<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE
     ACT OF 1934

For the Fiscal Year Ended September 30, 2002

                                       OR

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

                          Commission File Number 1-5735

                        Union Financial Bancshares, Inc.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

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

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

Issuer's telephone number:

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


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

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

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

     The issuer's gross revenues for the fiscal year ended September 30, 2002
were approximately $19,669,000.

     As of November 13, 2002, there were 1,958,069 shares of the registrant's
common stock issued and outstanding. The aggregate market value of the voting
stock held by non-affiliates, computed by reference to the average bid and asked
price on November 25, 2002, was approximately $23,894,000 (1,803,311 shares at
$13.25 per share). Solely for the purposes of this calculation it is assumed
that directors and executive officers are affiliates of the registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the Annual Report to Shareholders for the Fiscal Year Ended
     September 30, 2002 (Part II).

2.   Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders
     (Part III).

<PAGE>

<TABLE>
<CAPTION>
                                                     INDEX

                                                                                                                 Page
                                                                                                                 ----
<S>                                                                                                              <C>
                                                     Part I

Item 1.  Description of Business ..............................................................................  1-21
Item 2.  Description of Property ..............................................................................    22
Item 3.  Legal Proceedings ....................................................................................    22
Item 4.  Submission of Matters to a Vote of Security Holders ..................................................    22

                                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters .............................................    22
Item 6.  Management's Discussion and Analysis or Plan of Operation ............................................    22
Item 7.  Financial Statements .................................................................................    22
Item 8.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure .................    22

                                                    Part III

Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
         Exchange Act..........................................................................................    23
Item 10. Executive Compensation................................................................................    23
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........    24
Item 12. Certain Relationships and Related Transactions........................................................    24
Item 13. Exhibits and Reports on Form 8-K......................................................................    25
Item 14. Controls and Procedures...............................................................................    25
</TABLE>

<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

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

     The Bank is a federally-chartered, capital stock savings bank headquartered
in Union, South Carolina. The Bank's operations are conducted through its main
office and five full-service banking centers, all of which are located in the
upstate area of South Carolina. The Corporation opened a temporary facility in
York County with a full service facility to be completed by the second quarter
of the fiscal year. The Bank is a member of the Federal Home Loan Bank ("FHLB")
and its deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").

     The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on residential properties located
in Laurens, Union and Fairfield counties in South Carolina. The Bank also makes
commercial real estate, construction, commercial and consumer loans and invests
in obligations of the federal government and its agencies and of state and local
municipalities. The Bank purchases both fixed and adjustable rate mortgage-
backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. The Bank has
purchased variable rate mortgages originated by other organizations. See
"Lending Activities." The principal sources of funds for the Bank's lending
activities include deposits received from the general public, interest and
principal repayments on loans and, to a lesser extent, borrowings from the
FHLB-Atlanta. The Bank's primary source of income is interest earned on loans
and investments. The Bank's principal expense is interest paid on deposit
accounts and borrowings and expenses incurred in operating the Bank.

     This annual report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. These
forward-looking statements include, but are not limited to, estimates and
expectation of future performance with respect to the financial condition and
results of operations of the Corporation and other factors. These
forward-looking statements are not guarantees of future performance and are
subject to various factors that could cause actual results to differ materially
from these forward-looking statements. These factors include, but are not
limited to, changes in general economic and market conditions and the legal and
regulatory environment in which Union Financial and the Bank operate and the
development of an interest rate environment that adversely affects the
Corporation's interest rate spread or other income anticipated from the
Corporation's operations. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Corporation does not undertake-- and specifically disclaims
any obligation-- to publicly release the results of any revisions which may be
made to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.

COMPETITION

     The Corporation faces competition in both the attraction of deposit
accounts and in the origination of mortgage, commercial and consumer loans. Its
most direct competition for savings deposits has historically derived from other
thrift institutions and commercial banks located in and around Union, Laurens
and Fairfield County, South Carolina. The Corporation faces additional
significant competition for investor funds from money market instruments and
mutual funds. It competes for savings by offering depositors a variety of
savings accounts, convenient office locations and other services.

     The Corporation competes for loans principally through the interest rates
and loan fees it charges and the efficiency and quality of the services it
provides borrowers, real estate brokers and home builders. The Corporation's

                                       1

<PAGE>

competition for real estate loans comes principally from other thrift
institutions, commercial banks and mortgage banking companies.

     Competition has increased and is likely to continue to increase as a result
of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Technological advances, for
example, have lowered barriers to market entry, allowed banks to expand their
geographic reach by providing services over the Internet and made it possible
for non-depositing institutions to offer products and services that
traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which
permits affiliation among banks, securities firms and insurance companies, also
has changed and may continue to change the competitive environment in which the
Bank conducts business. As of September 30, 2002, a local commercial bank and an
office of a regional commercial bank were located in Union County, South
Carolina. The Corporation is the largest financial institution based in Union
County, South Carolina.

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST

     The following table sets forth certain information for the periods
indicated regarding: (1) average balances of assets and liabilities; (2) the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities; and (3) average yields
and costs. Such yields and costs for the periods indicated are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily balances results in any material difference
in the information presented.

                                        2

<PAGE>

<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30,
                                            ---------------------------------------------------------------------
                                                          2002                                2001
                                            ---------------------------------  ----------------------------------
                                             AVERAGE                AVERAGE      AVERAGE                AVERAGE
                                             BALANCE    INTEREST   YIELD/COST    BALANCE    INTEREST   YIELD/COST
                                            ---------   --------   ----------   ---------   --------   ----------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>              <C>    <C>         <C>              <C>
Interest-earning assets:
   Loans receivable, net (1)..............  $ 165,085   $ 12,519         7.58%  $ 163,665   $ 14,487         8.85%
   Mortgage-backed securities.............     73,397      4,012         5.47      48,721      2,894         5.94
Investment securities:
   Taxable................................     14,606      1,015         6.95      19,872      1,417         7.13
   Nontaxable.............................     17,648        731         4.14       2,276        108         4.75
                                            ---------   --------   ----------   ---------   --------   ----------
Total investment securities...............     32,254      1,745         5.41      22,148      1,525         6.88
   Overnight deposits.....................      8,246         86         1.03       5,526        112         2.03
                                            ---------   --------   ----------   ---------   --------   ----------
      Total interest-earning assets.......    278,983     18,361         6.58     240,060     19,018         7.92
Non-interest-earning assets...............     18,365                              21,998
                                            ---------                           ---------
      Total assets........................  $ 297,347                           $ 262,058
                                            =========                           =========

Interest-bearing liabilities:
   Savings accounts.......................     15,336        146         0.95   $  15,354        279         1.82
   Negotiable order of withdrawal
    accounts..............................     37,862        425         1.12      31,779        604         1.90
   Certificate accounts...................    142,953      5,430         3.80     140,576      7,939         5.65
   FHLB advances and other borrowings.....     74,918      3,774         5.04      47,169      2,791         5.92
                                            ---------   --------   ----------   ---------   --------   ----------
      Total interest-bearing liabilities..    271,069      9,775         3.61     234,878     11,613         4.94
   Non-interest-bearing liabilities.......      1,576                               4,907
                                            ---------                           ---------
      Total liabilities...................    272,645                             239,785
   Shareholders' equity...................     24,702                              22,273
                                            ---------                           ---------
      Total liabilities and shareholders'
       equity ............................  $ 297,348                           $ 262,058
                                            =========                           =========

Net interest income.......................              $  8,586                            $  7,405
                                                        ========                            ========
Interest rate spread (2)..................                               2.97%                               2.98%
Net interest margin (3) ..................                  3.08%                               3.08%
Ratio of average interest-earning assets
 to average interest-bearing liabilities..       1.03x                               1.02x

<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                            ---------------------------------
                                                          2000
                                            ---------------------------------
                                             AVERAGE                AVERAGE
                                             BALANCE    INTEREST   YIELD/COST
                                            ---------   --------   ----------
                                                   (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>              <C>
Interest-earning assets:
   Loans receivable, net (1)..............  $ 183,692   $ 15,272         8.31%
   Mortgage-backed securities.............     29,157      1,711         5.87
Investment securities:
   Taxable................................     19,962      1,411         7.07
   Nontaxable.............................      1,824         84         4.60
                                            ---------   --------   ----------
Total investment securities...............     21,786      1,495         6.86
   Overnight deposits.....................      3,411         77         2.25
                                            ---------   --------   ----------
      Total interest-earning assets.......    238,046     18,555         7.79
Non-interest-earning assets...............     19,794
                                            ---------
      Total assets........................  $ 257,840
                                            =========

Interest-bearing liabilities:
   Savings accounts.......................  $  16,407        319         1.94
   Negotiable order of withdrawal
    accounts..............................     28,519        474         1.66
   Certificate accounts...................    139,621      7,574         5.42
   FHLB advances and other borrowings.....     49,517      2,808         5.67
                                            ---------   --------   ----------
      Total interest-bearing liabilities..    234,064     11,175         4.77
   Non-interest-bearing liabilities.......      3,657
                                            ---------
      Total liabilities...................    237,721
   Shareholders' equity...................     20,119
                                            ---------
      Total liabilities and shareholders'
       equity ............................  $ 257,840
                                            =========

Net interest income.......................              $  7,380
                                                        ========
Interest rate spread (2)..................                               3.02%
Net interest margin (3) ..................                  3.10%
Ratio of average interest-earning assets
 to average interest-bearing liabilities..       1.02x
</TABLE>

----------
(1)  Average loans receivable includes nonaccruing loans. Interest income does
     not include interest on loans 90 days or more past due.
(2)  Represents difference between weighted average yield on all
     interest-earning assets and weighted average rate on all interest-bearing
     liabilities.
(3)  Represents net interest income before provision for loan losses as a
     percentage of average interest-earning assets.

                                        3

<PAGE>

LENDING ACTIVITIES

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

<TABLE>
<CAPTION>
                                                             AT SEPTEMBER 30,
                              --------------------------------------------------------------------------------------
                                      2002                   2001                 2000                  1999
                              --------------------   -------------------   -------------------   -------------------
                               AMOUNT     PERCENT      AMOUNT    PERCENT    AMOUNT     PERCENT    AMOUNT     PERCENT
                              ---------   --------   ---------   -------   ---------   -------   ---------   -------
<S>                           <C>           <C>      <C>          <C>      <C>          <C>      <C>          <C>
First mortgage loans:
   Conventional.............  $  88,746      54.92%  $  99,593     63.01%  $ 116,735     69.56%  $ 105,094     70.35%
   Commercial loans.........      6,961       4.31       1,937      1.22       4,844      2.89       3,172      2.12
   Construction loans.......      5,514       3.41      12,259      7.76      12,335      7.35      17,039     11.40
   Participation loans
    purchased...............         --         --         353      0.22         366      0.22         377      0.25
                              ---------   --------   ---------   -------   ---------   -------   ---------   -------
      Total mortgage loans..    101,221      62.64     114,142     72.21     134,280     80.02     125,682     84.12
                              ---------   --------   ---------   -------   ---------   -------   ---------   -------
Second mortgage loans.......     11,174       6.92      10,163      6.43       9,848      5.87       8,499      5.69
Consumer and installment
 loans......................     25,646      15.87      20,653     13.06      20,336     12.12      16,388     10.97
Commercial loans............     27,945      17.29      19,955     12.63      10,719      6.39       7,748      5.19
Savings account loans.......      1,723       1.07       2,009      1.27       1,971      1.17       1,435      0.96
                              ---------   --------   ---------   -------   ---------   -------   ---------   -------
      Total loans...........    167,709     103.79     166,922    105.60     177,154    105.57     159,752    106.93
                              ---------   --------   ---------   -------   ---------   -------   ---------   -------
Less:
   Undisbursed loans in
    process.................     (3,204)     (1.97)     (6,108)    (3.86)     (5,445)    (3.24)     (9,964)    (6.67)
   Loan discount
    unamortized.............     (1,685)     (1.04)     (1,922)    (1.22)     (2,718)    (1.62)         --        --
   Allowance for loan
    losses..................     (1,371)     (0.85)     (1,080)    (0.68)     (1,360)    (0.81)       (836)    (0.56)
   Deferred loan fees.......        127       0.07         251      0.16         176      0.10         449      0.30
                              ---------   --------   ---------   -------   ---------   -------   ---------   -------
   Net loans receivable.....  $ 161,576     100.00   $ 158,063    100.00   $ 167,807    100.00   $ 149,401    100.00
                              =========   ========   =========   =======   =========   =======   =========   =======

<CAPTION>
                                AT SEPTEMBER 30,
                              ------------------
                                      1998
                              -------------------
                               AMOUNT     PERCENT
                              ---------   -------
<S>                           <C>          <C>
First mortgage loans:
   Conventional.............  $ 110,190     77.49%

   Commercial loans.........      4,193      2.95
   Construction loans.......     12,838      9.03
   Participation loans
    purchased...............        665      0.47
                              ---------   -------
      Total mortgage loans..    127,886     89.94
                              ---------   -------
Second mortgage loans.......      5,857      4.12
Consumer and installment
 loans......................     10,679      7.51
Commercial loans............      3,539      2.49
Savings account loans.......      1,551      1.09
                              ---------   -------
      Total loans...........    149,512    105.15
                              ---------   -------
Less:
   Undisbursed loans in
    process.................     (6,625)    (4.66)
   Loan discount
    unamortized.............         --        --
   Allowance for loan
      losses................       (827)    (0.59)
   Deferred loan fees.......        142      0.10
                              ---------   -------
   Net loans receivable.....  $ 142,202    100.00
                              =========   =======
</TABLE>

     The following table sets forth, at September 30, 2002, certain information
regarding the dollar amount of principal repayments for loans becoming due
during the periods indicated (in thousands). Demand loans (loans having no
stated schedule of repayments and no stated maturity) and overdrafts are
reported as due in one year or less.

                                                  DUE
                                                 AFTER
                                       DUE      1 YEAR
                                      WITHIN    THROUGH    DUE AFTER
                                     ONE YEAR   5 YEARS     5 YEARS      TOTAL
                                     --------   --------   ---------   ---------
First mortgage loans:
   Conventional loans ............   $  1,474   $  8,203   $  86,030   $  95,707
   Construction loans (1).........      5,514         --          --       5,514
Second mortgage loans ............         --         --      11,174      11,174
Consumer and installment loans ...     12,526     11,867       1,253      25,646
Commercial loans .................      6,136     19,694       2,115      27,945
Savings account loans ............      1,723         --          --       1,723
                                     --------   --------   ---------   ---------
      Total ......................   $ 27,373   $ 39,764   $ 100,572   $ 167,709
                                     ========   ========   =========   =========
----------
(1) Includes construction/permanent loans.

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

                                        4

<PAGE>

     The following table sets forth, at September 30, 2002, the dollar amount of
loans due after September 30, 2003 which have fixed rates of interest and which
have adjustable rates of interest (in thousands).

                        FIXED     ADJUSTABLE     TOTAL
                       --------   ----------   ---------

Mortgage loans .....   $ 47,077   $   25,347   $  74,424
Commercial loans ...     19,157        2,652      21,809
All other loans ....     28,601       17,502      46,103
                       --------   ----------   ---------
      Total ........   $ 94,835   $   45,501   $ 140,336
                       ========   ==========   =========

     Real Estate Loans. The Corporation originates conventional mortgage loans
to enable borrowers to purchase existing single family homes or to construct new
homes. The Corporation's residential real estate loan portfolio also includes
loans on multi-family dwellings (more than five units). At September 30, 2002,
approximately $101.2 million, or 62.6% of the Corporation's net loan portfolio
consisted of loans secured by residential real estate (net of undisbursed
principal).

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

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

     The Corporation offers a full complement of mortgage lending products with
both fixed and adjustable rates. Due to the nature of the Corporation's
marketplace, only a small percentage of "local" loans are adjustable-rate
mortgage loans ("ARMs"). The majority of adjustable-rate loans in the portfolio
are originated outside of Union, Fairfield, and Laurens County by third party
originators. The Corporation has established a network of third party loan
brokers who originate loans for the Corporation, as well as other originators,
throughout the state of South Carolina. These loans are originated and
underwritten using the same terms and conditions as loans originated by the
Corporation. The Corporation offers ARMs tied to U.S. Treasury Bills with a
maximum interest rate adjustment of 2% annually and 6% over the life of the
loan. At September 30, 2002, the Corporation had approximately $27.9 million of
ARMs, or 16.9% of the Corporation's total loans receivable.

     At September 30, 2002, 42.4% of the Corporation's loan portfolio consisted
of long-term, fixed-rate real estate loans. Net interest income depends to a
large extent on how successful the Corporation is in "matching" interest-earning
assets and interest-bearing liabilities. The Corporation has taken steps to
reduce its exposure to rising interest rates. For a discussion of these steps,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report.

     Commercial real estate loans constituted approximately $6.9 million, or
4.3%, of the Corporation's net loan portfolio at September 30, 2002. Commercial
real estate loans consist of permanent loans secured by multi-family loans,
generally apartment houses, as well as commercial and industrial properties,
including office buildings, warehouses, shopping centers, hotels, motels and
other special purpose properties. Commercial real estate loans are originated
and purchased for inclusion in the Corporation's portfolio. These loans
generally have 20 to 30 year amortization schedules

                                       5

<PAGE>

and are callable or have balloon payments after five years. Typically, the loan
documents provide for adjustment of the interest rate every one to three years.
Fixed-rate loans secured by multi-family residential and commercial properties
have terms ranging from 20 to 25 years.

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

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

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

     Construction financing affords the Corporation the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than do
single-family permanent mortgage loans. However, construction loans are
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending due to: (i) the concentration of principal among
relatively few borrowers and development projects; (ii) the increased difficulty
at the time the loan is made of estimating the building costs and selling price
of the property to be built; (iii) the increased difficulty and costs of
monitoring the loan; (iv) the higher degree of sensitivity to increases in
market rates of interest; and (v) the increased difficulty of working out loan
problems. Speculative construction loans have the added risk associated with
identifying an end-purchaser for the finished property.

     At September 30, 2002, the Corporation had approximately $5.5 million
outstanding in construction loans, including approximately $3.2 million in
undisbursed proceeds. Of the $5.5 million in construction loans at September 30,
2002, approximately $748,000 were "speculative," meaning that, at the time the
loan was made, there was no sales contract or permanent loan in place for the
finished home. Substantially all of these loans were secured by one- to
four-family residences.

     Consumer Loans. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of the
institution's assets. In addition, a federal thrift institution has lending
authority above the 35% category for certain consumer loans, such as home equity
loans, property improvement loans, mobile home loans and loans secured by
savings accounts. The Corporation's consumer loan portfolio consists primarily
of automobile loans on new and used vehicles, mobile home loans, boat loans,
home equity loans, second mortgage loans, loans secured by savings accounts and
unsecured loans. As of September 30, 2002, consumer loans amounted to $38.5
million, or 23.0% of the Corporation's total loan portfolio. The Corporation
makes consumer loans to serve the needs of its customers and as a way to improve
the interest-rate sensitivity of the Corporation's loan portfolio.

     Consumer loans tend to bear higher rates of interest and have shorter terms
to maturity than residential mortgage loans. However, nationally, consumer loans
have historically tended to have a higher rate of default than residential
mortgage loans. Additionally, consumer loans entail greater risk than do
residential mortgage loans, particularly in the case of loans that are unsecured
or secured by rapidly depreciating assets such as automobiles. In these cases,
any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. In addition, consumer

                                        6

<PAGE>

loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy.

     Commercial Loans. The Corporation makes commercial business loans primarily
in its market area to small businesses. The Corporation offers secured
commercial loans with maturities of up to 20 years. The term for repayment will
normally be limited to the lesser of the expected useful life of the asset being
financed or a fixed amount of time, generally less than seven years. These loans
have adjustable rates of interest indexed to the prime rate as reported in The
Wall Street Journal and are payable on demand, subject to annual review and
renewal. When making commercial loans, the Corporation considers the financial
statements of the borrower, the borrower's payment history of both corporate and
personal debt, the debt service capabilities of the borrower, the projected cash
flows of the business, the viability of the industry in which the customer
operates and the value of the collateral. Commercial loans are generally secured
by a variety of collateral, primarily accounts receivable, inventory and
equipment, and are generally supported by personal guarantees. Depending on the
collateral used to secure the loans, commercial loans are made in amounts of up
to 80% of the value of the collateral securing the loan. The Corporation's
largest commercial loan relationship was a $2.3 million loan secured by real
estate located in Rock Hill, South Carolina. This loan was performing according
to its original terms at September 30, 2002.

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

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

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

     Loan Originations, Purchases and Sales. The Corporation purchases loans
from mortgage brokers primarily located in South Carolina. The loan types
purchased are primarily adjustable rate residential loans. The Corporation had
total purchases through the broker network of $6.6 million in fiscal 2002. The
Corporation reduced broker loan purchases beginning in fiscal 2001 to provide an
increased capital allocation for consumer and commercial lending. At September
30, 2002, the Bank was servicing $45.8 million of loans for others.

                                       7

<PAGE>

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

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

                                                 YEAR ENDED SEPTEMBER 30,
                                              ------------------------------
                                                2002       2001       2000
                                              --------   --------   --------
Loans originated:
   First mortgage loans:
      Conventional loans ..................   $  9,926   $ 28,795   $ 34,321
      Construction loans ..................      6,625     11,726     16,526
                                              --------   --------   --------
         Total mortgage loans originated ..     16,551     40,521     50,847
                                              --------   --------   --------
Consumer loans ............................     12,318     15,467     15,523
Commercial loans ..........................     57,838     27,359     13,357
                                              --------   --------   --------
         Total loans originated ...........   $ 86,707   $ 83,347   $ 79,727
                                              ========   ========   ========

Loans purchased ...........................   $  5,275   $ 30,851   $ 44,102
Loans sold ................................         --   $ 32,868   $ 43,508

     Loan Commitments. The Corporation's commitments to make conventional
mortgage loans on existing residential dwellings are normally made for periods
of up to 60 days from the date of loan approval. See "Financial Condition,
Liquidity and Capital Resources" in the Annual Report.

     Loan Origination and Other Fees. In addition to interest earned on loans
and fees for making loan commitments, the Corporation charges origination fees
or "points" for originating loans. Loan origination fees are usually a
percentage of the principal amount of the mortgage loan, typically between 0.5%
and 2%, depending on the terms and conditions. Other fees collected include late
charges applied to delinquent payments and fees collected in connection with
loan modifications. The Corporation charges a 5% late charge fee on payments
delinquent 15 days or more on new loan originations, loan modifications, loan
assumptions and loans currently in the Corporation's portfolio where applicable.
The 5% late charge is calculated on the delinquent monthly principal and
interest payment amount. Late charges and modification fees do not constitute a
material source of income. Current accounting standards require fees received
(net of certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. As of
September 30, 2002, the Corporation had net deferred loan fees of approximately
$251,000.

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

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

     The Corporation generally determines a loan to be impaired at the time
management believes that it is probable that the principal and interest may be
uncollectible. Management has determined that, generally, a failure to make a
payment within a 90-day period constitutes a minimum delay or shortfall and does
not generally constitute an impaired loan. However, management reviews each past
due loan on a loan-by-loan basis and may determine a loan to be impaired prior
to the loan becoming over 90 days past due, depending upon the circumstances of
that particular loan. A loan is classified as non accrual at the time management
believes that the collection of interest is improbable, generally when a loan
becomes

                                       8

<PAGE>

90 days past due. The Corporation's policy for charge-off of impaired
loans is on a loan-by-loan basis. At the time management believes the collection
of interest and principal is remote, the loan is charged off. The Corporation's
policy is to evaluate impaired loans based on the fair value of the collateral.
Interest income from impaired loans is recorded using the cash method.

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

     The following table sets forth information with respect to the
Corporation's non-performing assets for the periods indicated (dollars in
thousands). It is the policy of the Corporation to cease accruing interest on
loans 90 days or more past due. As of and for the years ended September 30, 2002
and 2001, loans totaled $809,293 and $121,075 respectively, that were classified
within the meaning of Statement of Financial Accounting Standards ("SFAS") No.
15. The increase in impaired loans over the previous year was due to higher loan
delinquencies as a result of higher than state average unemployment from plant
layoffs and closings in the surrounding communities. Also, at the dates
indicated, there were no loans which are not disclosed in the following table
about which there was known information of possible credit problems of the
borrowers' ability to comply with the present repayment terms:

<TABLE>
<CAPTION>
                                                              AT SEPTEMBER 30,
                                                ---------------------------------------------
                                                 2002       2001     2000      1999     1998
                                                -------    -----    -------   ------   ------
<S>                                             <C>        <C>      <C>       <C>      <C>
Loans accounted for on a non accrual basis:
     Real estate .............................  $   916    $ 626    $   763   $   43   $  581
     Commercial ..............................      524      160        247       --       --
     Consumer ................................      426        9        106      141      115
                                                -------    -----    -------   ------   ------
      Total ..................................    1,866      795      1,116      184      696
                                                -------    -----    -------   ------   ------
Accruing loans which are contractually past
 due 90 days or more .........................       --       --         --       --       --
Real estate owned, net .......................      356       77        459      241       35
                                                -------    -----    -------   ------   ------
         Total non-performing assets .........  $ 2,222    $ 872    $ 1,575   $  425   $  731
                                                =======    =====    =======   ======   ======

Percentage of loans receivable net ...........     1.37%    0.56%      0.94%    0.28%    0.55%
                                                =======    =====    =======   ======   ======
</TABLE>

     Interest income that would have been recorded for the year ended September
30, 2002 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $112,000. There was no interest included in
interest income on such loans for the year ended September 30, 2002.

     Allowance for Loan Losses. In originating loans, the Corporation recognizes
that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower
over the term of the loan, general economic conditions and, in the case of a
secured loan, the quality of the security for the loan. To cover losses inherent
in the portfolio of performing loans, the Corporation maintains an allowance for
loan losses. Management's periodic evaluation of the adequacy of the allowance
is based on a number of factors, including management's evaluation of the
collectibility of the loan portfolio, the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans
and economic conditions. The amount of the allowance is based on the estimated
value of the collateral securing the loan and other analysis pertinent to each
situation.

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

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

                                       9

<PAGE>

the category weight is adjusted accordingly. In addition, as the loan categories
increase and decrease in balance, the provision for loan loss calculation will
adjust accordingly.

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

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

<TABLE>
<CAPTION>
                                                                  AT SEPTEMBER 30,
                                              -------------------------------------------------------
                                               2002         2001        2000        1999        1998
                                              -------     -------     -------     -------     -------
<S>                                           <C>         <C>         <C>         <C>         <C>
Balance at beginning of year ..............   $ 1,080     $ 1,360     $   836     $   827     $   928
                                              -------     -------     -------     -------     -------
Loans charged off:
      Real estate .........................      (127)       (180)        (85)         --          --
      Commercial ..........................      (542)       (211)         --          --          --
      Consumer ............................       (82)       (176)       (129)       (106)       (127)
                                              -------     -------     -------     -------     -------
         Total charge-offs ................      (751)       (567)       (214)       (106)       (127)
                                              -------     -------     -------     -------     -------
Recoveries:
      Real estate .........................        36           4          --          --          --
      Commercial ..........................        --           8          --          --          --
      Consumer ............................        16          35          64          10          26
                                              -------     -------     -------     -------     -------
         Total recoveries .................        52          47          64          10          26
                                              -------     -------     -------     -------     -------
Net charge-offs ...........................      (699)       (520)       (150)        (96)       (101)
                                              -------     -------     -------     -------     -------
Merger additions ..........................        --          --         449          --          --
Provision for loan losses (1)..............       990         240         225         105          --
                                              -------     -------     -------     -------     -------
Balance at end of year ....................   $ 1,371     $ 1,080     $ 1,360     $   836     $   827
                                              =======     =======     =======     =======     =======

Ratio of net charge-offs to average gross
 loans outstanding during the period ......      0.42%       0.32%       0.08%       0.07%       0.07%
                                              =======     =======     =======     =======     =======
</TABLE>

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

     The Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $699,000 in fiscal 2002 compared to $520,000 for fiscal 2001. The
increase in bad debt charge-offs over the previous year includes approximately
$500,000 from one commercial loan that was written down due to a reduction in
the market value of the supporting loan collateral. The allowance for loan
losses to total loans ratio at the end of fiscal 2002 was 0.83% compared to
0.67% at the end of fiscal 2001. Nonperforming assets which includes repossessed
assets and loans on non accrual increased to $2,2 million at September 30, 2002
from $872,000 at September 30, 2001.

                                       10

<PAGE>

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

<TABLE>
<CAPTION>
                                                                    AT SEPTEMBER 30,
                  -----------------------------------------------------------------------------------------------------------------
                          2002                   2001                    2000                    1999                  1998
                  ---------------------  ----------------------  ---------------------   ---------------------  -------------------
                            % OF LOANS              % OF LOANS             % OF LOANS             % OF LOANS            % OF LOANS
                              IN EACH                IN EACH                 IN EACH                IN EACH               IN EACH
                            CATEGORY TO            CATEGORY TO             CATEGORY TO            CATEGORY TO           CATEGORY TO
                  AMOUNT    TOTAL LOANS  AMOUNT    TOTAL LOANS   AMOUNT    TOTAL LOANS   AMOUNT   TOTAL LOANS   AMOUNT  TOTAL LOANS
                  -------   -----------  -------   ------------  -------   -----------   ------   ------------  ------  -----------
<S>               <C>            <C>     <C>             <C>     <C>            <C>      <C>            <C>     <C>          <C>
 Real estate..... $   357         27.98% $   400          73.55% $   600         79.76%  $  400          80.77% $  400        85.90%
 Commercial......     778         60.97      100           1.23      200          2.89       75           2.12     100         2.90
 Consumer........     141         11.05      500          25.22      500         17.35      311          17.11     277        11.20
 Unallocated.....      95           N/A       80            N/A       60           N/A       50            N/A      50          N/A
                  -------   -----------  -------   ------------  -------   -----------   ------   ------------  ------  -----------
Total allowance
 for loan losses. $ 1,371        100.00% $ 1,080         100.00% $ 1,360        100.00%  $  836         100.00% $  827       100.00%
                  =======   ===========  =======   ============  =======   ===========   ======   ============  ======  ===========
</TABLE>

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

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

     When an institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an institution classifies problem
assets or a portion of assets as loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset or a
portion thereof so classified or to charge-off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS which can order the
establishment of additional general or specific loss allowances.

     The following table sets forth the number and amount of classified loans at
September 30, 2002 (dollars in thousands):

                                       11

<PAGE>

<TABLE>
<CAPTION>
                                     LOSS             DOUBTFUL        SUBSTANDARD      SPECIAL MENTION
                              -----------------   ---------------   ----------------   ----------------
                               NUMBER    AMOUNT   NUMBER   AMOUNT   NUMBER   AMOUNT    NUMBER   AMOUNT
                              --------   ------   ------   ------   ------   -------   ------   -------
   <S>                              <C>  <C>          <C>  <C>          <C>  <C>           <C>  <C>
   Real estate..............        --   $   --       --   $   --       30   $ 1,413       24   $   929
   Commercial...............        --       --       --       --        7     2,002        3       226
   Consumer.................        --       --       --       --       16       532       17       422
                              --------   ------   ------   ------   ------   -------   ------   -------
   Total....................        --   $   --       --   $   --       53   $ 3,947       44   $ 1,577
                              ========   ======   ======   ======   ======   =======   ======   =======
</TABLE>

INVESTMENT ACTIVITIES

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

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

<TABLE>
<CAPTION>
                                                                       AT SEPTEMBER 30,
                                          ----------------------------------------------------------------------
                                                   2002                     2001                     2000
                                          ----------------------   ---------------------   ---------------------
                                           CARRYING   PERCENT OF   CARRYING   PERCENT OF   CARRYING   PERCENT OF
                                            VALUE     PORTFOLIO     VALUE      PORTFOLIO     VALUE    PORTFOLIO
                                          ---------   ----------   --------   ----------   --------   ----------
<S>                                       <C>             <C>      <C>            <C>      <C>            <C>
AVAILABLE FOR SALE:
   Investment securities:
      U.S. Agency obligations ..........  $  10,599         9.01%  $ 13,494        17.35%  $ 15,286        52.28%
      Corporate securities .............      3,717         3.16         --           --         --           --
      Municipal securities .............     14,597        12.41      9,726        12.50      1,669         5.71
                                          ---------   ----------   --------   ----------   --------   ----------
         Total investment securities ...     28,913        24.58     23,220        29.85     16,955        57.98
                                          ---------   ----------   --------   ----------   --------   ----------
   Mortgage-backed and related
    securities .........................     88,720        75.42     54,582        70.15     12,285        42.02
                                          ---------   ----------   --------   ----------   --------   ----------
         Total available for sale ......  $ 117,633       100.00%  $ 77,802       100.00%  $ 29,240       100.00%
                                          =========   ==========   ========   ==========   ========   ==========

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

     During the quarter ended December 31, 2001 the Corporation reclassified
approximately $24.0 million in mortgage backed securities from held to maturity
to available for sale as part of the adoption of FASB 133, "Accounting for
Derivative Instruments and Hedging Activities." The purpose of this transfer was
to allow for the sale of the fixed rate securities in order to reduce interest
rate risk exposure.

     The Corporation purchases mortgage-backed securities, both fixed-rate and
adjustable-rate, from Freddie Mac, Fannie Mae and Ginnie Mae with maturities
from five to 30 years. The Corporation also purchases adjustable-rate Small
Business Administration securities that are backed by the full faith and credit
of the U.S. government.

                                       12

<PAGE>

     The Corporation also purchases mortgage derivative securities in the form
of collateralized mortgage obligations ("CMOs"). While these securities possess
minimal credit risk due to the Federal guarantee backing the U. S. government
agencies, they do possess liquidity risk and interest rate risk. The amortized
cost and fair value of the CMOs at September 30, 2002 was approximately $3.4
million. See Note 2 of Notes to Consolidated Financial Statements for more
information regarding investment and mortgage-backed securities.

                                       13

<PAGE>

     The following table sets forth at amortized cost and market value the
maturities and weighted average yields of the Corporation's investment and
mortgage-backed securities portfolio at September 30, 2002 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                           AMOUNT DUE OR REPRICING WITHIN:
                                     ------------------------------------------------------------------------
                                            ONE YEAR               OVER ONE TO              OVER FIVE TO
                                            OR LESS                 FIVE YEARS               TEN YEARS
                                     ---------------------   -----------------------   ----------------------
                                                  WEIGHTED                 WEIGHTED                 WEIGHTED
                                     CARRYING     AVERAGE     CARRYING      AVERAGE     CARRYING     AVERAGE
                                       VALUE       YIELD       VALUE         YIELD       VALUE        YIELD
                                     ---------   ---------   ----------   ----------   ----------   ---------
<S>                                  <C>              <C>    <C>                <C>    <C>               <C>
AVAILABLE FOR SALE:
 Investment securities:
   U.S. Agency obligations .......   $   1,371        5.98%  $      356         6.44%  $    8,351        6.25%
   Corporate securities ..........          --          --           --           --           --          --
   Municipal securities ..........          30        4.30          171         4.40           --          --
                                     ---------   ---------   ----------   ----------   ----------   ---------
    Total investment securities ..       1,401        5.94          527         5.78        8,351        6.25
 Mortgage-backed and related
  securities .....................      20,435        4.16       27,773         4.89        5,044        6.21
                                     ---------   ---------   ----------   ----------   ----------   ---------
    Total available for sale .....   $  21,836        4.27   $   28,300         4.91   $   13,395        6.23
                                     =========   =========   ==========   ==========   ==========   =========

<CAPTION>
                                             AMOUNT DUE OR REPRICING WITHIN:
                                     ---------------------------------------------
                                             OVER
                                           TEN YEARS                 TOTAL
                                     ---------------------   ---------------------
                                                  WEIGHTED                WEIGHTED
                                     CARRYING     AVERAGE     CARRYING    AVERAGE
                                      VALUE        YIELD       VALUE       YIELD
                                     --------   ----------   ----------  ---------
<S>                                  <C>              <C>    <C>              <C>
AVAILABLE FOR SALE:
 Investment securities:
   U.S. Agency obligations .......   $    520         6.50%  $   10,598       6.23%
   Corporate securities ..........      3,717         6.68        3,717       6.68
   Municipal securities ..........     14,396         4.53       14,597       4.53
                                     --------    ---------   ----------  ---------
    Total investment securities ..     18,633         5.01       28,912       5.43
 Mortgage-backed and related
  securities .....................     35,469         6.73       88,721       5.53
                                     --------   ----------   ----------  ---------
    Total available for sale .....   $ 54,102         6.14   $  117,633       5.51
                                     ========    =========   ==========  =========
</TABLE>

                                       14

<PAGE>

     At September 30, 2002, approximately $43.8 million of mortgage-backed
securities were adjustable-rate securities.

DEPOSITS AND BORROWINGS

     Deposits are the major source of the Corporation's funds for lending and
other investment purposes. In addition to deposits, the Corporation derives
funds from principal repayments and interest payments on loans and investment
and mortgage-backed securities. Principal repayments and interest payments are a
relatively stable source of funds, although principal prepayments tend to slow
when interest rates increase. Deposit inflows and outflows may be significantly
influenced by general market interest rates and money market conditions. During
fiscal year 2002, the Corporation experienced a net increase in deposits of
approximately $6.2 million due to the result of various deposit promotion
programs with continued emphasis on increasing core deposits. The Corporation
borrowed funds to support the remaining growth experienced in fiscal 2002.

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

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

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

<TABLE>
<CAPTION>
                                                              AT SEPTEMBER 30,
                                             --------------------------------------------------
                                                 2002               2001               2000
                                             ------------       ------------       ------------
       <S>                                   <C>                <C>                <C>
       Up to 2.0% .........................  $     16,830       $         --       $         --
       2.01% to 4.0% ......................        90,116             18,152                440
       4.01% to 6.0% ......................        29,103             98,064             53,052
       6.01% to 8.0% ......................         2,791             24,187             88,666
                                             ------------       ------------       ------------

          Total savings certificates ......  $    138,840       $    140,403       $    142,158
                                             ============       ============       ============
</TABLE>

The following table sets forth the maturities of time deposits at September 30,
2002 (in thousands):

                                                             AMOUNT
                                                          ------------
       Within three months ............................   $     42,841
       After three months but within six months .......         22,281
       After six months but within one year ...........         31,468
       After one year but within three years ..........         32,465
       After three years but within five years ........          9,625
       After five years but within ten years ..........            160
                                                          ------------
          Total .......................................   $    138,840
                                                          ============

     Certificates of deposit with maturities of less than one year decreased
from $116.8 million at September 30, 2001 to $96.6 million at September 30,
2002. Historically, the Bank has been able to retain a significant amount of its
deposits as they mature. In addition, management of the Bank believes that it
can adjust the offering rates of savings certificates to retain deposits in
changing interest rate environments.

                                       15

<PAGE>

     The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 2002 (in
thousands). Jumbo certificates of deposit are certificates in amounts of
$100,000 or more.

                     MATURITY PERIOD                         AMOUNT
                     ---------------                      ------------
      Three months or less ...........................    $     10,145
      Over three through six months ..................           5,276
      Over six months through 12 months ..............           7,449
      Over 12 months .................................          10,004
                                                          ------------
        Total jumbo certificates .....................    $     32,874
                                                          ============

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

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

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

<TABLE>
<CAPTION>
                                                                    AT SEPTEMBER 30,
                                                   --------------------------------------------------
                                                       2002               2001               2000
                                                   ------------       ------------       ------------
<S>                                                <C>                <C>                <C>
Balance outstanding at end of period:
 FHLB advances and other borrowings ..........     $     82,000       $     57,007       $     47,687

Weighted average rate paid on:
 FHLB advances and other borrowings ..........             5.04%              5.92%              6.28%
</TABLE>

<TABLE>
<CAPTION>
                                                                YEAR ENDED SEPTEMBER 30,
                                                   --------------------------------------------------
                                                       2002               2001               2000
                                                   ------------       ------------       ------------
<S>                                                <C>                <C>                <C>
Maximum amount of borrowings
 outstanding at any month end:
  FHLB advances and other borrowings .........     $     82,000       $     57,007       $     55,852

Approximate average short-term borrowings
 outstanding with respect to:
  FHLB advances and other borrowings .........           74,936             47,169             17,927

Approximate weighted average rate paid on:
  FHLB advances and other borrowings .........             4.94%              5.41%              6.57%
</TABLE>

     At September 30, 2002, the Corporation had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $15 million.
These lines of credit are available on a one-to-ten day basis for general
purposes of the Corporation. All of the lenders have reserved the right to
withdraw these lines at their option. At September 30, 2002, the Corporation had
unused lines of credit with the FHLB of Atlanta totaling $27 million.

                                       16

<PAGE>

SUBSIDIARY ACTIVITIES

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

EMPLOYEES

     The Corporation has 70 full-time employees and 7 part-time employees. None
of the employees are represented by a collective bargaining unit. The
Corporation believes that relations with its employees are excellent.

                           REGULATION AND SUPERVISION

GENERAL

     As a savings and loan holding company, Union Financial is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Bank is subject to extensive regulation, examination
and supervision by the OTS, as its primary federal regulator, and the FDIC, as
the deposit insurer. The Bank is a member of the FHLB and its deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on Union Financial, the
Bank and their operations. Certain of the regulatory requirements applicable to
the Bank and to Union Financial are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this report does not
purport to be a complete description of such statutes and regulations and their
effects on Union Financial and the Bank.

HOLDING COMPANY REGULATION

     Union Financial is a nondiversified unitary savings and loan holding
company within the meaning of federal law. The Gramm-Leach-Bliley Act of 1999
provides that no company may acquire control of a savings association after May
4, 1999 unless it engages only in the financial activities permitted for
financial holding companies under the law or for multiple savings and loan
holding companies as described below. Further, the Gramm-Leach-Bliley Act
specifies that, subject to a grandfather provision, existing savings and loan
holding companies may only engage in such activities. The Company does qualify
for the grandfathered activities. Permissible holding company activities include
banking services such as lending, trust services, insurance activities and
underwriting, investment banking and real estate investment.

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

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

                                       17

<PAGE>

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

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

     Acquisition of the Company. Under the Federal Change in Bank Control act
("CIBCA"), a notice must be submitted to the Office of Thrift Supervision if any
person (including a company), a group acting in concert, seeks to acquire 10% or
more of the Company's outstanding voting stock, unless the Office of Thrift
Supervision has found that the acquisition will not result in a change in
control of the Company. Under the CIBCA, the Office of Thrift Supervision has 60
days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effects of the acquisition. Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.

FEDERAL SAVINGS INSTITUTION REGULATION

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

     Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier I
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank.

     The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.

     The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. The OTS deferred implementation of the interest rate risk
capital charge and repealed the interest rate risk component in May 2002,
concluding that it was unnecessary in light of other tools available to measure
and control interest rate risk. At September 30, 2002, the Bank met each of its
capital requirements.

                                       18

<PAGE>

     The following table presents the Bank's capital position at September 30,
2002.

<TABLE>
<CAPTION>
                                                                                              CAPITAL
                                                                                    ----------------------------
                                ACTUAL          REQUIRED            EXCESS           ACTUAL           REQUIRED
                               CAPITAL          CAPITAL             AMOUNT           PERCENT           PERCENT
                             -----------       ---------          ----------        ---------        -----------
                                                             (DOLLARS IN THOUSANDS)
   <S>                       <C>               <C>                <C>                   <C>                 <C>
   Tangible                  $    25,679       $   4,561          $   21,118             8.44%              1.50%
   Core (Leverage)                25,679          12,164              13,515             8.44               4.00
   Risk-based                     27,050          12,587              14,463            17.19               8.00
</TABLE>

     Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

     Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.

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

     In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During fiscal
2002, FICO payments for SAIF members approximated 1.73 basis points of
assessable deposits.

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

     Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent,

                                       19

<PAGE>

equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral. At September 30, 2002, the Bank's limit on loans
to one borrower was $4.1 million and the Bank's largest aggregate outstanding
balance of loans to one borrower was $2.3 million.

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

     A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2002, the Bank met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."

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

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

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

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. An exception exists for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. The law limits both the individual and aggregate amount of
loans the Bank may make to insiders based, in part, on the Bank's capital
position and requires certain board approval procedures to be followed.

                                       20

<PAGE>

     Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.

     Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.

FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares
of capital stock in the Federal Home Loan Bank of Atlanta in an amount at least
equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank of Atlanta, whichever
is greater. The Bank was in compliance with this requirement with an investment
in Federal Home Loan Bank stock at September 30, 2002, of $2.9 million.

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

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve ratio is assessed on net transaction accounts up to and including
$41.3 million and a 10% reserve ratio is applied above $41.3 million. The first
$5.7 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank
complies with the foregoing requirements.

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

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

                                       21

<PAGE>

to Union Financial or the Bank. For its 2002 taxable year, Union Financial is
subject to a maximum federal income tax rate of 34%.

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

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

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

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

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

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

STATE TAXATION

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

                                       22

<PAGE>

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

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The Corporation owns its main office, located at 203 West Main Street in
Union, South Carolina, which was opened in 1977. At September 30, 2002, the
Corporation also owned a banking center which opened in April 1989, located at
508 North Duncan By-Pass, Union, South Carolina, a branch office, acquired in
1997, in Laurens, South Carolina, an operations center located in Union, South
Carolina, which opened in 1998 and a branch office in Jonesville, South
Carolina, which opened as a full service facility in 1999. As a result of the
merger with South Carolina Community Bancshares in November 1999, the
Corporation acquired two branch locations in Winnsboro, South Carolina. The
Corporation opened a temporary facility in York County with a full service
facility to be completed by the second quarter of the fiscal year. The net book
value of the Corporation's investment in premises and equipment totaled
approximately $6.5 million at September 30, 2002. See Note 4 of Notes to
Consolidated Financial Statements. All property is in good condition and meets
the operating needs of the Corporation.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2002.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

     The information contained under the section captioned "Common Stock Market
Price and Dividend Information" in the Annual Report to Shareholders (the
"Annual Report") is incorporated herein by reference.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

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

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

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

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

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

                                       23

<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
Name                            Age(1)                           Position as of September 30, 2002
----                            -----                   --------------------------------------------------
<S>                               <C>                   <C>
Dwight V. Neese                   52                    President, Chief Executive Officer and Director
Richard H. Flake                  54                    Executive Vice President - Chief Financial Officer
Lud W. Vaughn                     52                    Senior Vice President - Chief Credit Officer
Wanda J. Wells                    46                    Vice President - Corporate Secretary
</TABLE>

----------
(1)  At September 30, 2002.

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

     Richard H. Flake joined Union Financial in September 1995.

     Lud W. Vaughn joined Union Financial in April 2002. Prior to joining Union
Financial, Mr. Vaughn was Senior Vice President for Bank of America in Rock
Hill, South Carolina.

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

ITEM 10. EXECUTIVE COMPENSATION
-------------------------------

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

                                       24

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------

     (a)  Security Ownership of Certain Beneficial Owners

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

     (b)  Security Ownership of Management

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

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

     (d)  Equity Compensation Plan Information

<TABLE>
<CAPTION>
PLAN CATEGORY                 NUMBER OF SECURITIES          WEIGHTED-AVERAGE            NUMBER OF SECURITIES
                              TO BE ISSUED UPON             EXERCISE PRICE OF           REMAINING AVAILABLE FOR
                              EXERCISE                      OUTSTANDING OPTIONS,        FUTURE ISSUANCE UNDER
                              OF OUTSTANDING OPTIONS,       WARRANTS AND RIGHTS         EQUITY COMPENSATION
                              WARRANTS AND RIGHTS                                       PLANS (EXCLUDING
                                                                                        SECURITIES REFLECTED IN
                                                                                        COLUMN (A))

                              (a)                           (b)                         (c)
---------------------------------------------------------------------------------------------------------------
<S>                                  <C>                    <C>                                <C>
Equity compensation                  184,193                $  8.13                            79,930
 plans approved by
 security holders
---------------------------------------------------------------------------------------------------------------
Equity compensation
 plans not approved by                    --                     --                                --
 security holders
---------------------------------------------------------------------------------------------------------------
Total                                184,193                $  8.13                            79,930
---------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

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

                                       25

<PAGE>

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

     (a)  Exhibits

          3(a)  Certificate of Incorporation(1)
          3(b)  Bylaws(2)
          3(c)  Certificate of Amendment of Certificate of Incorporation dated
                January 22, 1997(3)
          10(a) Employment Agreement with Dwight V. Neese(4)
          10(b) Employment Agreement with Richard H. Flake(2)
          10(c) Union Financial Bancshares, Inc. 1995 Stock Option Plan(5)
          10(d) Union Financial Bancshares, Inc. 2001 Stock Option Plan(6)
          13    2002 Annual Report to Shareholders
          21    Subsidiaries of the Registrant
          23    Consent of Independent Auditor
          99(a) Chief Executive Officer Certification Pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002
          99(b) Chief Financial Officer Certification Pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002
     (b)  There were no reports on Form 8-K filed during the fourth quarter of
          fiscal 2002.

----------
(1)  Incorporated herein by reference to Union Financial's Registration
     Statement on Form S-4 (File No. 33-80808) filed with the Securities and
     Exchange Commission on June 29, 1994.
(2)  Incorporated herein by reference to Union Financial's Form 10-KSB for the
     year ended September 30, 1999.
(3)  Incorporated herein by reference to Exhibit 3(c) to Union Financial's Form
     10-KSB for the year ended September 30, 1997.
(4)  Incorporated herein by reference to Union Financial's Form 10-KSB for the
     year ended September 30, 1996.
(5)  Incorporated herein by reference to Exhibit A to Union Financial's Proxy
     Statement for its 1996 Annual Meeting of Stockholders.
(6)  Incorporated herein by reference to Appendix A to Union Financial's Proxy
     Statement for its 2000 Annual Meeting of Stockholders.

ITEM 14. CONTROLS AND PROCEDURES
--------------------------------

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

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

                                       26

<PAGE>

                                   SIGNATURES

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

                                       UNION FINANCIAL BANCSHARES, INC.


Date: December 2, 2002                By:  /s/ Dwight V. Neese
                                         -------------------------------------
                                           Dwight V. Neese
                                           President and Chief Executive Officer
                                           Duly Authorized
                                           Representative

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

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

Date:   December 2, 2002               Date:  December 2, 2002

By:      /s/ Richard H. Flake          By:  /s/ John S. McMeekin
        -----------------------------      ----------------------------
        Richard H. Flake                   John S. McMeekin
        (Principal Financial and           Director
        Accounting Officer)
                                       Date:  December 2, 2002
Date:   December 2, 2002

By:      /s/ Mason G. Alexander        By:  /s/ Philip C. Wilkins
        -----------------------------      ------------------------------
        Mason G. Alexander                 Philip C. Wilkins
        Director                           Director

Date:   December 2, 2002               Date:  December 2, 2002

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

Date:   December 2, 2002

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

Date:   December 2, 2002

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

Date:   December 2, 2002

<PAGE>

                                  CERTIFICATION

I, Dwight V. Neese, certify, that:

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

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

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

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

          a.   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

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

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

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

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

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

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


Date: December 2, 2002                   /s/ Dwight V. Neese
                                        --------------------------------
                                        Dwight V. Neese
                                        President and Chief Executive Officer

<PAGE>

                                  CERTIFICATION

I, Richard H. Flake, certify, that:

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

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

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

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

          a.   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

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

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

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

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

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

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


Date: December 2, 2002                  /s/ Richard H. Flake
                                        ----------------------------------
                                        Richard H. Flake
                                        Executive Vice President and Chief
                                        Financial Officer