<PAGE>

                                 EXHIBIT NO. 13

                       2002 ANNUAL REPORT TO SHAREHOLDERS

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.

                         2002 SUPPLEMENTAL ANNUAL REPORT

                                TABLE OF CONTENTS

     Business.............................................................1
     Selected Financial and Other Data....................................2
     Management's Discussion and Analysis of Financial
      Condition and Results of Operations.................................4
     Independent Auditor's Report........................................14
     Consolidated Financial Statements...................................15
     Notes to Consolidated Financial Statements..........................20
     Directors and Leadership Group......................................41
     Corporate Information...............................................42

                                 ==============

                                    BUSINESS

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

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

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

<PAGE>

                        SELECTED FINANCIAL AND OTHER DATA

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

OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                            Years Ended September 30,
                                         -----------------------------------------------------------------
                                           2002           2001          2000         1999          1998
                                         ---------     ---------     ---------     ---------     ---------
                                                  (Dollars In Thousands - Except Share Amounts)
<S>                                      <C>           <C>           <C>           <C>           <C>
Interest income                          $  18,361     $  19,018     $  18,555     $  14,046     $  13,405
Interest expense                            (9,775)      (11,613)      (11,175)       (7,698)       (7,549)
                                         ---------     ---------     ---------     ---------     ---------
Net interest income                          8,586         7,405         7,380         6,348         5,856
Provision for loan losses                     (990)         (240)         (225)         (105)           --
                                         ---------     ---------     ---------     ---------     ---------
Net interest income after
 provision for loan losses                   7,596         7,165         7,155         6,243         5,856
Other income                                 1,308         1,149         2,580         1,192         1,038
Other expense                               (6,602)       (6,250)       (6,352)       (4,814)       (4,447)
                                         ---------     ---------     ---------     ---------     ---------
Income before income taxes                   2,302         2,064         3,383         2,621         2,447
Income tax expense                            (558)         (721)       (1,190)         (945)         (897)
                                         ---------     ---------     ---------     ---------     ---------
Net income                               $   1,744     $   1,343     $   2,193     $   1,676     $   1,550
                                         ---------     ---------     ---------     ---------     ---------

Income per common share: (1)
Net income per common
 share (Basic)                           $    0.90     $    0.70     $    1.18     $    1.26     $    1.17
                                         =========     =========     =========     =========     =========
Net income per common
 share (Diluted)                         $    0.86     $    0.68     $    1.16     $    1.19     $    1.10
                                         =========     =========     =========     =========     =========
Weighted average number of
 common shares outstanding (Basic)       1,939,084     1,918,431     1,855,706     1,328,305     1,327,845
Weighted average number of
 common shares outstanding (Diluted)     2,030,040     1,971,611     1,898,494     1,414,121     1,410,158
</TABLE>

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                        2

<PAGE>

FINANCIAL CONDITION:

<TABLE>
<CAPTION>
                                                                    September 30,
                                         -----------------------------------------------------------------
                                           2002          2001          2000          1999          1998
                                         ---------     ---------     ---------     ---------     ---------
                                                             (Dollars In Thousands)
<S>                                      <C>           <C>           <C>           <C>           <C>
Total amount of:
Assets                                   $ 310,968     $ 277,752     $ 260,564     $ 205,294     $ 189,286
Short-term interest-bearing deposits         7,385         5,694         4,500         2,781         1,124
Investment securities                       28,913        24,170        19,432        15,506         9,633
Mortgage-backed securities                  88,720        64,947        47,460        17,415        19,922
Loans (net)                                161,576       158,063       167,807       149,401       142,202
Deposits                                   200,303       194,079       187,974       142,624       130,768
Advances from Federal Home Loan Bank
 and other borrowings                       57,000        46,007        47,687        46,503        41,441
Securities sold under agreement to
 repurchase                                 17,000        11,000            --            --            --
Corporate obligated floating rate
 capital securities                          8,000            --            --            --            --
Shareholders' equity                        27,198        24,376        21,924        14,738        15,300

Number of:
Real estate loans outstanding                1,503         1,783         2,216         1,411         1,651
Deposit accounts                            19,506        20,499        22,418        18,865        17,686
Banking centers                                  6             6             7             5             4
</TABLE>

OTHER SELECTED DATA:

<TABLE>
<CAPTION>
                                                           Years Ended September 30,
                                         -----------------------------------------------------------------
                                            2002         2001          2000          1999           1998
                                         ---------     ---------     ---------     ---------     ---------
<S>                                      <C>           <C>           <C>           <C>           <C>
Interest rate spread during the year          2.97%         2.98%         3.02%         3.36%         3.09%

Net yield on average interest-
 earning assets                               3.08%         3.08%         3.10%         3.46%         3.42%

Return on average assets                      0.59%         0.51%         0.85%         0.85%         0.87%

Return on average shareholders' equity        7.06%         6.03%        10.92%        10.96%        10.77%

Dividend payout ratio                        44.55%        57.03%        26.13%        29.46%        30.08%

Operating expense to average assets           2.22%         2.39%         2.44%         2.43%         2.52%

Ratio of average shareholders'
 equity to average assets                     8.31%         8.50%         7.78%         7.44%         8.12%

Cash dividends declared and paid
 per share of common stock (1)           $    0.40     $    0.40     $    0.40     $    0.37     $    0.35
</TABLE>

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                        3

<PAGE>

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

CRITICAL ACCOUNTING POLICIES

The Corporation has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of financial statements. The significant accounting
policies of the company are described in the footnotes to the consolidated
financial statements at September 30, 2002.

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

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

FORWARD-LOOKING STATEMENTS

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

ASSET AND LIABILITY MANAGEMENT

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

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

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                        4

<PAGE>

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

At September 30, 2002, the Corporation's exposure to interest rate risk, as
calculated by the Office of Thrift Supervision (OTS) and measured by the impact
of changing interest rates on the Net Portfolio Value ("NPV"), was as follows:

<TABLE>
<CAPTION>
                                                                 Rate Environment
                                         ---------------------------------------------------------------
                                         Minus 100 Basis Points        Base        Plus 200 Basis Points
                                         ----------------------      ---------     ---------------------
                                                                (In Thousands)
<S>                                                   <C>            <C>                       <C>
Estimated Market Value of Assets                      $ 319,620      $ 317,292                 $ 307,154

Estimated Market Value of Liabilities                 $ 289,649      $ 286,068                 $ 277,718

NPV                                                   $  29,971      $  31,224                 $  29,435

Increase/(Decrease) in NPV                            $  (1,253)     $      --                 $  (1,789)
</TABLE>

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                        5

<PAGE>

YIELDS EARNED AND RATES PAID

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

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

<TABLE>
<CAPTION>
                                         At September 30,      Years Ended September 30
                                         ----------------      ------------------------
                                               2002             2002     2001     2000
                                              ------           ------   ------   ------
<S>                                             <C>              <C>      <C>      <C>
Average yield on earnings assets:

    Loans                                       7.17%            7.58%    8.85%    8.31%
    Investments (1)                             4.05%            5.47%    5.92%    6.27%
    Mortgage-backed securities                  4.44%            4.52%    5.94%    5.84%

Total interest-earning assets                   5.91%            6.58%    7.92%    7.79%
                                              ------           ------   ------   ------

Less:

  Average rate paid on deposits                 2.54%            3.06%    4.70%    4.53%
  Average rate paid on borrowings               4.94%            5.04%    5.92%    5.67%

Average Cost of Funds                           3.24%            3.61%    4.94%    4.77%
                                              ------           ------   ------   ------

Average interest rate spread                    2.67%            2.97%    2.98%    3.02%
                                              ------           ------   ------   ------

Net yield on average interest-
 earning assets                                 2.98%            3.08%    3.08%    3.10%
                                              ------           ------   ------   ------
</TABLE>

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                        6

<PAGE>

RATE/VOLUME ANALYSIS

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

<TABLE>
<CAPTION>
                                                        Years Ended September 30,
                                   ------------------------------------------------------------------------
                                             2002 vs. 2001                          2001 vs. 2000
                                   ----------------------------------     ---------------------------------
                                    Volume       Rate          Total       Volume       Rate        Total
                                   --------     --------     --------     --------     ------      --------
                                                             (Dollars in Thousands)
<S>                                <C>          <C>          <C>          <C>          <C>         <C>
Change in interest income:

Loans                              $    126     $ (2,094)    $ (1,968)    $ (1,665)    $  880      $   (785)
Mortgage-backed securities            1,465         (346)       1,119        1,143         47         1,190
Investments                             761         (569)         192          155        (97)           58
                                   --------     --------     --------     --------     ------      --------
Total interest income                 2,352       (3,009)        (657)        (367)       830           463
                                   --------     --------     --------     --------     ------      --------

Change in interest expense:

Deposits                                397       (3,217)      (2,820)         143        312           455
Borrowings and other                  1,642         (660)         982         (133)      116           (17)
                                   --------     --------     --------     --------     ------      --------

Total interest expense                2,039       (3,877)      (1,838)          10        428           438
                                   ========     ========     ========     ========     ======      ========
Change in net interest income      $    313     $    868     $  1,181     $   (377)    $  402      $     25
                                   ========     ========     ========     ========     ======      ========
</TABLE>

RESULTS OF OPERATIONS

COMPARISON OF YEARS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001

General

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

Interest Income

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                        7

<PAGE>

2002. The increase was due primarily to purchases of investment and
mortgage-backed securities made during the current fiscal year, offset by lower
rates due to a lower market interest rate environment.

Interest Expense

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

Provision for Loan Loss

Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. The provision for loan loss calculation includes a
segmentation of loan categories subdivided by residential mortgage, commercial
and consumer loans. Each category is risk rated for all loans including
performing groups. The weight assigned to each performing group is developed
from a three-year historical average loan loss experience ratio and as the loss
experience changes, the category weight is adjusted accordingly. In addition to
loan loss experience, management's evaluation of the loan portfolio will include
the market value of the underlying collateral, growth and composition of the
loan portfolio, delinquency trends and economic conditions. Management evaluates
the carrying value of loans periodically, and the allowance for loan losses is
adjusted accordingly. The provision for loan losses increased from $240,000 in
fiscal 2001 to $990,000 in fiscal 2002. The increased provision reflects the
Corporation's continued movement from longer term, fixed rate residential loans
to shorter term, floating rate consumer and commercial loans. Consumer and
commercial loans carry higher risk weighted rates in the reserve calculation as
compared to residential mortgage loans. The provision also reflects that during
the current fiscal year, non- performing loans increased $1,071,000 from
$795,000 at September 30, 2001 to $1,866,000 at September 30, 2002. At and for
the years ended September 30, 2002 and 2001, impaired loans totaled $809,293 and
$121,075 respectively. The fiscal year 2002 total includes one commercial loan
that was written down from the original loan balance of approximately $1,000,000
to $500,000 due to a reassessment of collateral values. See Note 3 of
Consolidated Financial Statements for an analysis of loans.

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

Non-Interest Income

Non-interest income increased 13.84% to $1,308,000 for the year ended September
30, 2002 from $1,149,000 for the year ended September 30, 2001. Service charges
and fees increased $584,000 to $1,512,000, primarily due to the development of
new fee income programs that were implemented during the first quarter of the
2002 fiscal year. Loan servicing fee costs increased $64,000 to $(167,000) for
the year ended September 30, 2002 from $(103,000) for the year ended September
30, 2001. Higher loan prepayments during fiscal years 2001 and 2002 resulted in
servicing rights amortization expense exceeding service fee income. Gain (loss)
on sale of loans and investments decreased $361,000 to $(37,000) during the year
ended September 30, 2002 from $324,000 for the year ended September 30, 2001.
The Corporation phased out its wholesale mortgage operation during the third
quarter of fiscal year 2001 and no longer actively sells loans into the
secondary market. The loss on sale of investments for the current year was the
result of the sale of investments with higher interest rate sensitivity and
therefore the sale will improve interest rate exposure for the Corporation.

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                        UNION FINANCIAL BANCSHARES, INC.
                                        8

<PAGE>

Non-Interest Expense

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

Income Tax Expense

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

COMPARISON OF YEARS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000

General

Net income decreased $850,000 from $2,193,000 in fiscal 2000 to $1,343,000 in
fiscal 2001. Earnings per share were $.70 per share (basic) and $.68 per share
(diluted) for the year ended September 30, 2001 compared to $1.18 per share
(basic) and $1.16 per share (diluted) for the same period in 2000. The decrease
in net income was due to reduced mortgage loan service fees and lower gain on
sale of mortgage loans. A sale of the Bank's mortgage loan servicing portfolio
that was completed during the fourth quarter of fiscal 2000 contributed $700,000
to non interest income in fiscal 2000. As a result of this sale, the Company
phased out its wholesale mortgage unit during the third quarter of fiscal 2001.

Interest Income

Total interest income increased $463,000 or 2.50%, from $18,555,000 in fiscal
2000 to $19,018,000 in fiscal 2001. Interest income on loans decreased $785,000,
or 5.14%, from $15,272,000 in fiscal 2000 to $14,487,000 in fiscal 2001 due
primarily to the reduction of the loan portfolio as a result of lower
residential mortgage loan production. The reduction in income due to lower
residential loan production was somewhat offset by growth in higher yielding
commercial loans. Interest income on investment and mortgage-backed securities
increased $1,248,000, or 38.01%, from $3,283,000 in fiscal 2000 to $4,531,000 in
fiscal 2001. The increase was due primarily to purchases of investment and
mortgage-backed securities made during fiscal 2001.

Interest Expense

Interest expense increased 3.92% to $11,613,000 for fiscal 2001 from $11,175,000
for fiscal 2000. Interest expense increased $455,000 for deposits and decreased
$17,000 for other borrowings. Interest expense for deposits increased due to the
growth in deposits along with higher rates on certificates of deposits at the
beginning of the year. Interest expense on other borrowings decreased due to
higher rates as a result of longer term maturities offset by lower average
balances throughout fiscal 2001 as compared to fiscal 2000.


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                        UNION FINANCIAL BANCSHARES, INC.
                                        9

<PAGE>

Provision for Loan Losses

The provision for loan losses increased from $225,000 in fiscal 2000 to $240,000
in fiscal 2001. See Note 3 of Consolidated Financial Statements for an analysis
of loans.

The Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $520,000 in fiscal 2001 compared to $150,000 for fiscal 2000. The
increase in bad debt charge-offs over the previous year includes approximately
$210,000 from two commercial loan customers that filed for bankruptcy. The
allowance for loan losses to total loans ratio at the end of fiscal 2001 was
..67% compared to .80% at the end of fiscal 2000. Nonperforming assets which
includes repossessed assets and loans on non accrual decreased to $915,000 at
September 30, 2001 from $1,579,000 at September 30, 2000.

Non-Interest Income

Non-interest income decreased 55.47% to $1,149,000 for the year ended September
30, 2001 from $2,580,000 for the year ended September 30, 2000. Service charges
and fees decreased $310,000 to $928,000, primarily due to a reduction in
production from Provident Financial Services, a wholly-owned subsidiary of
Provident Community Bank. Provident Financial Services, which offers brokerage
services, had experienced an increase in its business in 2000 which decreased in
fiscal 2001 due to changing economic conditions for brokerage relationships.
Loan servicing fees (net) decreased $454,000 to $(103,000) for the year ended
September 30, 2001 from $351,000 for the year ended September 30, 2000. The
reduction in loan servicing fees (net) was due to the sale of the loan servicing
rights that was completed on September 30, 2000. In addition, higher loan
prepayment speeds for fiscal 2001 resulted in servicing rights amortization
expense exceeding service fee income. Gain on sale of loans and investments
decreased $667,000 to $324,000 during the year ended September 30, 2001 from
$991,000 for the year ended September 30, 2000. During fiscal 2000, the
Corporation sold approximately $250 million of servicing rights resulting in a
pre-tax gain of approximately $700,000.

Non-Interest Expense

Non-interest expense decreased 1.61% to $6,250,000 in fiscal 2001 from
$6,352,000 in fiscal 2000. The Company phased out its wholesale mortgage unit in
fiscal 2001, completing the process during the third quarter. Compensation and
employee benefits decreased 7.57% or $238,000 from fiscal 2000 to fiscal 2001
due primarily to the staff reductions from the phase out of the mortgage
operation. Occupancy and equipment expenses decreased 6.32% or $90,000 from
fiscal 2000 to fiscal 2001 due to expense reductions realized from the previous
fiscal year data processing conversion. Professional services expense increased
23.76% or $72,000 from fiscal 2000 to fiscal 2001 due to higher usage of
external consultants for loan operations. Other operating expenses increased
10.40% or $154,000 from fiscal 2000 to fiscal 2001 due to increases in
amortization of intangibles, postage, telephone, liability insurance and
expenses associated with shareholder relations.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

Assets

At September 30, 2002, the Corporation's assets totaled $310,968,000, an
increase of $33,216,000, or 11.96%, as compared to $277,752,000 at September 30,
2001. Investment and mortgage-backed securities increased $28,516,000 to
$117,633,000 from $89,117,000 at September 30, 2001. The increase in securities
was funded by the additional $8,000,000 capital that was received through the
trust preferred capital offering that was completed on December 18, 2001. During
the quarter ended June 30, 2002, management determined that a reclassification
of the held to maturity securities was necessary in order to achieve certain
interest rate risk management goals. This transfer was determined to be
necessary due to the volatility in interest rates during the most recent 12-15
month period as management reclassified $9,500,000 (amortized cost) of
mortgage-backed securities to available for sale in order to sell them and
restructure the Corporation's interest rate risk profile. In addition,
management reclassified $8,500,000 (amortized cost) of additional securities as
available for sale. This transfer was done to comply with the FASB's position
that following transfers of held to maturity securities for any purpose other
than under unusual and unforeseen circumstances, any remaining held-to-maturity
securities should be reclassified to available-for-sale. At the time of the
reclassification, the net unrealized gain on the securities included in equity
was $131,000.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       10

<PAGE>
Total loans, net, increased $3,513,000, or 2.22%, to $161,576,000 from
$158,063,000 at September 30, 2001. The net change in the loan portfolio balance
includes a reduction in residential mortgage loans that reflects the
Corporation's movement toward higher yielding consumer and commercial loans that
are intended to provide improvements in interest rate risk exposure. Consumer
and commercial loans outstanding during this period increased $19,896,000, or
46.31%, while outstanding residential mortgage loans decreased $16,139,000 or
15.84%.

Liabilities

Total liabilities increased $30,394,000, or 12%, to $283,770,000 at September
30, 2002 from $253,376,000 at September 30, 2001.

Total deposits increased $6,224,000, or 3.21%, from $194,079,000 at September
30, 2001 to $200,303,000 at September 30, 2002. The growth was a result of
various deposit promotion programs with continued emphasis on increasing core
deposits. Borrowings from the Federal Home Loan Bank (FHLB) increased
$10,993,000, or 23.89%, to $57,000,000 at September 30, 2002 from $46,007,000 at
September 30, 2001. Securities sold under agreements to repurchase were
$17,000,000 at September 30, 2002 compared to $11,000,000 at September 30, 2001.
Securities sold under agreement to repurchase were a lower cost funding
alternative during this period compared to Federal Home Loan Bank advances. The
increases in borrowings from FHLB and securities sold under agreement to
repurchase were utilized to fund additional growth for the Corporation. Other
liabilities decreased $886,000, or 58.60%, to $626,000 at September 30, 2002
from $1,512,000 at September 30, 2001 due to the payment of state and federal
income taxes.

Shareholders' Equity

At September 30, 2002, the Corporation's shareholder equity totaled $27,198,000,
an increase of $2,822,000, or 11.58%, as compared to $24,376,000 at September
30, 2001. In addition to $1,744,000 of net income after dividends of $777,000,
available for sale securities mark to market, net of tax improved $1,603,000
from ($182,000) at September 30, 2001 to $1,421,000 at September 30, 2002.

Corporate obligated floating rate capital securities

On November 14, 2001, the Corporation established the Union Financial Statutory
Trust as a business trust for the purpose of issuing trust preferred securities
in a private placement conducted as part of a pooled offering sponsored by First
Tennessee Capital Markets and Keefe Bruyette & Woods, Inc. On December 18, 2001,
the Trust issued $8,000,000 in trust preferred securities in the form of
floating rate capital securities and issued  approximately $248,000 of trust
common securities to Union Financial. The Trust used the proceeds of these
issuances to purchase $8,200,000 of Union Financial's floating rate junior
subordinated deferrable interest debentures due December 18, 2031 (the
"Debentures"). The interest rate on the Debentures and the trust preferred
securities is variable and adjustable quarterly at 3.60% over three-month LIBOR,
with an initial rate of 5.60%. A rate cap of 12.50% is effective through
December 18, 2006. The Debentures are the sole assets of the Trust and are
subordinate to all of Union Financial's existing and future obligations for
borrowed money, its obligations under letters of credit and certain derivative
contracts, and any guarantees by Union Financial of any such obligations.
Concurrently with the issuance of the Debentures and the trust preferred and
common securities, Union Financial issued a guarantee related to the trust
securities for the benefit of the holders.

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

The stated maturity of the Debentures is December 18, 2031. In addition, the
Debentures are subject to redemption at par at the option of Union Financial,
subject to prior regulatory approval, in whole or in part on any interest
payment date after December 18, 2006. The Debentures are also subject to
redemption prior to December 18, 2006 at 107.5% of par after the occurrence of
certain events that would either have a negative tax effect on the Trust or
Union Financial or would result in the Trust being treated as an investment
company that is required to be registered under the Investment Company Act of

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       11

<PAGE>

1940. Upon repayment of the Debentures at their stated maturity or following
their redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common
securities.

Union Financial used the $8,000,000 received from the offering for general
corporate purposes, to fund dividends to shareholders and for contributions to
the capital of the Bank.

Liquidity

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

While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The primary investing activities of the Corporation are the
origination of residential one-to four-family mortgage loans, commercial and
consumer loans, and the purchase of investment and mortgage-backed securities.
These activities are funded primarily by principal and interest payments on
loans and investment securities, deposit growth, securities sold under
agreements to repurchase, the utilization of FHLB advances and the proceeds from
the offering of trust preferred securities. During the twelve months ended
September 30, 2002, the Corporation's loan originations totaled $91,900,000. At
September 30, 2002, the Corporation's investment in investment and
mortgage-backed securities totaled $117,600,000.

During the year ending on September 30, 2002, total deposits increased $6.2
million. Deposit flows are affected by the overall level of interest rates, the
interest rates and products offered by the Corporation and its local competitors
and other factors. The Corporation closely monitors its liquidity position on a
daily basis. Certificates of deposit, which are scheduled to mature in one year
or less from September 30, 2002, totaled $63,700,000. The Corporation relies
primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. From time to time, the
Corporation will also offer competitive special products to its customers to
increase retention and to attract new deposits. Based upon the Corporation's
experience with deposit retention and current retention strategies, management
believes that, although it is not possible to predict future terms and
conditions upon renewal, a significant portion of such deposits will remain with
the Corporation. If the Corporation requires funds beyond its ability to
generate them internally, additional sources of funds are available through FHLB
advances and securities sold under agreements to repurchase. At September 30,
2002, the Corporation had $57 million of FHLB borrowings and $17,000,000 of
securities sold under agreements to repurchase. At September 30, 2002, the
Corporation had unused short-term lines of credit to purchase federal funds from
unrelated banks totaling $15,000,000. These lines of credit are available on a
one-to-ten day basis for general purposes of the Corporation. All of the lenders
have reserved the right to withdraw these lines at their option. At September
30, 2002, the Corporation had unused lines of credit with the FHLB of Atlanta
totaling $27,000,000.

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

At September 30, 2002, the undisbursed portion of construction loans was
$3,200,000 and the unused portion of credit lines was $8,400,000. Funding for
these commitments is expected to be provided from deposits, loan and
mortgage-backed securities principal repayments, maturing investments and income
generated from operations.

As of September 30, 2002, the Bank exceeded the OTS's capital requirements. See
Note 16 to the Consolidated Financial Statements for further discussion of these
capital requirements.

OFF-BALANCE SHEET RISK

Through the operations of the Corporation, contractual commitments to extend
credit were made in the ordinary course of business activities. These
commitments are legally binding agreements to lend money to customers at
predetermined interest rates for a specified period of time. Outstanding loan
commitments (including commitments to fund credit lines) totaled

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       12

<PAGE>

$21,800,000 at September 30, 2002. Management of the Corporation anticipates
that it will have sufficient funds available to meet its current loan
commitments. At September 30, 2002, $266,000 in letters of credit were issued.
Each customer's credit worthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on the credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate. The credit risk on
these commitments is managed by subjecting each customer to normal underwriting
and risk management processes.

IMPACT OF INFLATION AND CHANGING PRICES

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

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       13

<PAGE>

                           [ELLIOTT DAVIS LETTERHEAD]

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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


     We have audited the accompanying consolidated balance sheets of Union
Financial Bancshares, Inc. and Subsidiaries as of September 30, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Union Financial Bancshares, Inc. and Subsidiaries as of September 30, 2002 and
2001 and the consolidated results of their operations and their cash flows for
cash flows for each of the years in the three-year period ended September 30,
2002, in conformity with accounting principles generally accepted in the United
States of America.



                                                           /s/ Elliott Davis LLC

Elliott Davis, LLC
Greenville, South Carolina
October 21, 2002

<PAGE>

                 UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                                          September 30,
                                                                    -----------------------
                                                                       2002         2001
                                                                    ----------   ----------
                                                                        (In Thousands)
<S>                                                                 <C>          <C>
Assets
------
Cash                                                                $    1,346   $      914
Short term interest-bearing deposits                                     7,385        5,694
                                                                    ----------   ----------
Total cash and cash equivalents                                          8,731        6,608
                                                                    ----------   ----------
Investment and mortgage-backed securities:
  Held to maturity                                                          --       11,315
  Available for sale                                                   117,633       77,802
                                                                    ----------   ----------
Total investment and mortgage-backed securities                        117,633       89,117
                                                                    ----------   ----------
Loans, net                                                             161,576      158,063
Office properties and equipment, net                                     6,523        7,204
Federal Home Loan Bank Stock, at cost                                    2,900        2,625
Accrued interest receivable                                              1,728        1,629
Intangible assets                                                        5,643        6,299
Mortgage servicing rights                                                  491          842
Cash surrender value of life insurance                                   4,724        4,465
Other assets                                                             1,019          900
                                                                    ----------   ----------
Total assets                                                        $  310,968   $  277,752
                                                                    ==========   ==========

Liabilities
-----------
Deposits                                                            $  200,303   $  194,079
Advances from the Federal Home Loan Bank and other borrowings           57,000       46,007
Securities sold under agreements to repurchase                          17,000       11,000
Corporate obligated floating rate capital securities                     8,000           --
Accrued interest payable                                                   427          404
Advances from borrowers for taxes and insurance                            414          374
Other liabilities                                                          626        1,512
                                                                    ----------   ----------
Total liabilities                                                      283,770      253,376
                                                                    ----------   ----------

Commitments and contingencies - note 14

Shareholders' equity
--------------------
Serial preferred stock, no par value,
 authorized - 500,000 shares, issued and outstanding - None
Common stock - $0.01 par value, authorized - 2,500,000 shares
 issued and outstanding  - 1,958,069 shares at September 30, 2002
 and 1,924,478 shares at September 30, 2001                                 20           20
Additional paid-in capital                                              11,573       11,321
Accumulated other comprehensive income (loss)                            1,421         (182)
Retained earnings, substantially restricted                             14,184       13,217
                                                                    ----------   ----------
Total  shareholders' equity                                             27,198       24,376
                                                                    ----------   ----------
Total liabilities and  shareholders' equity                         $  310,968   $  277,752
                                                                    ==========   ==========
</TABLE>

See notes to consolidated financial statements.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       15

<PAGE>

                 UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                 For the Years Ended September 30,
                                                                          --------------------------------------------
                                                                              2002            2001            2000
                                                                          ------------    ------------    ------------
                                                                               (In Thousands, Except Share Data)
<S>                                                                       <C>             <C>             <C>
Interest Income:
  Loans                                                                   $     12,519    $     14,487    $     15,272
  Deposits and federal funds sold                                                   85             112              77
  Securities available for sale:
    State and municipal                                                            731             108              84
    Other investments                                                            4,868           3,012           1,770
  Securities held to maturity and FHLB stock dividends                             158           1,299           1,352
                                                                          ------------    ------------    ------------
  Total interest income                                                         18,361          19,018          18,555
                                                                          ------------    ------------    ------------
Interest Expense:
  Deposit accounts                                                               6,001           8,822           8,367
  Corporate obligated floating rate capital securities                             365              --              --
  Advances from the FHLB and other                                               3,409           2,791           2,808
                                                                          ------------    ------------    ------------
  Total interest expense                                                         9,775          11,613          11,175
                                                                          ------------    ------------    ------------
Net Interest Income                                                              8,586           7,405           7,380
  Provision for loan losses                                                        990             240             225
                                                                          ------------    ------------    ------------
Net interest income after provision for loan losses                              7,596           7,165           7,155
                                                                          ------------    ------------    ------------
Non Interest Income:
  Fees for financial services                                                    1,512             928           1,238
  Loan servicing fees,(costs) net of servicing amortization                       (167)           (103)            351
  Net gain (loss) on sale of investment transactions                               (37)            114              --
  Gains on sale of loans                                                            --             210             991
                                                                          ------------    ------------    ------------
  Total non interest income                                                      1,308           1,149           2,580
                                                                          ------------    ------------    ------------
Non Interest Expense:
  Compensation and employee benefits                                             2,863           2,905           3,143
  Occupancy and equipment                                                        1,570           1,335           1,425
  Deposit insurance premiums                                                        34              33              54
  Professional services                                                            479             375             303
  Intangible amortization                                                          659             659             613
  Other                                                                            997             943             814
                                                                          ------------    ------------    ------------
  Total non interest expense                                                     6,602           6,250           6,352
                                                                          ------------    ------------    ------------
Income before income taxes                                                       2,302           2,064           3,383
Provision for income taxes                                                         558             721           1,190
                                                                          ------------    ------------    ------------
Net Income                                                                $      1,744    $      1,343    $      2,193
                                                                          ============    ============    ============
Net Income per common share (Basic)                                       $       0.90    $       0.70    $       1.18
                                                                          ============    ============    ============
Net Income per common share (Diluted)                                     $       0.86    $       0.68    $       1.16
                                                                          ============    ============    ============
Cash dividends per common share                                           $       0.40    $       0.40    $       0.40
                                                                          ============    ============    ============
Weighted average number of common shares outstanding (Basic)                 1,939,084       1,918,431       1,855,706
                                                                          ============    ============    ============
Weighted average number of common shares outstanding (Diluted)               2,030,040       1,971,611       1,898,494
                                                                          ============    ============    ============
</TABLE>

See notes to consolidated financial statements.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       16

<PAGE>

                 UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 -----------------------------------------------

<TABLE>
<CAPTION>
                                                                                         Retained       Accumulated
                                                     Common Stock         Additional     Earnings          Other          Total
                                                -----------------------    Paid-In     Substantially   Comprehensive  Shareholders'
                                                  Shares       Amount       Capital     Restricted     Income (Loss)     Equity
                                                ----------   ----------   ----------   -------------   -------------  -------------
                                                                          (In Thousands, Except Share Data)
<S>                                              <C>         <C>          <C>          <C>                   <C>      <C>
Balance at September 30, 1999                    1,357,214   $       14   $    5,484   $      11,019   $      (1,779) $      14,738

Net income                                              --           --           --           2,193              --          2,193

Other comprehensive loss, net of tax
    Unrealized holding losses arising
     during period                                      --           --           --              --            (271)          (271)
                                                                                                       -------------  -------------
   Comprehensive income                                                                                                       1,922
                                                                                                                      -------------

Options exercised                                    2,200           --           13              --              --             13

Acquisition of South Carolina Community
 Bancshares, Inc.                                  526,183            5        5,617              --              --          5,622

Dividend reinvestment plan contributions            25,408            1          200              --              --            201

Cash dividend ($.40 per share)                          --           --           --            (572)             --           (572)
                                                ----------   ----------   ----------   -------------   -------------  -------------
Balance at September 30, 2000                    1,911,005   $       20   $   11,314   $      12,640   $      (2,050) $      21,924

Net income                                              --           --           --           1,343              --          1,343

Other comprehensive income, net of tax
    Equity reclassification                                                                                      113            113
    Unrealized holding gains arising
     during period                                      --           --           --              --           1,869          1,869
    Less investment gains included in
     net income                                         --           --           --              --            (114)          (114)
                                                                                                       -------------  -------------
   Comprehensive income                                                                                                       3,211
                                                                                                                      -------------

Options exercised                                      200           --            2              --              --              2

Equity reclassification                                 --           --         (113)             --              --           (113)

Dividend reinvestment plan contributions            13,273           --          118              --              --            118

Cash dividend ($.40 per share)                          --           --           --            (766)             --           (766)
                                                ----------   ----------   ----------   -------------   -------------  -------------

Balance at September 30, 2001                    1,924,478   $       20   $   11,321   $      13,217   $        (182) $      24,376

Net income                                              --           --           --           1,744              --          1,744

Other comprehensive income, net of tax
    Unrealized holding gains arising
     during period                                      --           --           --              --           1,603          1,603
                                                                                                       -------------  -------------
   Comprehensive income                                                                                                       3,347
                                                                                                                      -------------

Options exercised                                   23,605           --          141              --              --            141

Dividend reinvestment plan contributions             9,986           --          111              --              --            111

Cash dividend ($.40 per share)                          --           --           --            (777)             --           (777)
                                                ----------   ----------   ----------   -------------   -------------  -------------
Balance at September 30, 2002                    1,958,069   $       20   $   11,573   $      14,184   $       1,421  $      27,198
                                                ==========   ==========   ==========   =============   =============  =============
</TABLE>

See notes to consolidated financial statements.

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                        UNION FINANCIAL BANCSHARES, INC.
                                       17

<PAGE>

                 UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                        For the Years Ended September 30,
                                                       -----------------------------------
                                                         2002          2001         2000
                                                       ---------    ---------    ---------
                                                                 (In Thousands)
<S>                                                    <C>          <C>          <C>
Operating activities:

Net income                                             $   1,744    $   1,343    $   2,193
Adjustments to reconcile net income to
 net cash provided by operating activities:
 Provision for loan losses                                   990          240          225
 Amortization expense                                      1,008          933        1,241
 Depreciation expense                                        895          812          468
 Recognition of deferred income, net of costs               (115)         (70)        (227)
 Deferral of fee income, net of costs                        195           18          471
 (Gain) loss on investment transactions                       37         (114)          --
 Loans originated for sale                                    --      (30,851)     (44,102)
 Proceeds from sale of loans                                  --       32,868       43,508
 Gain on sale of loans held for sale                          --         (210)        (991)
 (Increase) decrease in accrued interest receivable           99           --          (50)
 (Increase) decrease in other assets                         (91)       1,121        1,045
 Increase in accrued interest payable                         23           75          103
 Decrease in other liabilities                              (846)        (764)         (53)
                                                       ---------    ---------    ---------
Net cash provided by operating activities              $   3,939    $   5,401    $   3,831
                                                       ---------    ---------    ---------
</TABLE>

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       18

<PAGE>

                 UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                                          For the Years Ended September 30,
                                                                         -----------------------------------
                                                                            2002         2001        2000
                                                                         ---------    ---------    ---------
                                                                                    (In Thousands)
<S>                                                                      <C>          <C>          <C>
Investing activities:

Purchase of investment and mortgage-backed securities:
  Held to maturity                                                       $      --    $      --    $ (32,213)
  Available for sale                                                       (89,841)     (46,278)      (1,575)
Proceeds from maturity of investment and mortgage-backed securities:
  Held to maturity                                                              --        1,325           --
  Available for sale                                                         6,304        3,125          100
Proceeds from sale of investment and mortgage-backed securities:
  Held to maturity                                                          18,000           --           --
  Available for sale                                                        21,806       18,476           --
Principal repayments on mortgage-backed securities:
  Held to maturity                                                             605        1,294          779
  Available for sale                                                        14,610        1,816        1,540
Net (increase) decrease in loans                                            (3,513)       7,727       23,579
Investment in life insurance contracts                                          --       (3,467)          --
Acquisition of South Carolina Community Bancshares, Inc.                        --           --       (2,436)
Net (increase) decrease in mortgage servicing rights                            --         (672)       2,762
Purchase of FHLB stock                                                        (275)          --         (575)
Purchase of office properties and equipment                                   (204)      (1,531)      (2,429)
                                                                         ---------    ---------    ---------

Net cash used in investing activities                                      (32,508)     (18,185)     (10,468)
                                                                         ---------    ---------    ---------

Financing activities:

Proceeds from the exercise of stock options                                    141            2           13
Proceeds from dividend reinvestment plan                                       111          118          200
Dividends paid in cash                                                        (777)        (766)        (572)
Proceeds from term borrowings                                               16,993        9,320        1,184
Proceeds from issuance of corporate obligated floating rate securities       8,000           --           --
Increase in intangible assets                                                   --           --       (4,808)
Increase in deposit accounts                                                 6,224        6,105        9,663
                                                                         ---------    ---------    ---------

Net cash provided by financing activities                                   30,692       14,779        5,680
                                                                         ---------    ---------    ---------
Net (decrease) increase in cash and cash equivalents                         2,123        1,995         (957)

Cash and cash equivalents at beginning of year                               6,608        4,613        5,570
                                                                         ---------    ---------    ---------

Cash and cash equivalents at end of year                                 $   8,731    $   6,608    $   4,613
                                                                         =========    =========    =========
</TABLE>

See notes to consolidated financial statements.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       19

<PAGE>

                 UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                       20

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

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

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

At and for the years ended September 30, 2002 and 2001, impaired loans totaled
$809,293 and $121,075 respectively, and the Corporation had recognized no
interest income from impaired loans. The increase in impaired loans over the
previous year was due to higher loan delinquencies. The average balance in
impaired loans was $382,500 in 2002 and $88,513 in 2001.

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                        UNION FINANCIAL BANCSHARES, INC.
                                       21

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

Mortgage Servicing Rights - The Corporation accounts for mortgage servicing
rights ("MSRs") in accordance with SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. Purchased
mortgage servicing rights are recorded at the lower of cost or market.
Originated mortgage servicing rights are capitalized based on the allocated cost
which is determined when the underlying loans are sold or securitized. MSRs are
amortized in proportion to and over the period of estimated net servicing income
using a method that is designed to approximate a level-yield method, taking into
consideration the estimated prepayment of the underlying loans. For purposes of
measuring impairment, MSRs are periodically reviewed for impairment based upon
quarterly valuations. Such valuations are based on projections using a
discounted cash flow method that includes assumptions regarding prepayments,
servicing costs and other factors. Impairment is measured on a disaggregated
basis for each pool of rights.

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

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

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       22

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

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

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

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

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

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

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

Per-Share Data - SFAS 128, Earnings Per Share, requires the dual presentation of
basic and diluted earnings per share on the face of the income statement. Basic
earnings per share is computed by dividing net income by the weighted-average
number of shares outstanding for the period. Diluted earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Corporation's stock
option plan is reflected in diluted earnings per share by the application of the
treasury stock method.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       23

<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets - Intangible assets consist of core deposit premiums resulting
from the Corporation's branch acquisitions and the excess of cost over the fair
value of net assets resulting from the acquisition of South Carolina Community
Bancshares, Inc. The assets are being amortized over their range of useful
lives.

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

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

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

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

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

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

2. INVESTMENT AND MORTGAGE-BACKED SECURITIES

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

<TABLE>
<CAPTION>
                                                                  September 30, 2001
                                                  -------------------------------------------------
                                                                    Gross Unrealized
                                                   Amortized     ---------------------      Fair
                                                      Cost         Gains       Losses       Value
                                                  ------------   ---------   ---------   ----------
<S>                                               <C>            <C>         <C>         <C>
Mortgage-backed Securities:
 FHLMC                                            $     10,365   $      --   $     (80)  $   10,285
Investment Securities:
U.S. Agency Obligations                                    950          25          --          975
                                                  ------------   ---------   ---------   ----------
Total held to maturity                            $     11,315   $      25   $     (80)  $   11,260
                                                  ============   =========   =========   ==========
</TABLE>

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                        UNION FINANCIAL BANCSHARES, INC.
                                       24

<PAGE>

2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)

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

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

Total available for sale                        $    115,453   $   2,186   $      (7)  $  117,633
                                                ============   =========   =========   ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                September 30, 2001
                                                -------------------------------------------------
                                                                 Gross Unrealized
                                                 Amortized     ---------------------      Fair
                                                    Cost         Gains      Losses       Value
                                                ------------   ---------   ---------   ----------
<S>                                             <C>            <C>         <C>         <C>
Investment Securities:
  U.S. Agency Obligations                       $     13,194   $      --   $    (249)  $   12,945
  Municipal Securities                                 9,765          --         (39)       9,726
  Other                                                  561          --         (12)         549
                                                ------------   ---------   ---------   ----------
Total Investment Securities                           23,520          --        (300)      23,220
                                                ------------   ---------   ---------   ----------
Mortgage-backed Securities:
  Fannie Mae                                          27,200         411          --       27,611
  Freddie Mac                                         13,805          --         (14)      13,791
  Collateralized Mortgage Obligations                 13,557          --        (377)      13,180
                                                ------------   ---------   ---------   ----------
Total Mortgage-backed Securities                      54,562         411        (391)      54,582
                                                ------------   ---------   ---------   ----------

Total available for sale                        $     78,082   $     411   $    (691)  $   77,802
                                                ============   =========   =========   ==========
</TABLE>

During the quarter ended December 31, 2000 the Corporation reclassified
approximately $24,000,000 in mortgage backed securities from held to maturity to
available for sale as part of the adoption of FASB 133, Accounting for
Derivative Instruments and Hedging Activities. The purpose of this transfer was
to allow for the possible sale of the securities in order to reduce interest
rate risk exposure. For the quarter ended December 31, 2000 the unrealized loss
on the above securities was $435,352. During the third and fourth quarters of
fiscal 2001, approximately $14,274,000 of the securities were sold that resulted
in a gain on sale of securities of $114,000.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       25

<PAGE>

2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)

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

<TABLE>
<CAPTION>
                                                            September 30,
                                                ------------------------------------
                                                    2002         2001        2000
                                                ------------   ---------   ---------
<S>                                             <C>            <C>         <C>
Proceeds                                        $     46,110   $  21,601   $     100
                                                ------------   ---------   ---------
Gross gains                                     $         --   $     114   $      --
Gross losses                                             (37)         --          --
                                                ------------   ---------   ---------
Net gain (loss)on investment transactions       $        (37)  $     114   $      --
                                                ============   =========   =========
</TABLE>

The maturities of available for sale securities at September 30, 2002 are as
follows (in thousands):

                                                 Available for Sale
                                              -------------------------
                                               Amortized        Fair
                                                  Cost         Value
                                              ------------   ----------
Due in one year or less                       $      1,285   $    1,306
Due after one year through five years                  635          655
Due after five years through ten years              13,158       13,395
Due after ten years                                100,375      102,277
                                              ------------   ----------
Total investment and mortgage-backed
 securities                                   $    115,453   $  117,633
                                              ============   ==========

The mortgage-backed securities held at September 30, 2002 mature between one and
thirty years. The actual lives of those securities may be significantly shorter
as a result of principal payments and prepayments.

At September 30, 2002 and 2001, $24,063,000 and $28,411,000, respectively, of
securities were pledged as collateral for certain deposits.

At September 30, 2002, approximately $43,828,000 of mortgage-backed securities
were adjustable rate securities. The adjustment periods range from monthly to
annually and rates are adjusted based on the movement of a variety of indices.

Investments in collateralized mortgage obligations ("CMOs") represent securities
issued by agencies of the federal government. At September 30, 2002
approximately $3,425,000 was invested in CMOs.

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                        UNION FINANCIAL BANCSHARES, INC.
                                       26

<PAGE>

3. LOANS, NET

Loans receivable consisted of the following (in thousands):

                                                     September 30,
                                              -------------------------
                                                  2002          2001
                                              ------------   ----------
Conventional real estate loans:
  Fixed rate residential                      $     63,859   $   62,262
  Fixed rate commercial                              4,597        1,657
  Adjustable rate residential                       24,887       37,684
  Adjustable rate commercial                         2,364          280
  Construction loans                                 5,514       12,259
                                              ------------   ----------
Total real estate loans                            101,221      114,142
                                              ------------   ----------
Other loans:
  Consumer and installment loans                    12,986       16,466
  Commercial loans                                  27,945       19,955
  Commercial lines of credit                        12,660        3,554
  Consumer lines of credit                          11,174       10,796
  Loans secured by deposit accounts                  1,723        2,009
                                              ------------   ----------
Total other loans                                   66,488       52,780
                                              ------------   ----------

Total loans                                        167,709      166,922
                                              ------------   ----------
Less:
  Undisbursed portion of interim
   construction loans                               (3,204)      (6,108)
  Loan discount unamortized                         (1,685)      (1,922)
  Allowance for loan losses                         (1,371)      (1,080)
  Net deferred loan origination costs                  127          251
                                              ------------   ----------

Total, net                                    $    161,576   $  158,063
                                              ============   ==========

Weighted-average interest rate of loans               7.17%        8.37%

Servicing loans for others consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payments to investors and foreclosure processing.
Loan servicing income is recorded on the accrual basis and includes servicing
fees received from the investors as well as certain charges collected from the
borrowers, such as late payment fees. Loans sold and serviced by the Corporation
at September 30, 2002 and 2001 were approximately $45,805,000 and $65,907,000,
respectively. In connection with these loans serviced for others, the
Corporation held borrowers' escrow balances of $414,000 at September 30, 2002
and $375,000 at September 30, 2001.

Adjustable rate residential real estate loans (approximately $24,887,000 and
$37,684,000 at September 30, 2002 and 2001, respectively) are subject to rate
adjustments annually and generally are adjusted based on movement of the Federal
Home Loan Bank National Monthly Median Cost of Funds rate or the Constant
Maturity Treasury index. The maximum loan rates can be adjusted is 200 basis
points in any one year with a lifetime cap of 600 basis points.

The Corporation made commercial real estate loans which totaled approximately
$6,960,000 and $1,937,000 at September 30, 2002 and 2001, respectively. These
loans are considered by management to contain a somewhat greater risk of
uncollectibility due to the dependency on income production or future
development and sale of the real estate. These commercial real estate loans are
collateralized by housing for the aged, churches, motels, apartments and other
improved real estate.

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                       27

<PAGE>
3. LOANS, NET (CONTINUED)

The amortization of servicing rights and excess servicing rights included in
loan servicing fees amounted to $350,371, $281,729, and $628,653 in 2002, 2001,
and 2000 respectively. The fair value of mortgage servicing rights at September
30, 2002 was approximately $623,000.

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

Under OTS regulations, the Bank may not make loans to one borrower in excess of
15% of unimpaired capital. This limitation does not apply to loans made before
August 9, 1989. At September 30, 2002, the Bank had loans outstanding to one
borrower ranging up to $2,200,000 and was in compliance with this regulation.

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

See Note 7 of Consolidated Financial Statements for an analysis of qualifying
mortgages pledged for FHLB advances.

At September 30, 2002 and 2001, loans which are accounted for on a non-accrual
basis or contractually past due ninety days or more totaled approximately
$1,866,000 and $795,000, respectively. The amount the Corporation will
ultimately realize from these loans could differ materially from their carrying
value because of future developments affecting the underlying collateral or the
borrower's ability to repay the loans. During the years ended September 30,
2002, 2001, and 2000, the Corporation recognized no interest income on loans
past due 90 days or more, whereas, under the original terms of these loans, the
Corporation would have recognized additional interest income of approximately
$111,500, $90,000, and $95,000, respectively.

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

<TABLE>
<CAPTION>
                                                      Years Ended September 30,
                                                ------------------------------------
                                                    2002         2001        2000
                                                ------------   ---------   ---------
<S>                                             <C>            <C>         <C>
Balance at beginning of year                    $      1,080   $   1,360   $     836
Provision for loan losses                                990         240         225
Merger additions                                          --          --         449
(Charge-offs) recoveries, net                           (699)       (520)       (150)
                                                ------------   ---------   ---------
Balance at end of year                          $      1,371   $   1,080   $   1,360
                                                ============   =========   =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                      Years Ended September 30,
                                                ------------------------------------
                                                    2002         2001        2000
                                                ------------   ---------   ---------
<S>                                             <C>            <C>         <C>
Balance at beginning of year                    $      1,132   $   1,545   $   2,304
Loans originated during the year                         404          --          81
Loan repayments during the year                         (235)       (413)       (840)
                                                ------------   ---------   ---------
Balance at end of year                          $      1,301   $   1,132   $   1,545
                                                ============   =========   =========
</TABLE>

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       28

<PAGE>

4. OFFICE PROPERTIES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                            September 30,
                                                ------------------------------------
                                                    2002         2001        2000
                                                ------------   ---------   ---------
<S>                                             <C>            <C>         <C>
Land                                            $        884   $     884   $     889
Building and improvements                              4,439       4,409       3,676
Office furniture, fixtures and equipment               4,774       4,640       4,336
                                                ------------   ---------   ---------
Total                                                 10,097       9,933       8,901

Less accumulated depreciation                         (3,574)     (2,729)     (2,416)
                                                ------------   ---------   ---------

Office properties and equipment, net            $      6,523   $   7,204   $   6,485
                                                ============   =========   =========
</TABLE>

Depreciation expense was $895,000, $812,000 and $468,000 for 9/30/02, 01 and 00.

5. INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>
                                                            September 30,
                                                ------------------------------------
                                                    2002         2001        2000
                                                ------------   ---------   ---------
<S>                                             <C>            <C>         <C>
Balance at beginning of year                    $      6,299   $   7,042   $   2,848
Additions                                                 --          --       4,807
Amortization/other                                      (656)       (743)       (613)
                                                ------------   ---------   ---------

Balance at end of year                          $      5,643   $   6,299   $   7,042
                                                ============   =========   =========
</TABLE>

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       29

<PAGE>

6. DEPOSIT ACCOUNTS

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

<TABLE>
<CAPTION>
                                                     2002                              2001
                                       -------------------------------   ---------------------------------
                                         Rate      Balance       %         Rate      Balance         %
                                       --------   ---------   --------   --------   ----------    --------
<S>                                        <C>    <C>           <C>          <C>    <C>             <C>
Account Type
NOW accounts:
  Commercial non interest-bearing                 $  10,144       5.06%             $   10,427        5.37%
  Noncommercial                            1.34%     26,504      13.23%      0.87%      14,386        7.41%
Money market checking accounts             1.40%      7,832       3.91%      3.31%      10,840        5.59%
Regular Savings                            0.87%     15,464       7.72%      1.40%      15,309        7.88%
                                                  ---------   --------              ----------    --------
Total demand and savings deposits          1.00%     59,944      29.92%      1.37%      50,962       26.25%
                                                  ---------   --------              ----------    --------
Savings certificates:
  Up to 3.00%                                        69,678      34.79%                     92        0.05%
  3.01 %- 4.00%                                      37,268      18.61%                 18,060        9.31%
  4.01 %- 5.00%                                      21,684      10.82%                 63,673       32.81%
  5.01 %- 6.00%                                       7,419       3.70%                 34,391       17.72%
  6.01 %- 7.00%                                       2,356       1.17%                 19,179        9.88%
  7.01 %- 8.00%                                         435       0.22%                  5,008        2.58%
                                                  ---------   --------              ----------    --------
Total savings certificates                 3.22%    138,840      69.31%      5.00%     140,403       72.35%
                                                  ---------   --------              ----------    --------

Sweep accounts                             1.75%      1,519       0.77%      3.50%       2,714        1.40%

Total deposit accounts                     2.54%  $ 200,303     100.00%      4.11%  $  194,079      100.00%
                                       ========   =========   ========   ========   ==========    ========
</TABLE>

As of September 30, 2002 and 2001, total deposit accounts include approximately
$1,729,000 and $1,533,000, respectively, of deposits from the Corporation's
officers, directors, employees or parties related to them.

At September 30, 2002 and 2001, deposit accounts with balances of $100,000 and
over totaled approximately $66,915,000 and $59,251,000, respectively.

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

                                           September 30,
                                       ---------------------
                                         2002        2001
                                       ---------   ---------
Maturity Date
Within 1 year                          $  96,590   $ 116,764
After 1 but within 2 years                21,224      17,640
After 2 but within 3 years                11,241       4,674
Thereafter                                 9,785       1,325
                                       ---------   ---------

Total savings certificates             $ 138,840   $ 140,403
                                       =========   =========

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       30

<PAGE>

6. DEPOSIT ACCOUNTS (CONTINUED)

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

                                           Years Ended September 30,
                                       --------------------------------
                                         2002        2001        2000
                                       ---------   ---------   --------
Account Type
NOW accounts and money market deposit
 accounts                              $     426   $     724   $    507
Passbook and statement savings
 accounts                                    146         279        319
Certificate accounts                       5,453       7,843      7,577
Early withdrawal penalties                   (24)        (24)       (36)
                                       ---------   ---------   --------

Total                                  $   6,001   $   8,822   $  8,367
                                       =========   =========   ========

7. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

At September 30, 2002 and 2001, the Bank had $57,000,000 and $46,007,000,
respectively, of advances outstanding from the Federal Home Loan Bank and
treasury, tax and loan deposits. The maturity of the advances from the Federal
Home Loan Bank and treasury, tax and loan deposits is as follows (in thousands):

                                                       September 30,
                                                   --------------------
                                                     2002        2001
                                                   ---------   --------
Contractual Maturity:
Within one year - fixed rate                       $  10,000         --
Within one year - adjustable rate                      7,500      2,507
After one but within three years - fixed rate          5,000     10,000
After one but within three years - adjustable
 rate                                                     --     10,000
Greater than three years - adjustable rate         $  34,500   $ 23,500
                                                   ---------   --------

Total Advances                                     $  57,000   $ 46,007
                                                   =========   ========

Weighted average rate                                   4.86%      5.41%

The Bank pledges as collateral to the advances their Federal Home Loan Bank
Stock, and has entered into a blanket collateral agreement with the Federal Home
Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying
mortgages (as defined) with unpaid principal balances equal to, when discounted
at 75% of the unpaid principal balances, 100% of total advances. The amount of
qualifying mortgages was $66,083,000 and $81,772,000, respectively, at September
30, 2002 and 2001.

8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company had $17,000,000 and $11,000,000 borrowed under agreements to
repurchase at September 30, 2002 and 2001, respectively. The amortized cost of
the securities underlying the agreements to repurchase at September 30, 2002 was
$17,128,000 and $12,240,000 at September 30, 2001. The maximum amount
outstanding at any month end during fiscal 2002 was $17,000,000 and $11,000,000
for fiscal 2001. The average amount of outstanding agreements for fiscal 2002
was $15,586,000 and $917,000 for fiscal 2001.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       31

<PAGE>

9. CORPORATE OBLIGATED FLOATING RATE CAPITAL SECURITIES

On November 14, 2001, the Corporation sponsored the creation of the Trust. The
Corporation is the owner of all of the common securities of the Trust. On
December 18, 2001, the Trust issued $8.0 million in the form of floating rate
capital securities through a pooled trust preferred securities offering. The
proceeds from this issuance, along with the Corporation's $248,000 capital
contribution for the Trust's common securities, were used to acquire $8.2
million aggregate principal amount of the Corporation's floating rate junior
subordinated deferrable interest debentures due December 18, 2031 (the
"Debentures"), which constitute the sole asset of the Trust. The interest rate
on the Debentures and the capital securities is variable and adjustable
quarterly at 3.60% over the three-month LIBOR, with an initial rate of 5.60%. A
rate cap of 12.50% is effective through December 18, 2006. The Corporation has,
through the Trust agreement establishing the Trust, the Guarantee Agreement, the
notes and the related Debenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the capital
securities.

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

The Corporation has the right, at one or more times, to defer interest payments
on the Debentures for up to twenty consecutive quarterly periods. All deferrals
will end on an interest payment date and will not extend beyond December 18,
2031, the stated maturity date of the Debentures. If the Corporation defers
interest payments on the Debentures, the Trust will also defer distributions on
the capital securities. During any deferral period, each installment of interest
that would otherwise have been due and payable will bear additional interest at
the applicable distribution rate, compounded quarterly. The Corporation paid
$365,000, in interest for the fiscal year ended September 30, 2002.

10. INCOME TAXES

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

                                     For the  Years Ended September 30,
                                     ----------------------------------
                                       2002        2001         2000
                                     ---------   ---------   ----------
Current                              $     747   $   1,829   $    1,020
Deferred                                  (189)     (1,108)         170
                                     ---------   ---------   ----------

Total income taxes                   $     558   $     721   $    1,190
                                     =========   =========   ==========

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

                                       For the  Years Ended September 30,
                                       ----------------------------------
                                         2002        2001         2000
                                       ---------   ---------   ----------
Tax at federal income tax rate         $     783   $     702   $    1,150
Increase (decrease) resulting from:
  State income taxes, net of federal
   benefit benefit                            54          77          109
  Interest on municipal bonds               (232)        (20)         (23)
  Non-taxable life insurance income          (88)        (23)           4
Other, net                                    41         (15)         (50)
                                       ---------   ---------   ----------

Total                                  $     558   $     721   $    1,190
                                       =========   =========   ==========

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       32

<PAGE>

10. INCOME TAXES (CONTINUED)

The tax effects of significant items comprising the Corporation's deferred taxes
as of September 30, 2002 and 2001 are as follows (in thousands):

                                                        September 30,
                                                   ----------------------
                                                     2002        2001
                                                   ---------   ----------
Deferred tax assets:
Book reserves in excess of tax basis bad debt
 reserves arising after September 30, 1988         $     229   $      227
Book reserves and amortization  in excess of tax
 on mortgage servicing rights                             56          113
SFAS No. 115 mark to market adjustment                    --           98
Difference between book and tax goodwill basis           211          168
Other                                                     20          104
                                                   ---------   ----------
Total deferred tax asset                                 516          710

Deferred tax liabilities:
  SFAS No. 115 mark to market adjustment                 758           --
  Difference between book and tax property basis         245          249
  Difference between book and tax Federal Home
   Loan Bank stock basis                                 100          100
  Deferred loan fees                                      51           97
  Tax mark to market adjustment on securities             83          111
   Other                                                  37           55
                                                   ---------   ----------
Total deferred tax liability                           1,274          612
                                                   ---------   ----------

Net deferred tax asset (liability)                 $    (758)  $       98
                                                   =========   ==========

A deferred tax asset (liability) of ($758,000) and $98,000 at September 30, 2002
and 2001, is included in other liabilities in the balance sheet.

Retained earnings at September 30, 2002 includes approximately $1,636,000
representing pre-1988 tax bad debt base year reserve amounts for which no
deferred income tax liability has been provided since these reserves are not
expected to reverse until indefinite future periods and may never reverse.
Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to
the end of 1987, failure to meet the tax definition of a savings bank, dividend
payments in excess of current year or accumulated tax earnings and profits, or
other distributions in dissolutions, liquidations or redemption of the Bank's
stock.

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

11. EMPLOYEE BENEFITS

The Corporation has a contributory profit-sharing plan which is available to all
eligible employees. Annual employer contributions to the plan consist of an
amount which matches participant contributions up to a maximum of 5% of a
participant's compensation and a discretionary amount determined annually by the
Corporation's Board of Directors. In addition, the Corporation implemented a
money purchase pension plan, effective October 1, 1996, in which all eligible
employees participate. The annual contributions to the pension plan will be 5%
of a participant's compensation. Employer expensed contributions to the plans
were $187,000, $177,000, and $209,000 for the years ended September 30, 2002,
2001 and 2000, respectively.


--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       33

<PAGE>

12. FINANCIAL INSTRUMENTS

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

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

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

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

                                                               September 30,
                                                            -------------------
                                                              2002       2001
                                                            --------   --------
Fixed interest rate commitments to extend credit            $    768   $  2,070

Undisbursed portion of interim construction loans              3,204      6,108
Unused portion of credit lines (principally variable-rate
 consumer lines secured by real estate)                       17,780     12,195
                                                            --------   --------

Total                                                       $ 21,752   $ 20,373
                                                            ========   ========

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

The Corporation has not been required to perform on any financial guarantees
during the past two years. The Corporation has not incurred any losses on its
commitments in 2002, 2001 or 2000.

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       34

<PAGE>

12. FINANCIAL INSTRUMENTS (CONTINUED)

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

                                                      September 30, 2002
                                                ------------------------------
                                                Carrying Amount    Fair Value
                                                ---------------   ------------
Financial assets
----------------
Cash and cash equivalents                       $         8,731   $      8,731
Securities available for sale                           117,633        117,633
FHLB Stock                                                2,900          2,900
Loans                                                   161,576        166,106
Accrued interest receivable                               1,728          1,728
Cash surrender value of life insurance                    4,724          4,724

Financial liabilities
---------------------
Deposits                                        $       200,303   $    206,188
Advances from FHLB and other borrowings                  57,000         60,215
Securities sold under agreement to repurchase            17,000         17,959
Corporate obligated floating rate securities              8,000          8,111
Accrued interest payable                                    427            427

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

 Commitments to extend credit                   $        21,752   $     21,752


                                                      September 30, 2001
                                                ------------------------------
                                                Carrying Amount    Fair Value
                                                ---------------   ------------

Financial assets
----------------
Cash and cash equivalents                       $         6,608   $      6,608
Securities available for sale                            77,802         77,802
Securities held to maturity                              11,315         11,262
FHLB Stock                                                2,625          2,625
Loans                                                   158,063        163,512
Accrued interest receivable                               1,629          1,629
Cash surrender value of life insurance                    4,465          4,465

Financial liabilities
---------------------
Deposits                                        $       194,079   $    196,194
Advances from FHLB and other borrowings                  46,007         47,723
Securities sold under agreement to repurchase            11,000         11,410
Accrued interest payable                                    404            404

Off-balance-sheet asset (liabilities)
-------------------------------------
 Commitments to extend credit                   $        20,373   $     20,373

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       35

<PAGE>

13. SUPPLEMENTAL CASH FLOW DISCLOSURES

<TABLE>
<CAPTION>
                                                                For the Years Ended September 30,
                                                           -------------------------------------------
                                                               2002           2001            2000
                                                           ------------   ------------    ------------
<S>                                                        <C>            <C>             <C>
Cash paid for:

 Income taxes                                              $      2,593   $        476    $        520
 Interest                                                  $      9,775   $     11,613    $     11,072

Non-cash transactions:

 Loans foreclosed                                          $        366   $        425    $        387
 Unrealized gain (loss) on securities available for sale   $      2,179   $       (280)   $     (3,204)
 Exchanges of mortgage loans for securities                          --             --          32,300
</TABLE>

14.  COMMITMENTS AND CONTINGENCIES

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

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

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

15. STOCK OPTION PLANS

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

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       36

<PAGE>

<TABLE>
<CAPTION>
                                                  Years Ended September 30,
                                         ------------------------------------------
                                             2002           2001           2000
                                         ------------   ------------   ------------
<S>                                      <C>            <C>            <C>
Net income (in thousands)
 As reported                             $      1,744   $      1,343   $      2,193
 Pro forma                                      1,698          1,301          2,164

Basic net income per common share
 As reported                                     0.90           0.70           1.18
 Pro forma                                       0.88           0.68           1.17

Diluted net income per common share
 As reported                                     0.86           0.68           1.16
 Pro forma                                       0.84           0.66           1.14
</TABLE>

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

           Dividend yield                                    4%
           Expected volatility                               30%
           Risk-free interest rate                           6%
           Expected lives                                    10 years

A summary of the status of the plan as of September 30, 2002 and 2001, and
changes during the years ending on those dates is presented below (all shares
have been adjusted for the 3:2 stock split in February 1998 and the 5% stock
dividend in February 1999):

                               Average
                  Shares   Exercise Price       Expiration      Earliest Date
Grant Date        Granted     Per Share            Date          Exercisable
----------       --------  ---------------   ---------------   --------------
October, 1995     108,050             5.79     October, 2005    October, 1995
January, 1996       1,890             5.79     January, 2006    January, 1996
April, 1996         6,300             6.67       April, 2006      April, 1997
May, 1998          24,574            15.83         May, 2008        May, 1998
October, 2000       7,000             8.75     October, 2010    October, 2000
December, 2001     10,000            10.30    December, 2011   December, 2001
January, 2001      35,715             9.06     January, 2011    January, 2001
January, 2002      27,383            10.36     January, 2012    January, 2002
April, 2002         5,000            13.00       April, 2012      April, 2002
                 --------
Total Shares
 Granted          225,912
                 ========

At September 30, 2002, the Corporation had the following options exercisable:

<TABLE>
<CAPTION>
 Fiscal                                   Weighted Average        Number Options       Average
  Year     Range of exercise price   Remaining Contractual Life     Exercisable     Exercise Price
-------    -----------------------   --------------------------   ---------------   ---------------
<S>        <C>                                 <C>                        <C>       <C>
1995       $5.79                                 3 years                  108,050   $          5.79
1996       $5.79 - $6.67                       3.4 years                    8,190              6.46
1998       $15.83                              4.7 years                   24,574             15.83
2000       $8.75                                 8 years                    4,200              8.75
2001       $9.06-$10.30                        8.6 years                   28,305              9.35
2002       $10.36-$13.00                       9.4 years                   10,874             10.68
           -----------------------   --------------------------   ---------------   ---------------
           $5.79 - $13.00                      4.6 years                  184,193   $          8.13
           =======================   ==========================   ===============   ===============
</TABLE>

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

--------------------------------------------------------------------------------
                        UNION FINANCIAL BANCSHARES, INC.
                                       37

<PAGE>
                                                        Average Exercise
For the Years Ended September 30,   Shares Exercised    Price Per Share
---------------------------------   ----------------    ----------------
            2002                              23,605    $           5.97
            2001                                 200    $           8.75
            2000                               2,200    $           5.79

Stock options for 14,023 shares at an average price of $11.75 were forfeited
during the year ended September 30, 2002. Stock options for 8,518 shares at an
average price of $12.46 were forfeited during the year ended September 30, 2001.
Stock options for 316 shares at an average price of $15.83 were forfeited during
the year ended September 30, 2000. At September 30, 2002, 79,930 shares were
available for grant and 225,912 options at an average price of $8.43 were
outstanding.

16. SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS

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

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

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

At September 30, 2002 and 2001, the Bank had the following actual and required
capital amounts and ratios (in thousands):

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                       38

<PAGE>

16. SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
    (CONTINUED)

<TABLE>
<CAPTION>
                                                                    September 30, 2001
                                                        -----------------------------------------
                                                          Tangible        Core        Risk-Based
                                                          Capital        Capital        Capital
                                                        ------------   -----------   ------------
<S>                                                     <C>            <C>           <C>
Actual Capital                                          $     23,920   $    23,920   $     23,920
Unrealized gain on available for sale securities                 192           192            192
Goodwill and other intangible assets                          (6,300)       (6,300)        (6,300)
Allowance for loan losses (1)                                     --            --          1,080
                                                        ------------   -----------   ------------
Total Adjusted capital                                        17,812        17,812         18,892

Minimum Capital Requirement                                    4,086        10,896         11,864
                                                        ------------   -----------   ------------
Regulatory Capital Excess                               $     13,726   $     6,916   $      7,028
                                                        ------------   -----------   ------------

Regulatory Capital Ratio                                        6.54%         6.54%         12.74%
</TABLE>

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

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

17. RECENTLY ISSUED ACCOUNTING STANDARDS

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

In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other Intangible
Assets. This SFAS addresses how goodwill and other intangible assets should be
accounted for at their acquisition (except for those acquired in a business
combination) and after they have been initially recognized in the financial
statements. The statement is effective for all fiscal years beginning after
December 15, 2001. The Company will adopt this standard on October 1, 2002 and
is in the process of determining the effect of this SFAS on the financial
position of the Company.

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

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                        UNION FINANCIAL BANCSHARES, INC.
                                       39

<PAGE>

18. UNION FINANCIAL BANCSHARES, INC. FINANCIAL INFORMATION
    (PARENT CORPORATION ONLY)

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

<TABLE>
<CAPTION>
        Condensed Balance Sheets                            September 30,
        ------------------------                    ----------------------------
                                                       2002             2001
                                                    -----------     ------------
        <S>                                         <C>             <C>
        Assets:
        Cash and cash equivalents                   $     2,235     $        360
        Investment in subsidiary                         32,743           23,919
        Other                                               236               97
                                                    -----------     ------------
        Total Assets                                $    35,214     $     24,376
                                                    ===========     ============

        Liabilities and Shareholders' Equity:
        Accrued interest payable                    $        16     $         --
        Corporate obligated floating rate capital
         securities                                       8,000               --
        Shareholders' Equity                             27,198           24,376
                                                    -----------     ------------
        Total Liabilities and Shareholders'Equity   $    35,214     $     24,376
                                                    ===========     ============

<CAPTION>
        Condensed Statements of Income                       For Years Ended September 30,
        ------------------------------                    ----------------------------------
                                                              2002         2001       2000
                                                          -----------   ---------   --------
        <S>                                               <C>           <C>         <C>
        Equity in undistributed earnings of subsidiary    $     2,210   $   1,440   $  2,280
        Interest expense-trust preferred securities              (365)         --         --
        Other expense, net                                       (101)        (97)       (87)
                                                          -----------   ---------   --------
        Net income                                        $     1,744   $   1,343   $  2,193
                                                          -----------   ---------   --------
        Operating Activities:

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

        Operating Activities:

        Net income                                        $     1,744   $   1,343   $  2,193
        Adjustments to reconcile net income to
           net cash used in operating activities:
        Equity in undistributed earnings of subsidiary         (2,210)     (1,440)    (2,280)
        Increase in other assets                                 (134)        (67)       (19)
                                                          -----------   ---------   --------
        Net cash used in operating activities             $      (600)       (164)      (106)
                                                          -----------   ---------   --------

<CAPTION>


        <S>                                               <C>           <C>         <C>
        Financing Activities:

        Proceeds from issuance of trust preferred
         corporate obligations                            $     8,000          --         --
        Capital contribution to subsidiary                     (5,000)         --         --
        Dividends received from subsidiary                         --       1,100        500
        Dividend reinvestment plan contributions                  111         118         69
        Dividends paid                                           (777)       (766)      (573)
        Proceeds from the exercise of stock options               141           2         13
                                                          -----------   ---------   --------
        Net cash provided by financing activities               2,475         454          9
                                                          -----------   ---------   --------

        Net increase (decrease) in cash and cash
         equivalents                                            1,875         290        (97)
        Cash and cash equivalents at beginning of year            360          70        167
                                                          -----------   ---------   --------
        Cash and cash equivalents at end of year          $     2,235   $     360   $     70
                                                          ===========   =========   ========
</TABLE>

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                        UNION FINANCIAL BANCSHARES, INC.
                                       40

<PAGE>

                               BOARD OF DIRECTORS

                   UNION FINANCIAL BANCSHARES AND SUBSIDIARIES

MASON G. ALEXANDER                        JOHN S. MCMEEKIN
Director, Mid-South Management Company    President, Winnsboro Furniture Company

JAMES W. EDWARDS                          DWIGHT V. NEESE
Dean of Academics, USC-Union              President and Chief Executive Officer
                                          Provident Community Bank
WILLIAM M. GRAHAM
Owner, Graham's Flowers                   PHILIP C. WILKINS, DMD
                                          Dentist
LOUIS M. JORDAN
President, Jordan's Ace Hardware, Inc.

CARL L. MASON
CHAIRMAN
Retired

                                LEADERSHIP GROUP

                            PROVIDENT COMMUNITY BANK

CAROLYN H. BELUE                          CAROLINE T. THOMAS
Vice President                            Vice President
Operational Administration Manager        Retail Banking and Marketing Manager

J. A. FERGUSON                            LUD W. VAUGHN
Senior Vice President                     Senior Vice President
York County Regional President            Chief Credit Officer

RICHARD H. FLAKE                          WANDA J. WELLS
Executive Vice President                  Vice President & Corporate Secretary
Chief Financial Officer                   Shareholder Relations Officer

LISA G. MORRIS                            GERALD B. WYATT
Vice President                            Vice President
Human Resource Manager                    Commercial Relationship Manager

DWIGHT V. NEESE
President
Chief Executive Officer



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                        UNION FINANCIAL BANCSHARES, INC.
                                       41

<PAGE>

                              CORPORATE INFORMATION

COMMON STOCK INFORMATION
------------------------

Union Financial Bancshares, Inc.'s common stock is quoted on the Nasdaq National
Market under the symbol UFBS. As of September 30, 2002, there were 783
shareholders of record and 1,958,069 shares of common stock issued and
outstanding. The following table contains the range of high and low bid
information of Union Financial's common stock as reported by the Nasdaq Stock
Market and per share dividend as declared during each quarter of the last two
fiscal years. Share prices and dividends have been adjusted to reflect all stock
splits and stock dividends. See Note 16 to the financial statements for
information regarding certain limitations imposed on the Bank's ability to pay
cash dividends to the holding company.

                      High       Low      Dividend
                    --------  ---------  ----------
Fiscal 2002
 Fourth Quarter     $  13.88  $   12.85  $     .100
 Third Quarter      $  14.00  $   10.60  $     .100
 Second Quarter     $  11.23  $   10.25  $     .100
 First Quarter      $  10.60  $   10.00  $     .100

                      High       Low      Dividend
                    --------  ---------  ----------
Fiscal 2001
 Fourth Quarter     $  11.46     $ 9.50  $     .100
 Third Quarter      $   9.50     $ 9.00  $     .100
 Second Quarter     $   9.88     $ 8.00  $     .100
 First Quarter      $   9.94     $ 7.94  $     .100

DIVIDEND REINVESTMENT PLAN
--------------------------

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

10-KSB INFORMATION
------------------

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

ANNUAL MEETING OF SHAREHOLDERS
------------------------------

The Annual Meeting of Shareholders will convene at the Main Street Auditorium of
the University of South Carolina, Union Campus, Union, South Carolina on January
29, 2003 at 2:00 p.m.

<PAGE>

ADDITIONAL INFORMATION
----------------------

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

CORPORATE OFFICES
-----------------

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

TRANSFER AGENT
--------------

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

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
----------------------------------------

Elliott Davis, LLC
870 South Pleasantburg Drive
Greenville, SC 29607-6286

SPECIAL COUNSEL
---------------

Muldoon Murphy & Faucette  LLP
5101 Wisconsin Avenue,  N.W.
Washington, D.C.  20016

GENERAL COUNSEL
---------------

Nelson Mullins Riley & Scarborough
104 South Main Street, Suite 900
Greenville, South Carolina 29601

SHAREHOLDER RELATIONS OFFICER
-----------------------------

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

WEBSITE
-------

www.provcombank.com

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                        UNION FINANCIAL BANCSHARES, INC.
                                       42