TABLE>
<CAPTION>
                                                                               September 30,
                                                                             ------------------
                                                                             1999          1998
                                                                             ----          ----
                                                                               (In Thousands)
<S>                                                                          <C>        <C>
Assets
------
Cash                                                                         $  3,149   $  2,469
Short term interest-bearing deposits                                            2,421      1,124
                                                                             --------   --------
Total cash and cash equivalents                                                 5,570      3,593
                                                                             --------   --------
Investment and mortgage-backed securities:
    Held to maturity                                                            5,586      2,699
    Available for sale                                                         27,335     26,856
                                                                             --------   --------
Total investment and mortgage-backed securities                                32,921     29,555
                                                                             --------   --------
Loans, net
    Held for sale                                                                 216     37,584
    Held for investment                                                       149,185    104,618
                                                                             --------   --------
Total loans, net                                                              149,401    142,202
Office properties and equipment, net                                            4,524      4,020
Federal Home Loan Bank Stock, at cost                                           2,050      2,023
Accrued interest receivable                                                     1,574      1,197
Mortgage servicing rights                                                       3,842      3,270
Other assets                                                                    5,412      3,426
                                                                             --------   --------
Total assets                                                                 $205,294   $189,286
                                                                             ========   ========

Liabilities
-----------
Deposit accounts                                                             $142,624   $130,768
Advances from the Federal Home Loan Bank and other borrowings                  46,503     41,441
Accrued interest payable                                                          226        336
Advances from borrowers for taxes and insurance                                   548        496
Other liabilities                                                                 655        945
                                                                             --------   --------
Total liabilities                                                             190,556    173,986
                                                                             --------   --------

Commitments and contingencies - note 11

Shareholders' equity
--------------------
Serial preferred stock, no par value,
  authorized - 500,000 shares, issued and outstanding - None
Common stock - $0.01 par value, authorized - 2,500,000 shares
  issued and outstanding - 1,357,214 shares in 1999 and                            14         13
   1,278,250 shares in 1998
Additional paid-in capital                                                      5,484      4,471
Accumulated other comprehensive income (loss)                                  (1,779)       148
Retained earnings, substantially restricted                                    11,019     10,668
                                                                             --------   --------
Total shareholders' equity                                                     14,738     15,300
                                                                             --------   --------
Total liabilities and shareholders' equity                                   $205,294   $189,286
                                                                             ========   ========
</TABLE>

  See notes to consolidated financial statements.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -13-
<PAGE>

                UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------

<TABLE>
<CAPTION>
                                                               For the Years Ended September 30,
                                                              -----------------------------------
                                                              1999           1998          1997
                                                              ----           ----          ----
                                                              (In Thousands, Except Share Data)
<S>                                                           <C>         <C>          <C>
Interest Income:
  Loans                                                       $   11,420   $   11,865   $    9,747
  Deposits and federal funds sold                                     83          110           63
  Securities available for sale:
    State and municipal                                               36           17           37
    Other investments                                              2,320          980        1,128
  Securities held to maturity:
    Other investments                                                187          433          880
                                                              ----------   ----------   ----------
  Total interest income                                           14,046       13,405       11,855
                                                              ----------   ----------   ----------
Interest Expense:
  Deposit accounts                                                 5,706        5,544        4,666
  Advances from the FHLB and other                                 1,992        2,005        1,981
                                                              ----------   ----------   ----------
  Total interest expense                                           7,698        7,549        6,647
                                                              ----------   ----------   ----------
Net Interest Income                                                6,348        5,856        5,208
  Provision for loan losses                                          105           --          243
                                                              ----------   ----------   ----------
Net interest income after provision for loan losses                6,243        5,856        4,965
                                                              ----------   ----------   ----------
Non Interest Income:
  Fees for financial services                                        905          791          710
  Loan servicing fees, net of servicing amortization                 (64)        (111)          88
  Net gains on sale of investments                                     9           --           59
  Gains on sale of loans                                             342          358           96
                                                              ----------   ----------   ----------
  Total non interest income                                        1,192        1,038          953
                                                              ----------   ----------   ----------
Non Interest Expense:
  Compensation and employee benefits                               2,368        2,301        1,768
  Occupancy and equipment                                          1,133          972          702
  Deposit insurance premiums                                          77           54           93
  Professional services                                              275          275          332
  Deposit premium amortization                                       276          212          106
  Other                                                              685          633          615
                                                              ----------   ----------   ----------
  Total non interest expense                                       4,814        4,447        3,616
                                                              ----------   ----------   ----------
Income before income taxes                                         2,621        2,447        2,302
Provision for income taxes                                           945          897          858
                                                              ----------   ----------   ----------
Net Income                                                    $    1,676   $    1,550   $    1,444
                                                              ==========   ==========   ==========

Net Income per common share (Basic)                           $     1.26   $     1.17   $     1.12
                                                              ==========   ==========   ==========
Net Income per common share (Diluted)                         $     1.19   $     1.10   $     1.04
                                                              ==========   ==========   ==========

Cash dividends per common share                               $     0.37   $     0.35   $     0.34
                                                              ==========   ==========   ==========

Weighted average number of common shares outstanding (Basic)   1,328,305    1,327,845    1,292,284
                                                              ==========   ==========   ==========

Weighted average number of common shares outstanding           1,414,121    1,410,158    1,391,988
(Diluted)                                                     ==========   ==========   ==========

</TABLE>

See notes to consolidated financial statements.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -14-
<PAGE>

                UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                -----------------------------------------------

<TABLE>
<CAPTION>
                                                                               Retained     Accumulated
                                                                 Additional    Earnings        Other           Total
                                               Common Stock        Paid-In   Substantially  Comprehensive   Shareholders'
                                            ------------------
                                            Shares      Amount     Capital    Restricted      Income           Equity
                                            ------      ------     -------    ----------      ------           ------
                                                          (In Thousands, Except Share Data)
<S>                                         <C>         <C>        <C>        <C>             <C>              <C>
Balance at September 30, 1996               811,286      $  8        $3,897    $ 8,578         ($ 229)         $12,254
                                                                                                               -------
Net income                                       --        --            --      1,444             --            1,444

Other comprehensive income, net of tax
  Unrealized holding gains arising
  during period                                  --        --            --         --            166              166
                                                                                               ------          -------
 Comprehensive income                                                                                            1,610
                                                                                                               -------

Options exercised                            16,414        --            96         --             --               96

Cash dividend ($.34 per share)                   --        --            --       (433)            --             (433)
                                             ------       ---        ------    -------         ------          -------

Balance at September 30, 1997               827,700         8         3,993      9,589            (63)          13,527
                                                                                                               -------

Net income                                       --        --            --      1,550             --            1,550

Other comprehensive income, net of tax
  Unrealized holding gains arising
  during period                                  --        --            --         --            211              211
                                                                                               ------          -------
 Comprehensive income                                                                                            1,761
                                                                                                               -------

Options exercised                             9,920       --             51         --             --               51

Three-for-two stock split                   413,850        4             --         (4)            --               --

Dividend reinvestment plan contributions     26,780        1            427         --             --              428

Cash dividend ($.35 per share)                   --       --             --       (467)            --             (467)
                                          ---------      ---         ------    -------         ------          -------

Balance at September 30, 1998             1,278,250       13          4,471     10,668            148           15,300
                                                                                                               -------

Net income                                       --       --             --      1,676             --            1,676

Other comprehensive income, net of tax
  Unrealized holding losses arising
  during period                                  --       --             --         --         (1,927)          (1,927)
                                                                                               ------          -------
 Comprehensive loss                                                                                               (251)
                                                                                                               -------

Options exercised                              315        --              1         --             --                1

Five percent stock dividend                 63,818         1            830       (829)            --               --

Dividend reinvestment plan contributions    14,831        --            182         --             --              182

Cash dividend ($.37 per share)                  --        --             --       (494)            --             (494)
                                          ---------      ---         ------    -------         ------          -------

Balance at September 30, 1999             1,357,214      $14         $5,484    $11,019        ($1,779)         $14,738
                                          =========      ===         ======    =======         ======          =======
</TABLE>

See notes to consolidated financial statements.

_______________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -15-
<PAGE>

                UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

<TABLE>
<CAPTION>
                                                              For the Years Ended September 30,
                                                              ---------------------------------
                                                              1999          1998          1997
                                                              ----          ----          ----
                                                                     (In Thousands)
<S>                                                          <C>          <C>          <C>
Operating activities:

Net income                                                   $   1,676     $   1,550    $   1,444
Adjustments to reconcile net income to
  net cash provided by (used) in operating activities:
  Provision for loan losses                                        105            --          243
  Amortization expense                                           1,127           561          106
  Depreciation expense                                             343           221          188
  Recognition of deferred income, net of costs                    (100)         (140)          (7)
  Deferral of fee income, net of costs                             243            77           29
  Gain on investment transactions                                   (9)           --          (59)
  Loans originated for sale                                   (108,962)     (141,436)     (61,806)
  Proceeds from sale of loans                                  108,746       123,677       46,762
  Gain on sale of loans held for sale                             (342)         (358)         (96)
   (Increase) decrease in accrued interest receivable             (377)          120         (196)
   (Increase) decrease in other assets                          (1,189)         (835)       2,720
   Increase (decrease) in accrued interest payable                (239)          (22)         235
   Increase (decrease) in other liabilities                       (110)          434         (830)
                                                             ---------     ---------    ---------
 Net cash provided by (used) in operating activities         $     912    ($  16,151)  ($  11,267)
                                                             ---------     ---------    ---------
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -16-
<PAGE>

                UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
               -------------------------------------------------

<TABLE>
<CAPTION>
                                                                        For the Years Ended September 30,
                                                                       ------------------------------------
                                                                          1999          1998         1997
                                                                        --------      --------    ---------
                                                                                (In Thousands)
<S>                                                                     <C>          <C>          <C>
Investing activities:

Purchase of investment and mortgage-backed securities:
  Held to maturity                                                      $ (4,864)    $     --      $ (2,000)
  Available for sale                                                     (16,097)     (20,368)       (2,950)
Proceeds from maturity of investment and mortgage- backed securities:
  Held to maturity                                                         1,500        4,497           500
  Available for sale                                                       3,375        7,978         4,450
Proceeds from sale of investment and mortgage-backed securities:
  Available for sale                                                       5,941           --         8,281
Principal repayments on mortgage-backed securities:
  Held to maturity                                                           477          616           137
  Available for sale                                                       6,356        1,388         1,712
Net (increase) decrease in loans                                          (9,512)       5,952       (28,861)
Purchase of mortgage servicing rights                                       (572)      (2,814)           --
Purchase of FHLB stock                                                       (27)          --        (1,380)
Redemption of FHLB stock                                                      --           82           225
Purchase of office properties and equipment                                 (847)      (1,231)       (1,534)
                                                                        --------     --------      --------

Net cash used in investing activities                                    (14,270)      (3,900)      (21,420)
                                                                        --------     --------      --------

Financing activities:
Proceeds from the exercise of stock options                                    1           51            96
Proceeds from dividend reinvestment plan                                     182          427            --
Dividends paid in cash                                                      (494)        (467)         (433)
Proceeds from term borrowings                                              4,863        3,853        17,997
Acquired deposits from purchased branch                                   12,622           --        20,073
Premium paid for acquired deposits                                        (1,073)          --        (2,115)
Increase (decrease) in deposit accounts                                     (766)      11,959         1,205
                                                                        --------     --------      --------

Net cash provided by financing activities                                 15,335       15,823        36,823
                                                                        --------     --------      --------
Net (decrease) increase in cash and cash equivalents                       1,977       (4,228)        4,136

Cash and cash equivalents at beginning of year                             3,593        7,821         3,685
                                                                        --------     --------      --------

Cash and cash equivalents at end of year                                $  5,570     $  3,593      $  7,821
                                                                        ========     ========      ========
</TABLE>

See notes to consolidated financial statements.

_______________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -17-
<PAGE>

                UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------


1.  Summary of Significant Accounting Policies

Organization - Union Financial Bancshares, Inc. ("Union Financial") was
------------
incorporated in the State of Delaware in April 1994, for the purpose of becoming
a thrift holding company for Provident Community Bank or the "Corporation"
(formerly known as Union Federal Savings Bank), a federally chartered savings
bank ("the Bank").  Provident Community Bank, founded in 1934, offers a complete
array of financial services through four full service banking centers, a
mortgage banking center and a lending and investment center in two counties in
South Carolina.  The Bank offers a full range of financial services including
checking, savings, time deposits, individual retirement accounts (IRAs),
investment services, and secured and unsecured consumer loans.  The Bank
originates and services home loans and provides financing for small businesses
and affordable housing.

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

Basis of Consolidation - The accompanying consolidated financial statements
----------------------
include the accounts of the Corporation and its wholly owned subsidiary,
Provident Community Bank  and its wholly owned subsidiary, Provident Financial
Services, Inc. ("PFS").  PFS consists primarily of investment brokerage
services.  All inter corporation amounts and balances have been eliminated in
consolidation.

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

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

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

Loans - Loans held for investment are recorded at cost.  Mortgage loans consist
-----
principally of conventional one to four family residential loans and interim and
permanent financing of non-residential loans that are secured by real estate.
Commercial loans are made primarily on the strength of the borrower's general
credit standing, the ability to generate repayment from income sources and the
collateral securing such loans.  Consumer loans generally consist of home equity
loans, automobile and other personal loans.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -18-
<PAGE>

1.  Summary of Significant Accounting Policies (continued)

In many lending transactions, collateral is taken to provide an additional
measure of security.  Generally, the cash flow or earning power of the borrower
represents the primary source of repayment, and collateral liquidation serves as
a secondary source of repayment.  The Corporation determines the need for
collateral on a case-by-case or product-by-product basis.  Factors considered
include the current and prospective credit worthiness of the customer, terms of
the instrument and economic conditions.

Mortgage loans held for sale are valued at the aggregate lower of cost or market
as determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate loan basis.

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

The allowance for loan losses is based upon an evaluation of the loan portfolio.
The evaluation considers such factors as the delinquency status of loans,
current economic conditions, the net realizable value of the underlying
collateral and prior loan loss experience.

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

Accounting for Impaired Loans - Impaired loans are accounted for in accordance
-----------------------------
with SFAS No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS
                   ------------------------------------------------
114"), which was amended by SFAS No. 118.  SFAS 114 requires that impaired loans
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical matter, at the loan's
observable market value or fair value of the collateral if the loan is
collateral dependent.   The Corporation maintains an allowance for impaired
loans based on a combination of evaluation of impairment of smaller balance,
homogeneous loans (primarily consumer loans and 1-4 family real estate
mortgages) and specific identification of impaired loans based on delinquency
status and other factors related to the borrower's ability to repay the loan.
The risk characteristics used to aggregate loans are collateral type, borrower's
financial condition and geographic location.

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

As of and for the years ended September 30, 1999 and 1998, there were no
impaired loans and the Corporation had recognized no interest income from
impaired loans.

Office Properties and Equipment - Office properties and equipment are presented
-------------------------------
at cost less accumulated depreciation.  Depreciation is provided on the
straight-line basis over the estimated useful lives of the assets.  Estimated
useful lives are 20-50 years for buildings and improvements and generally five
to ten years for furniture, fixtures and equipment.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -19-
<PAGE>

1.  Summary of Significant Accounting Policies (continued)

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

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

Mortgage Servicing Rights - The Corporation accounts for mortgage servicing
-------------------------
rights in accordance with SFAS No. 122, Accounting for Mortgage Servicing
                                        ---------------------------------
Rights.  The statement eliminates the distinction between originated and
------
purchased mortgage servicing rights. The Corporation capitalizes the allocated
cost of originated mortgage servicing rights and records a corresponding
increase in mortgage banking income.

Purchased mortgage servicing rights are recorded at the lower of cost or market.
Originated mortgage servicing rights are capitalized based on the allocated cost
which is determined when the underlying loans are sold or securitized.  MSRs
are amortized in proportion to and over the period of estimated net servicing
income using a method that is designed to approximate a level-yield method,
taking into consideration the estimated prepayment of the underlying loans.  For
purposes of measuring impairment, MSRs are periodically reviewed for impairment
based upon quarterly valuations.  Such valuations are based on projections using
a discounted cash flow method that includes assumptions regarding prepayments,
servicing costs and other factors.  Impairment is measured on a disaggregated
basis for each pool of rights

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

Sale of Loans - The Corporation frequently sells and retains servicing rights on
-------------
certain mortgage loans.  Gains or losses on the sale of such loans are
recognized when substantially all risks and rewards of ownership are
transferred.  If loan servicing is retained, the value of future servicing
rights are considered in the determination of the amount of gain or loss.

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

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

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

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -20-
<PAGE>

1.  Summary of Significant Accounting Policies (continued)

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

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

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

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

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

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

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

Per-Share Data - SFAS 128, Earnings Per Share, issued in February 1997,
--------------             ------------------
simplifies the standard for computing earnings per share and makes them
comparable to international earnings per share standards. It also requires the
dual presentation of basic and diluted earnings per share on the face of the
income statement.

Basic earnings per share is computed by dividing net income by the weighted-
average number of shares outstanding for the period. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common share that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Corporation's stock
option plan is reflected in diluted earnings per share by the application  of
the treasury stock method.

SFAS128 became effective for the Corporation as of September 30, 1998. As
required by SFAS 128, all prior period earnings per share data presented has
been restated to conform with the provisions of the statement.

Share and per-share data have been restated to reflect stock splits issued in
July 1996, February 1998 and the 5% stock dividend occurring in February, 1999.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -21-
<PAGE>

1.  Summary of Significant Accounting Policies (continued)

Intangible Assets - Intangible assets, included in other assets, consist of core
-----------------
deposit premiums resulting from the Corporation's branch acquisition.

During 1999, $276,000 of intangible expense was charged  to operations.  Core
deposit intangibles are being amortized over 10 years using the straight-line
method.

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

Comprehensive Income - SFAS No.130 Reporting Comprehensive Income, establishes
--------------------               ------------------------------
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses). This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income (including, for example, unrealized holding gains and
losses on available-for-sale securities) be reported in a financial statement
that is displayed with the same prominence as other financial statements. The
Corporation discloses components of comprehensive income in its statement of
shareholder's equity. The accumulated balance of other comprehensive income is
disclosed separately from retained earnings in the equity section of the balance
sheet.

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


2.  Investment And Mortgage-backed Securities

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

<TABLE>
<CAPTION>
                                                    September 30, 1999
                                       -----------------------------------------
                                       Amortized     Gross Unrealized       Fair
                                                     ----------------
                                          Cost       Gains     Losses      Value
                                          ----       -----     ------      -----
<S>                                    <C>           <C>       <C>        <C>
Mortgage-backed Securities:
 FHLMC                                    $4,864       $--      ($326)    $4,538
 GNMA                                        722        78         --        800
                                          ------       ---      -----     ------
Total held to maturity                    $5,586       $78      ($326)    $5,338
                                          ======       ===      =====     ======

<CAPTION>
                                                    September 30, 1998
                                       -----------------------------------------
                                        Amortized    Gross Unrealized       Fair
                                                     ----------------
                                           Cost      Gains     Losses      Value
                                           ----      -----     ------      -----
<S>                                    <C>           <C>       <C>        <C>
Investment Securities:
  U.S. Agency Obligations                 $1,500       $24      $  --     $1,524
Mortgage-backed Securities:
  GNMA                                     1,199        21         --      1,220
                                          ------       ---      -----     ------
Total held to maturity                    $2,699       $45      $  --     $2,744
                                          ======       ===      =====     ======
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -22-


<PAGE>

2.  Investment And Mortgage-backed Securities (continued)

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

<TABLE>
<CAPTION>
                                                                    September 30, 1999
                                                      -------------------------------------------
                                                      Amortized      Gross Unrealized      Fair
                                                                     ----------------
                                                        Cost        Gains       Losses    Value
                                                        ----        -----       ------    ------
<S>                                                   <C>          <C>         <C>        <C>
Investment Securities:
  U.S. Agency Obligations                               $15,139    $    --     ($1,209)   $13,930
  Municipal Securities                                    1,701         --        (125)     1,576
                                                        -------    -------     -------    -------
Total Investment Securities                              16,840         --      (1,334)    15,506
                                                        -------    -------     -------    -------
Mortgage-backed Securities:
  FHLMC                                                   6,356         --        (137)     6,219
  FNMA                                                      966         --         (17)       949
  CMOs                                                    5,952         --      (1,291)     4,661
                                                        -------    -------     -------    -------
Total Mortgage-backed Securities                         13,274         --      (1,445)    11,829
                                                        -------    -------     -------    -------

Total available for sale                                $30,114    $    --     ($2,779)   $27,335
                                                        =======    =======     =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   September 30, 1998
                                                      -----------------------------------------
                                                      Amortized     Gross Unrealized       Fair
                                                                    ----------------
                                                        Cost        Gains       Losses    Value
                                                        ----        -----       ------    -----
<S>                                                   <C>          <C>          <C>      <C>
Investment Securities:
  U.S. Agency Obligations                               $ 7,668      $ 45        ($31)   $ 7,682
  Municipal Securities                                      449         2          --        451
                                                        -------      ----        ----    -------
Total Investment Securities                               8,117        47         (31)     8,133
                                                        -------      ----        ----    -------
Mortgage-backed Securities:
  FHLMC                                                   9,713       158          --      9,871
  FNMA                                                      880        16          (2)       894
  CMOs                                                    7,806       157          (5)     7,958
                                                        -------      ----        ----    -------
Total Mortgage-backed Securities                         18,399       331          (7)    18,723
                                                        -------      ----        ----    -------

Total available for sale                                $26,516      $378        ($38)   $26,856
                                                        =======      ====        ====    =======
</TABLE>


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

<TABLE>
<CAPTION>
                                                                       September 30,
                                                                       -------------
                                                             1999          1998          1997
                                                            ------        ------        -------
<S>                                                         <C>           <C>           <C>
Proceeds                                                    $9,316        $7,978        $13,231
                                                            ------        ------        -------
Gross gains                                                      9            --             76
Gross losses                                                    --            --             17
                                                            ------        ------        -------
Net gain on investment transactions                         $    9        $   --        $    59
                                                            ======        ======        =======
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -23-
<PAGE>

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

The maturities of securities at September 30, 1999 are as follows (in
thousands):


<TABLE>
<CAPTION>
                                                   Held to Maturity             Available for Sale
                                                   -----------------            ------------------
                                                 Amortized       Fair          Amortized       Fair
                                                   Cost         Value            Cost         Value
                                                   ----        ------            ----         ------
<S>                                              <C>           <C>              <C>          <C>
Due in one year or less                           $   --       $   --           $   138      $   138
Due after one year through five years                 --           --             1,514        1,461
Due after five years through ten years                --           --             1,223        1,168
Due after ten years                                5,586        5,338            27,240       24,568
                                                  ------       ------           -------      -------
Total investment and mortgage-backed
   securities                                     $5,586       $5,338           $30,115      $27,335
                                                  ======       ======           =======      =======
</TABLE>

The mortgage-backed securities held at September 30, 1999 mature between one and
thirty years.  The actual lives of those securities may be significantly shorter
as a result of principal payments and prepayments.

At September 30, 1999 and 1998, $12,963,000 and $10,383,000, respectively,  of
securities were pledged as collateral for certain deposits.

At September 30, 1999, approximately  $1,151,000 of the debt securities and
$577,000 of mortgage-backed securities were adjustable rate securities.  The
adjustment periods range from monthly to annually and rates are adjusted based
on the movement of a variety of indices.

Investments in collateralized mortgage obligations ("CMOs") represent securities
issued by agencies of the federal government.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                     -24-
<PAGE>

3.    Loans, Net

Loans receivable consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                          September 30,
                                                    -----------------------------
                                                     1999                  1998
                                                     ----                  ----
<S>                                                 <C>                   <C>
Conventional real estate loans:
  Fixed rate residential
     Held for sale                                  $    216              $ 37,584
     Held for investment                              56,963                24,075
  Fixed rate commercial                                3,036                 4,053
  Adjustable rate residential
     Held for sale                                        --                    --
     Held for investment                              47,915                48,531
  Adjustable rate commercial                             136                   140
  Construction loans                                  17,039                12,838
                                                    --------              --------
Total real estate loans                              125,305               127,221
                                                    --------              --------
Other loans:
  Consumer and installment loans                      16,409                 9,797
  Commercial loans                                     7,748                 3,539
  Consumer lines of credit                             8,855                 7,404
  Loans secured by deposit accounts                    1,435                 1,551
                                                    --------              --------
Total other loans                                     34,447                22,291
                                                    --------              --------

Total loans                                          159,752               149,512
                                                    --------              --------
Less:
  Undisbursed portion of interim
   construction loans                                 (9,964)               (6,625)
  Allowance for loan losses                             (836)                 (827)
  Net deferred loan origination costs                    449                   142
                                                    --------              --------

Total, net                                          $149,401              $142,202
                                                    ========              ========

Weighted-average interest rate of loans                 7.85%                 8.01%
</TABLE>

Loans sold and serviced by the Corporation at September 30, 1999 and 1998 were
approximately $257,906,000 and $164,396,000, respectively. The Corporation sells
loans in the secondary market without recourse and retains servicing rights.
Servicing loans for others consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payments to investors and foreclosure processing.
Loan servicing income is recorded on the accrual basis and includes servicing
fees received from the investors as well as certain charges collected from the
borrowers, such as late payment fees. In connection with these loans serviced
for others, the Corporation held borrowers' escrow balances of $548,000 at
September 30, 1999 and $496,000 at September 30, 1998.

Adjustable rate real estate loans (approximately $47,915,000 and $48,531,000 at
September 30, 1999 and 1998, respectively) are subject to rate adjustments
annually and generally are adjusted based on movement of the Federal Home Loan
Bank National Monthly Median Cost of Funds rate or the Constant Maturity
Treasury index.  The maximum loan rates can be adjusted is 200 basis points in
any one year with a lifetime cap of 600 basis points.

The Corporation made commercial real estate loans which totaled approximately
$3,172,000 and $4,193,000 at September 30, 1999 and 1998, respectively. These
loans are considered by management to contain a somewhat greater risk of
uncollectibility due to the dependency on income production or future
development and sale of the real estate. These commercial real estate loans are
collateralized by housing for the aged, churches, motels, apartments and other
improved real estate.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -25-
<PAGE>

3.   Loans, Net (continued)

Mortgage loans held for sale are stated at the lower of aggregate cost or
market, net of discounts and deferred loan fees and are included in net loans in
the consolidated balance sheets. Nonrefundable deferred origination fees and
cost and discount points collected at loan closing, net of commitment fees paid,
are deferred and recognized at the time of sale of the mortgage loans. Gain or
loss on sales of mortgage loans is recognized based upon the difference between
the selling price and the carrying amount of the mortgage loans sold. Other fees
earned during the loan origination process are also included in net gain or loss
on sales of mortgage loans.

Mortgage servicing rights are accounted for in accordance with SFAS No. 122,
Accounting for Mortgage Servicing Rights.  SFAS No. 122 requires that an entity
----------------------------------------
recognize, as separate assets, rights to service mortgage loans for others,
whether purchased or originated, by allocating the total cost of loans between
the loan and the mortgage servicing rights ("MSR") based on their relative fair
values.

Capitalized MSRs are amortized based on a method which approximates the
proportion of current net servicing revenues to the total estimated net
servicing revenues expected to be recognized over the average estimated
remaining lives of the underlying loans.  Capitalized MSRs are assessed for
impairment based on their fair values.

The Bank paid $1,423,000 for mortgage servicing rights for approximately
$108,746,000 of loans in 1999. The amortization of servicing rights and excess
servicing rights included in loan servicing fees amounted to $850,589, $348,764,
and $19,171 in 1999, 1998, and 1997 respectively.

The fair value of mortgage servicing rights at September 30, 1999 is
approximately $3,988,000.

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

Under OTS regulations, the Bank may not make loans to one borrower in excess of
15% of unimpaired capital. This limitation does not apply to loans made before
August 9, 1989. At September 30, 1999, the Bank had loans outstanding to one
borrower ranging up to $1,293,000 and was in compliance with this regulation.

Also under current regulations, the Bank's aggregate commercial real estate
loans may not exceed 400% of its capital as determined under regulatory
requirements. These limitations are not expected to have a material impact on
the Bank's ongoing operations.

At September 30, 1999 and 1998, loans which are accounted for on a non-accrual
basis or contractually past due ninety days or more totaled approximately
$184,000 and $696,000, respectively. The amount the Corporation will ultimately
realize from these loans could differ materially from their carrying value
because of future developments affecting the underlying collateral or the
borrower's ability to repay the loans. During the years ended September 30,
1999, 1998, and 1997, the Corporation recognized no interest income on loans
past due 90 days or more, whereas, under the original terms of these loans, the
Corporation would have recognized additional interest income of approximately
$8,000, $20,000, and $36,000, respectively.

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

<TABLE>
<CAPTION>
                                                    Years Ended September 30,
                                                   ----------------------------
                                                     1999      1998      1997
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Balance at beginning of year                         $ 827     $ 928     $ 799
Provision for loan losses                              105        --       243
(Charge-offs) recoveries, net                          (96)     (101)     (114)
                                                     -----     -----     -----

Balance at end of year                               $ 836     $ 827     $ 928
                                                     =====     =====     =====
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -26-
<PAGE>

3.   Loans, Net (continued)

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

<TABLE>
<CAPTION>
                                                    Years Ended September 30,
                                                  -----------------------------
                                                   1999        1998      1997
                                                  ------      ------    -------
<S>                                               <C>         <C>       <C>
Balance at beginning of year                      $1,919      $ 1,014    $  712
Loans originated during the year                     472        1,908       685
Loan repayments during the year                      (87)      (1,003)     (383)
                                                  ------      -------    ------
Balance at end of year                            $2,304      $ 1,919    $1,014
                                                  ======      =======    ======
</TABLE>


4.  Office Properties And Equipment

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

<TABLE>
<CAPTION>
                                                        September 30,
                                             ---------------------------------
                                              1999                      1998
                                              ----                      ----
<S>                                          <C>                      <C>
Land                                         $   660                  $   660
Building and improvements                      3,212                    2,859
Office furniture, fixtures and equipment       1,912                    2,151
                                             -------                  -------
Total                                          5,784                    5,670

Less accumulated depreciation                 (1,260)                  (1,650)
                                             -------                  -------

Office properties and equipment, net         $ 4,524                  $ 4,020
                                             =======                  =======
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -27-
<PAGE>

5.    Deposit Accounts

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

<TABLE>
<CAPTION>
                                                        1999                                       1998
                                               ------------------------------------  ----------------------------------
                                               Rate          Balance         %       Rate          Balance         %
                                               ----          -------         -       ----          -------         -
<S>                                            <C>           <C>          <C>        <C>           <C>           <C>
Account Type
------------
NOW accounts:
  Commercial noninterest-bearing               0.00%         $  8,146      5.71%     0.00%         $  7,119        5.44%
  Noncommercial                                0.81%           12,091      8.48%     1.33%           10,925        8.35%
Money market checking accounts                 3.31%            7,303      5.12%     3.40%            6,832        5.22%
Regular savings                                1.60%           12,695      8.90%     1.97%           11,849        9.06%
                                                             --------    ------                    --------      ------
Total demand and savings deposits              1.34%           40,235     28.21%     1.60%           36,725       28.08%
                                                             --------    ------                    --------      ------

Savings certificates:
  Up to 3.00%                                                     558      0.39%                         29        0.02%
  3.01 %- 4.00%                                                    --      0.00%                         55        0.04%
  4.01 %- 5.00%                                                53,566     37.56%                     19,393       14.83%
  5.01 %- 6.00%                                                41,597     29.17%                     68,969       52.74%
  6.01 %- 7.00%                                                 5,972      4.19%                      4,702        3.60%
                                                             --------    ------                    --------      ------
Total savings certificates                     4.95%          101,693     71.30%     5.51%         $ 93,148       71.23%
                                                             --------    ------                    --------      ------
Sweep accounts                                 4.00%              696      0.49%     4.00%              895        0.68%
Total deposit accounts                         3.92%         $142,624    100.00%     4.40%         $130,768      100.00%
                                               ====          ========    ======      ====          ========      ======
</TABLE>

As of September 30, 1999 and 1998, total deposit accounts include approximately
$1,322,000 and $1,432,000, respectively, of deposits from the Corporation's
officers, directors, employees or parties related to them.

At September 30, 1999 and 1998, deposit accounts with balances of $100,000 and
over totaled approximately $23,022,000 and $18,829,000, respectively.

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

<TABLE>
<CAPTION>
                                                              September 30,
                                              ---------------------------------------------
                                                   1999                          1998
                                                   ----                          ----
<S>                                           <C>                             <C>
Maturity Date
-------------
Within 1 year                                   $ 89,343                      $74,647
After 1 but within 2 years                         6,998                       11,408
After 2 but within 3 years                         4,232                        2,038
Thereafter                                         1,120                        5,055
                                                --------                      -------

Total certificate accounts                      $101,693                      $93,148
                                                ========                      =======
</TABLE>


________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -28-
<PAGE>

5.  Deposit Accounts (continued)

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

<TABLE>
<CAPTION>
                                                              Years Ended September 30,
                                                             ----------------------------
                                                               1999      1998      1997
                                                             --------  --------  --------
<S>                                                          <C>       <C>       <C>
Account Type
------------
NOW accounts and money market deposit accounts                $  411    $  410    $  353
Passbook and statement savings accounts                          207       253       275
Certificate accounts                                           5,107     4,912     4,062
Early withdrawal penalties                                       (19)      (31)      (24)
                                                              ------    ------    ------

Total                                                         $5,706    $5,544    $4,666
                                                              ======    ======    ======
</TABLE>

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

At September 30, 1999 and 1998, the Bank had $46,503,000 and $41,441,000,
respectively, of advances outstanding from the Federal Home Loan Bank and
treasury, tax and loan deposits. The maturity of the advances from the Federal
Home Loan Bank and treasury, tax and loan deposits is as follows (in thousands):

<TABLE>
<CAPTION>
                                                            September 30,
                                                 --------------------------------
                                                    1999                     1998
                                                    ----                     ----
<S>                                               <C>                      <C>
Contractual Maturity:
Within one year - fixed rate                       $14,503                 $19,441
Within one year - adjustable rate                    7,000                  16,000
After one but within two years - fixed rate             --                   1,000
After one but within two years -
 adjustable rate                                        --                   5,000
Greater than three years-adjustable rate           $25,000                      --
                                                   -------                 -------

Total Advances                                     $46,503                 $41,441
                                                   =======                 =======

Weighted average rate                                 5.41%                   5.69%
</TABLE>

The Bank pledges as collateral to the advances their Federal Home Loan Bank
Stock, and has entered into a blanket collateral agreement with the Federal Home
Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying
mortgages (as defined) with unpaid principal balances equal to, when discounted
at 75% of the unpaid principal balances, 100% of total advances.  The amount of
qualifying mortgages was $112,304,000 and $117,840,000, respectively, at
September 30, 1999 and 1998.

7.    Income Taxes

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

<TABLE>
<CAPTION>
                                                 For the Years Ended September 30,
                                                -----------------------------------
                                                   1999         1998        1997
                                                -----------  -----------  ---------
<S>                                             <C>          <C>          <C>
Current                                              ($364)       $1,094      $ 755
Deferred                                             1,309           197        103
                                                    ------        ------      -----

Total income taxes                                  $  945        $  897      $ 858
                                                    ======        ======      =====
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -29-
<PAGE>

7.    Income Taxes (continued)

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

<TABLE>
<CAPTION>
                                                      For the Years Ended September 30,
                                                     -------------------------------------
                                                        1999         1998         1997
                                                     -----------  -----------  -----------
<S>                                                  <C>          <C>          <C>
Tax at federal income tax rate                            $ 891        $ 832        $ 783
------------------------------
Increase (decrease) resulting from:
  State income taxes, net of federal benefit                100           96           91
  Interest on municipal bonds                                (9)          (6)         (10)
  Non-taxable life insurance income                          28           --           --
Other, net                                                   (9)         (25)          (6)
                                                          -----        -----        -----

Total                                                     $ 945        $ 897        $ 858
                                                          =====        =====        =====
</TABLE>

The tax effects of significant items comprising the Corporation's deferred taxes
as of September 30, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   September 30,
                                                             -------------------------
                                                             1999                 1998
                                                             ----                 ----
<S>                                                         <C>                  <C>
Deferred tax assets:
Book reserves in excess of tax basis bad debt reserves
      arising after September 30, 1988                      $   207              $  251
Tax mark to market adjustment on securities                      --                 129
Book reserves and amortization in excess of tax on
      mortgage servicing rights                                  --                  58
SFAS No. 115 mark to market adjustment                        1,001                  --
Difference between book and tax goodwill basis                   76                  40
Other                                                            30                  24
                                                             ------              ------
Total deferred tax asset                                         --                 502
                                                             ------              ------

Deferred tax liabilities:
  Difference between book and tax property basis                199                 199
  Difference between book and tax Federal Home Loan
      Bank stock basis                                           95                  95
  Deferred loan fees                                            184                  54
  Tax mark to market adjustment on securities                 1,056                  --
  SFAS No. 115 mark to market adjustment                         --                 122
   Other                                                         --                   8
                                                             ------              ------
Total deferred tax liability                                  1,534                 478
                                                             ------              ------

Net deferred tax asset (liability)                            ($162)             $   24
                                                             ======              ======
</TABLE>

Net deferred tax liabilities of $162,000 at September 30, 1999, are included in
other liabilities in the balance sheet. Net deferred tax assets of $24,000 at
September 30, 1998, are included in other assets in the balance sheet.

Legislation has been passed which repeals the "reserve" method of accounting for
thrift bad debt reserves for the first tax year beginning after December 31,
1995 (the fiscal year ending September 30, 1999 for the Corporation which
qualifies for deferral of the recapture under the "residential loan
requirement").  This legislation requires all thrifts (including the
Corporation) to account for bad debts using either the specific charge-off
method (available to all thrifts) or the experience method (available only to
thrifts that qualify as "small banks," i.e. under $500 million in assets).  The
Corporation currently uses the experience method of accounting for its tax bad
debt reserves.  The legislation also suspends recapture of bad debt reserves
taken through 1987 (i.e., the base year reserve), but requires thrifts to
recapture or repay bad debt deductions taken after 1987 over six years.

As of September 30, 1999, the bad debt reserve subject to recapture, for which
deferred taxes have previously been

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -30-
<PAGE>

7.  Income Taxes (continued)

provided, totaled approximately $272,000. As permitted under SFAS 109, no
deferred tax liability is provided for approximately $1,636,000 ($621,000
approximate tax effect) of such tax bad debt reserves that arose prior to
October 1, 1988.

8.  Employee Benefits

The Corporation has a contributory profit-sharing plan which is available to all
eligible employees. Annual employer contributions to the plan consist of an
amount which matches participant contributions up to a maximum of 5% of a
participant's compensation and a discretionary amount determined annually by the
Corporation's Board of Directors. In addition, the Corporation implemented a
money purchase pension plan, effective October 1, 1996, in which all eligible
employees participate. The annual contributions to the pension plan will be 5%
of a participant's compensation. Employer expensed contributions to the plans
were $154,000, $182,000, and $91,000 for the years ended September 30, 1999,
1998 and 1997, respectively.

9.   Financial Instruments

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

Those instruments involve, to varying degrees, elements of credit and interest-
rate-risk in excess of the amount recognized in the Consolidated Balance Sheets.
The contract amounts of those instruments reflect the extent of the
Corporation's involvement in particular classes of financial instruments.

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

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

<TABLE>
<CAPTION>
                                                                   September 30,
                                                           ------------------------------
                                                            1999                   1998
                                                            ----                   ----
<S>                                                        <C>                   <C>
 Fixed interest rate commitments to extend credit          $   830               $ 2,736

Undisbursed portion of interim construction loans            9,964                 6,625
Unused portion of credit lines (principally variable-rate
   consumer lines secured by real estate)                    7,292                 5,767
                                                           -------               -------

Total                                                      $18,086               $15,128
                                                           =======               =======
</TABLE>

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

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -31-
<PAGE>

9.   Financial Instruments (continued)

The Corporation has not been required to perform on any financial guarantees
during the past two years.  The Corporation has not incurred any losses on its
commitments in 1999, 1998 or 1997.

The estimated fair values of the Corporation's financial instruments were as
follows at September 30, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                      September 30, 1999
                                            ----------------------------------
                                             Carrying Amount       Fair Value
                                             ---------------       ----------
<S>                                         <C>                    <C>
Financial assets
----------------
Cash and cash equivalents                       $  5,570             $  5,570
Securities available for sale                     27,335               27,335
Securities held to maturity                        5,586                5,338
FHLB Stock                                         2,050                2,050
Loans                                            149,401              146,293
Accrued interest receivable                        1,574                1,574

Financial liabilities
---------------------
Deposits                                        $142,624             $138,642
Advances from FHLB and other borrowings           46,503               41,814

Off-balance-sheet asset (liabilities)
-------------------------------------

 Commitments to extend credit                   $ 18,086             $ 18,086
</TABLE>


<TABLE>
<CAPTION>
                                                      September 30, 1998
                                            ----------------------------------
                                             Carrying Amount       Fair Value
                                             ---------------       ----------
<S>                                         <C>                    <C>
Financial assets
----------------
Cash and cash equivalents                       $  3,593             $  3,593
Securities available for sale                     26,856               26,856
Securities held to maturity                        2,699                2,744
FHLB Stock                                         2,023                2,023
Loans                                            142,202              144,634
Accrued interest receivable                        1,197                1,197

Financial liabilities
---------------------
Deposits                                        $130,768             $128,850
Advances from FHLB and other borrowings           41,441               41,547

Off-balance-sheet asset (liabilities)
-------------------------------------

Commitments to extend credit                    $ 14,896             $ 14,896
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -32-
<PAGE>

10.  Supplemental Cash Flow Disclosures

<TABLE>
<CAPTION>
                                                                       For the Years Ended September 30,
                                                                      ----------------------------------
                                                                         1999        1998        1997
                                                                         ----        ----        ----
<S>                                                                   <C>           <C>         <C>
Cash paid for:

 Income taxes, net of refund                                           $  1,231     $  792      $  873
 Interest                                                                 7,698      7,213       6,333

Non-cash transactions:

 Loans foreclosed                                                           214         --          --
 Unrealized gain (loss) on securities available for sale                ($3,119)    $  250      $  255
</TABLE>


11.  Commitments And Contingencies

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

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

Potential Impact of Changes in Interest Rates - The Corporation's profitability
---------------------------------------------
depends to a large extent on its net interest income, which is the difference
between interest income from loans and investments and interest expense on
deposits and borrowings.  Like most financial institutions, the Corporation's
interest income and interest expense are significantly affected by changes in
market interest rates and other economic factors beyond its control.  The
Corporation's interest-earning assets consist primarily of long-term, fixed rate
mortgage loans and investments which adjust more slowly to changes in interest
rates than its interest-bearing liabilities which are primarily term deposits
and advances.  Accordingly, the Corporation's earnings would be adversely
affected during periods of rising interest rates.

12.  Stock Option and Ownership Plans

The Corporation has a stock option incentive compensation plan through which the
Board of Directors may grant stock options to officers and employees to purchase
common stock of the Corporation at prices not less than 100 percent of the fair
market value on the date of grant.  The outstanding options expire ten years
from the date of grant.  The Corporation applies Accounting Principles Board
(APB) Opinion 25 and related Interpretations in accounting for the plan.
Accordingly, no compensation cost has been charged to operations.  Had
compensation cost for the plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the accounting method
available under SFAS No. 123, Accounting for Stock-Based Compensation, the
                              ---------------------------------------
Corporations's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -33-
<PAGE>

12.  Stock Option and Ownership Plans (continued)

<TABLE>
<CAPTION>

                                             Years Ended September 30,
                                            ----------------------------
                                             1999       1998       1997
                                             ----       ----       ----
<S>                                         <C>        <C>        <C>
Net income (in thousands)
 As reported                                $1,676     $1,550     $1,444
 Pro forma                                   1,658      1,532      1,443

Basic net income per common share
 As reported                                  1.26       1.17       1.12
 Pro forma                                    1.25       1.15       1.12

Diluted net income per common share
 As reported                                  1.19       1.10       1.04
 Pro forma                                    1.17       1.09       1.04
</TABLE>

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

<TABLE>
<CAPTION>
                                             1999       1998       1997
                                             ----       ----       ----
<S>                                          <C>        <C>        <C>
Dividend yield                                 --         2%         2%
Expected volatility                            --        17%        17%
Risk-free interest rate                        --         6%         6%
Expected lives                                 --  10 years   10 years
</TABLE>

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

<TABLE>
<CAPTION>
                              Shares     Average Option Price    Expiration
  Grant Date                  Granted         Per Share             Date
  ----------                  -------         ---------             ----
<S>                           <C>        <C>                     <C>
October, 1995                 134,919           5.79             October, 2005
January, 1996                   1,890           5.79             January, 2006
April, 1996                     6,300           6.67             April, 2006
March, 1997                     3,938          10.00             March, 2007
May, 1998                      38,698          15.83             May, 2008
                              -------
 Total Shares Granted         185,745
</TABLE>

As of September 30, 1999, the number of shares exercisable were 79,872.  Options
for the three previous fiscal years were exercised as follows (adjusted for
stock splits and dividends):

<TABLE>
<CAPTION>
                                                         Average Exercise
For the Years Ended September 30,    Shares Exercised    Price Per Share
---------------------------------    ----------------    ---------------
<S>                                  <C>                 <C>
              1999                          315               $5.79
              1998                        9,920               $5.09
              1997                       25,852               $3.75
</TABLE>

Stock options for 5,827 shares were forfeited during the year ended September
30, 1999. No stock options have been forfeited during the years ended September
30, 1998 and 1997.  At September 30, 1999, 15,206 shares were available for
grant.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -34-
<PAGE>

12.  Stock Option and Ownership Plans (continued)

The Plan also provides for stock appreciation rights ("SARs").  To date, no SARs
have been granted.  Employees participate in stock ownership through the profit
sharing plan (see Note 9).

During the fiscal year 1998, the Corporation implemented a dividend reinvestment
plan that allows existing shareholders to reinvest their dividends for the
purchase of additional Union Financial Bancshares stock. In addition, the plan
can accept cash contributions up to a maximum of $50,000 annually for the
purchase of Union Financial Bancshares stock. The plan currently offers a 5%
discount on all purchases and does not charge purchase fees.


13.  Shareholders' Equity, Dividend Restrictions And Regulatory Matters

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

The Bank is prohibited from declaring cash dividends on its common stock or
repurchasing its common stock if the effect thereof would cause its net worth to
be reduced below either the amount required for the liquidation account or the
minimum regulatory capital requirement.  In addition, the Bank is also
prohibited from declaring cash dividends and repurchasing its own stock without
prior regulatory approval in any amount in a calendar year in excess of 100% of
its current year's net income to the date of any such dividend or repurchase,
plus 50% of the excess of its capital at the beginning of the year over its
regulatory capital requirement.

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

At September 30, 1999 and 1998, the Bank had the following actual and required
capital amounts and ratios (in thousands):

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -35-
<PAGE>

13.  Shareholders' Equity, Dividend Restrictions And Regulatory Matters
(continued)

<TABLE>
<CAPTION>
                                                                         September 30, 1999
                                                                         ------------------
                                                             Tangible           Core        Risk-Based
                                                              Capital         Capital         Capital
                                                              -------         -------         -------
<S>                                                          <C>              <C>           <C>
Actual Capital                                                $14,563         $14,563         $14,563
Unrealized loss on available for sale securities                1,779           1,779           1,779
Goodwill and other intangible assets                           (2,694)         (2,694)         (2,694)
Allowances for loan losses (1)                                     --              --             835
                                                              -------         -------         -------
Total Adjusted capital                                         13,648          13,648          14,483

Minimum Capital Requirement                                     3,072           8,182           9,427
                                                              -------         -------         -------
Regulatory Capital Excess                                     $10,576         $ 5,468         $ 5,058
                                                              -------         -------         -------

Regulatory Capital Ratio                                         6.66%           6.66%          12.29%
</TABLE>

<TABLE>
<CAPTION>
                                                                         September 30, 1998
                                                                         ------------------
                                                             Tangible           Core        Risk-Based
                                                              Capital         Capital         Capital
                                                              -------         -------         -------
<S>                                                          <C>              <C>           <C>
Actual Capital                                                $14,945         $14,945         $14,945
Unrealized gain on available for sale securities                 (148)           (148)           (148)
Goodwill and other intangible assets                           (1,873)         (1,873)         (1,873)
Allowance for loan losses (1)                                      --              --             994
                                                              -------         -------         -------
Total Adjusted capital                                         12,924          12,924          13,918

Minimum Capital Requirement                                     2,824           7,530           8,454
                                                              -------         -------         -------
Regulatory Capital Excess                                     $10,100         $ 5,394         $ 5,464
                                                              -------         -------         -------

Regulatory Capital Ratio                                         6.86%           6.86%          13.17%
</TABLE>

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

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

14.  Recently Issued Accounting Standards

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

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -36-
<PAGE>

14.  Recently Issued Accounting Standards (continued)

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
                                            -------------------------
Instruments and Hedging Activities. All derivatives are to be measured at fair
----------------------------------
value and recognized in the balance sheet as assets or liabilities. This
statement's effective date was delayed by the issuance of SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
----------------------------------------------------------------------------
Effective Date of SFAS No. 133-an amendment of SFAS No. 133, and is effective
-----------------------------------------------------------
for fiscal years and quarters beginning after June 15, 2000. The Corporation
does not expect that the adoption of SFAS No. 133 will have a material impact on
the presentation of the Corporation's financial results or financial position.

In February 1999, the FASB issued SFAS No. 135, Rescission of SFAS No. 75 and
                                                -----------------------------
Technical Corrections. This statement provides technical corrections for
---------------------
previously issued statements and rescinds SFAS No. 75, which provides guidance
related to pension plans of state and local governmental units. SFAS No. 135 is
effective for fiscal years ending after February 15, 1999. The adoption of SFAS
No. 135 did not have a material impact on the presentation of the Corporation's
financial results or financial position.

In June 1999, the FASB issued SFAS No. 136, Transfers of Assets to a Not-for-
                                            --------------------------------
Profit Organization or Charitable Trust that Raises or Holds Contributions for
------------------------------------------------------------------------------
Others. This statement establishes standards for transactions in which an entity
-------
makes a contribution by transferring assets to a not-for-profit organization or
a charitable trust and then requires these contributions to be used on specified
manner. SFAS 136 is effective for fiscal years beginning after December 15,
1999. The Corporation does not expect that the adoption of SFAS No. 136 will
have a material impact on the presentation of the Corporation's financial
results or financial position.


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

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

<TABLE>
<CAPTION>
       Condensed Balance Sheets                             September 30,
       ------------------------                             -------------
                                                         1999           1998
                                                         ----           ----
       <S>                                              <C>            <C>
       Assets:
       Cash and cash equivalents                        $   167        $   350
       Investment in subsidiary                          14,563         14,922
       Other                                                  8             28
                                                        -------        -------
       Total Assets                                     $14,738        $15,300
                                                        =======        =======

       Liabilities and Shareholders' Equity:
       Liabilities                                      $    --        $    --
       Shareholders' Equity                              14,738         15,300
                                                        -------        -------
       Total Liabilities and Shareholders' Equity       $14,738        $15,300
                                                        =======        =======
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -37-
<PAGE>

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

<TABLE>
<CAPTION>
     Condensed Statements of Income                                             For Years Ended September 30,
     -------------------------------                                           -------------------------------
                                                                           1999              1998             1997
                                                                           ----              ----             ----
     <S>                                                                 <C>               <C>               <C>

     Equity in undistributed earnings of subsidiary                      $ 1,744           $ 1,610           $ 1,477
     Other expense, net                                                      (68)              (60)              (33)
                                                                         -------           -------           -------

     Net income                                                          $ 1,676           $ 1,550           $ 1,444
                                                                         =======           =======           =======

     Operating Activities:

     Condensed Statements of Cash Flows
     ----------------------------------

     Net income                                                          $ 1,676           $ 1,550           $ 1,444
     Adjustments to reconcile net income to
       net cash used in operating activities:
     Equity in undistributed earnings of subsidiary                       (1,744)           (1,610)           (1,477)
     (Increase)Decrease in other assets                                       (4)               (2)               14
                                                                         -------           -------           -------

     Net cash used in operating activities                                   (72)              (62)              (19)
                                                                         -------           -------           -------

     Financing Activities:

     Dividends received from subsidiary                                      200                --               500
     Dividend reinvestment plan contributions                                182               428                --
     Dividends paid                                                         (494)             (467)             (433)
     Proceeds from the exercise of stock options                               1                51                96
                                                                         -------           -------           -------
     Net cash provided by (used in) financing activities                    (111)               12               163
                                                                         -------           -------           -------

     Net increase (decrease) in cash and cash equivalents                   (183)              (50)              144
     Cash and cash equivalents at beginning of year                          350               400               256
                                                                         -------           -------           -------
     Cash and cash equivalents at end of year                            $   167           $   350           $   400
                                                                         =======           =======           =======
</TABLE>

16. Subsequent Event
    ----------------

On November 12, 1999 Union Financial completed its acquisition of South Carolina
Community Bancshares, Inc. and its wholly owned subsidiary, Community Federal
Savings Bank. Union Financial issued a total of 526,290 shares and paid a total
of $3,582,081 to the shareholders of South Carolina Community Bancshares, Inc.
The transaction was accounted for under the purchase method of accounting.  The
two offices of Community Federal Savings Bank became offices of Provident
Community Bank, the wholly owned subsidiary of Union Financial Bancshares. At
September 30, 1999, South Carolina Community Bancshares, Inc. had total assets
of $46.6 million, loans of $40.2 million and deposits of $35.9 million.

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -38-
<PAGE>

                              Board of Directors
                  Union Financial Bancshares And Subsidiaries


<TABLE>
<S>                                           <C>
Mason G. Alexander                            Quay W. McMaster
Director, Mid-South Management Company        Owner, Winnsboro Plywood

James W. Edwards                              John S. McMeekin
Dean of Academics, USC-Union                  President, Winnsboro Furniture Company

William M. Graham                             Dwight V. Neese
Owner, Graham's Flowers                       President and Chief Executive Officer
                                              Provident Community Bank
Louis M. Jordan
President, Jordan's Ace Hardware, Inc.        David G. Russell
                                              Self-employed accountant
Carl L. Mason
Chairman                                      Philip C. Wilkins, DMD
Retired                                       Dentist

                               Leadership Group
                           Provident Community Bank

Gerald L. Bolin                               Alan W. Pullen
Senior Vice President                         Senior Vice President
Chief Operating Officer                       City Executive

Richard H. Flake                              Michael H. Vanderford
Executive Vice President                      Senior Vice President
Chief Financial Officer                       Mortgage Lending Manager

George E. Hall, Jr.                           Mary E. Weiland
Vice President                                Investment Services Manager
Retail Banking Manager                        Provident Financial Services

Suzanne M. Lowery                             Wanda J. Wells
Vice President                                Vice President & Corporate Secretary
Mortgage Loan Acquisitions Manager            Shareholder Relations Officer

Dwight V. Neese                               Gerald B. Wyatt
President                                     Vice President
Chief Executive Officer                       Consumer/Commercial Lending Manager
</TABLE>

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -39-
<PAGE>

                             Corporate Information

Common Stock Information
------------------------

Union Financial Bancshares, Inc.'s common stock began trading on the Nasdaq
National Market under the symbol UFBS on November 15, 1999. From July 10, 1998
until November 15, 1999, Union Financial's common stock was quoted on the Nasdaq
SmallCap Market under the same trading symbol. As of September 30, 1999, there
were 534 shareholders of record and 1,357,214 shares of common stock issued and
outstanding. The following table contains the range of high and low bid
information of Union Financial's common stock as reported by the Nasdaq Stock
Market since Union Financial was first listed and per share dividend as declared
during each quarter of the last two fiscal years. Share prices and dividends
have been adjusted to reflect all stock splits and stock dividends. See Note 13
to the financial statements for information regarding certain limitations
imposed on the Bank's ability to pay cash dividends to the holding company

<TABLE>
<CAPTION>
                                    High      Low     Dividend
                                    ----      ---     --------
<S>                                <C>       <C>      <C>
Fiscal 1999
 Fourth Quarter                    $12.38    $10.50     $.093
 Third Quarter                     $14.00    $10.00     $.093
 Second Quarter                    $14.50    $12.00     $.093
 First Quarter                     $14.29    $12.86     $.093
</TABLE>

<TABLE>
<CAPTION>
                                    High      Low     Dividend
                                    ----      ---     --------
<S>                                <S>      <C>       <C>
Fiscal 1998
 Fourth Quarter                    $16.67   $13.33      $.093
 Third Quarter                        N/A      N/A      $.093
 Second Quarter                       N/A      N/A      $.093
 First Quarter                        N/A      N/A      $.090
</TABLE>

Dividend Reinvestment and Stock Purchase Plan
---------------------------------------------

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

10-KSB Information
------------------

A copy of the Form 10-KSB filed with the Securities and Exchange Commission,
will be furnished to shareholders upon written request to the Corporate
Secretary, Union Financial Bancshares, Inc., 203 West Main Street, Union, South
Carolina 29379.

Annual Meeting of Shareholders
------------------------------

The Annual Meeting of Shareholders will convene at the Community Room of the
University of South Carolina, Union Campus, Academy and North Mountain Street,
Union, South Carolina on January 19, 2000 at 2:00 p.m.

Additional Information
----------------------

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

Corporate Offices
-----------------

203 West Main Street
Union, South Carolina 29379
(888) 427-9002

Transfer Agent
--------------

Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 456-0596

Independent Certified Public Accountants
----------------------------------------

Elliott, Davis & Company,   LLP
870 South Pleasantburg Drive
Greenville, SC 29607-6286
(864) 242-3370

Special Counsel
---------------

Muldoon, Murphy & Faucette  LLP
5101 Wisconsin Avenue,  N.W.
Washington, D.C.  20016
(202) 362-0840

General Counsel
---------------

Whitney, White and Diamaduros
203 West South Street
Union, South Carolina 29379
(864) 427-5661

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -40-
<PAGE>

Stock Information
-----------------

I J L Wachovia
Interstate Tower
P. O. Box 1012
Charlotte, NC 28201-10123
(800) 929-1003

Trident Securities, Inc.
4601 Six Forks Road
Raleigh, NC   27609
(800) 222-2618

Wheat First Union
P. O. Box 10586
Greenville, SC 29603
(800) 695-5104

Shareholder Relations  Officer
------------------------------

Wanda J. Wells
Union Financial Bancshares, Inc.
203 West Main Street
Union, SC 29379
(864) 429-1861

________________________________________________________________________________
                       Union Financial Bancshares, Inc.

                                      -41-