<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-KSB

[X]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934.

For the fiscal year ended June 30, 1997
                          -------------

Commission file number 0-24476
                       -------

                   South Carolina Community Bancshares, Inc.
              --------------------------------------------------
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                   <C>
 
                       Delaware                                   22-0999615
                       --------                       ------------------------------------
            (STATE OR OTHER JURISDICTION OF           (I.R.S. EMPLOYER IDENTIFICATION NO.)
            INCORPORATION OR ORGANIZATION)

 
              110 S. Congress Street
            Winnsboro, South Carolina                                29180
          ---------------------------------                          -----
          (ADDRESS OF PRINCIPAL EXECUTIVE                          (ZIP CODE)
                   OFFICES)
</TABLE>
                       Telephone Number: (803) 635-5536
                                         --------------

     Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes   X                 No
                                     -----                  -----

   Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common
Stock

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained to the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

     The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the NASDAQ Small-cap Market on September 19, 1997 was
approximately $14,223,000.

     The Registrant's revenues for the fiscal year ended June 30, 1997 were
$3,588,000.

     The number of shares outstanding of the Registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of September 19, 1997
was 699,733.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-KSB:

I.   Portions of the South Carolina Community Bancshares, Inc. Proxy Statement
     for the 1997 Annual Meeting of Shareholders are incorporated by reference
     into certain items of Part III.
<PAGE>
 
<TABLE>
<CAPTION>
                           SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                          FORM 10-KSB
<S>          <C>                                                                    <C>
 
                                       TABLE OF CONTENTS
                                                                                    PAGE
 
PART I
 
Item 1.      Business.............................................................     1
 
Item 2.      Properties...........................................................    20
 
Item 3.      Legal Proceedings....................................................    20
 
Item 4.      Submission of Matters to a Vote of Security Holders..................    20
 
PART II      .....................................................................    20
 
Item 5.      Market for Registrant's Common Equity and Related Shareholder Matters    20
 
Item 5-A.    Selected Financial Data..............................................    21
 
Item 6.      Management's Discussion and Analysis of Financial Condition
              and Results of Operation............................................    22
 
Item 7.      Financial Statements.................................................    29
 
Item 8.      Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure..................................    56

PART III     .....................................................................    56
 
Item 9.      Directors and Officers of the Registrant.............................    56
 
Item 10.     Executive Compensation...............................................    56
 
Item 11.     Security Ownership of Certain Beneficial Owners and Management.......    56
 
Item 12.     Certain Relationships and Related Transactions.......................    56
 
Item 13.     Exhibits and Reports on Form 8-K.....................................    56
             (a)  Exhibits Required by Securities and Exchange Commission
                  Regulation S-B..................................................    56
             (b)  Reports on Form 8-K.............................................    57
</TABLE>
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS
-------  --------

         South Carolina Community Bancshares, Inc. (the "Company") was organized
in March, 1994 at the direction of the Board of Directors of Community Federal
Savings  Bank (the "Savings Bank"), formerly Community Federal Savings and Loan
Association, for the purpose of acquiring all of the capital stock to be issued
by the Savings Bank in the conversion of the Savings Bank from the mutual to the
stock form of organization (the "Conversion").   The Company received approval
from the OTS to become a savings and loan holding company and as such is subject
to regulation by the OTS.  The Conversion was completed as of July 7, 1994, the
Company issued 780,275 shares of Common Stock, and retained approximately fifty-
percent of the net cash proceeds of the offering, or $3.6 million (the balance
of the proceeds was transferred to the Savings Bank in exchange for the capital
stock of the Savings Bank).  In connection with the Conversion, the Company
loaned approximately $624,000 to the Community Federal Savings Bank Employee
Stock Ownership Plan ("ESOP") to enable the ESOP to purchase 62,422 shares of
the Company's Common Stock.  The primary business activity of the Company
consists of the operations of its wholly-owned subsidiary, the Savings Bank.

         The Company is a savings and loan holding company and the owner of all
of the issued and outstanding shares of capital stock of the Savings Bank. At
June 30, 1997 the assets of the Company consisted of its ownership of the
capital stock of the Savings Bank, the loan to the ESOP, $414,000 of interest
earning deposits, and $799,000 of investment securities. Community Federal
Savings Bank is a federally chartered savings bank that conducts its operations
from two facilities located in Winnsboro, South Carolina. The Savings Bank's
deposits are insured by the FDIC. The Savings Bank was chartered originally in
1934. The Savings Bank is a member of the FHLB of Atlanta. At June 30, 1997, the
Company had total assets of $46.6 million, total deposits of $34.0 million, and
stockholders' equity of $12.0 million.

         On October 25, 1996, the Company closed on its  agreement with First
Palmetto Savings Bank ("Seller") to purchase certain assets and assume certain
deposits and other liabilities associated with the operations of the Seller=s
branch office in Winnsboro, South Carolina. The assets  purchased  consisted of
branch loans, cash on hand, premises and equipment, safe deposit contracts and
records.  The total assets acquired were approximately $4 million. The
liabilities assumed  consisted of branch deposits and assumption of assignable
leases and operating contracts.

         The Savings Bank is a community-oriented savings institution that is
primarily engaged in the business of attracting deposits from the general public
in the Savings Bank's market area, and investing such funds in fixed-rate and
adjustable rate mortgage loans secured by one- to four-family residences, and,
to a lesser extent, investment securities. At June 30, 1997, mortgage loans
secured by one- to four-family residential real estate totalled $32.7 million,
or 88.9%, of the total loan portfolio, loans secured by commercial and other
property totalled $2.1 million, or 5.8%, of the total loan portfolio, loans
secured by unimproved land totalled $1.0 million, or 2.7%, of the total loan
portfolio, and consumer  loans totalled $1.0 million, or 2.6%, of the total loan
portfolio.  The Company also invests in United States Government and agency
obligations, which  investments totalled $3.4 million, or 7.2%, of total assets
at June 30, 1997, and interest-earning deposits in other financial institutions,
which totalled $5.2 million, or 11.2%, of total assets at June 30, 1997.

<PAGE>
 
       The Savings Bank's principal sources of funds are deposits and principal
and interest payments on loans and investment securities.  Principal sources of
income are interest received from loans and investment securities.  The Savings
Bank's principal expense is interest paid on deposits, compensation and related
costs, SAIF insurance premiums, and other noninterest expenses.

       LENDING

       Loan Portfolio Composition.  The principal components of the loan
portfolio are fixed-rate and adjustable rate conventional first mortgage loans
secured by one- to four-family residential real estate, and, to a much lesser
extent loans collateralized by unimproved land and commercial and other real
estate, and consumer loans.  At June 30, 1997, total loans receivable were $36.8
million, of which $32.7 million, or 88.9% were  one- to four-family residential
real estate mortgage loans, $1.0 million, or 2.7% were unimproved land loans,
$2.1 million, or 5.8%, were commercial and other real estate loans, and $1.0
million, or 2.6%, were consumer loans.


     The following table sets forth selected data relating to the composition of
the mortgage and other loan portfolios in dollar amounts and in percentages at
the dates indicated.
<TABLE>
<CAPTION>
 
                                                                         At June 30,
                                                                         -----------                        
                                                         1995                1996                1997
                                                         ----                ----                ----    
                                                   Amount   Percent    Amount   Percent    Amount   Percent
                                                  --------  --------  --------  --------  --------  --------
                                                                    (Dollars in Thousands)
<S>                                               <C>       <C>       <C>       <C>       <C>       <C>
 
Mortgage loans:
 One- to four-family.............................  $31,630     92.65%  $31,417     91.58%   32,698     88.88%
 Multifamily.....................................       30       .09        21       .06        12      0.03
 Commercial and other property...................    1,195      3.50     1,464      4.27     2,128      5.78
 Unimproved land.................................    1,081      3.16     1,121      3.27       988      2.69
                                                   -------    ------   -------    ------   -------    ------
   Total mortgage loans..........................   33,936     99.40    34,023     99.18    35,826     97.38
 
Other loans:
 Loans on savings accounts.......................      204       .60       282       .82       354      0.96
 Installment loans...............................        -         -         -         -       609      1.66
                                                   -------    ------   -------    ------   -------    ------
 
   Total loans receivable........................   34,140    100.00%   34,305    100.00%   36,789    100.00%
                                                              ======              ======              ======
Less:
 Loans in process................................     (480)               (377)               (285)
 Unearned loan fees, net of deferred loan costs..     (319)               (297)               (256)
 Allowance for loan losses.......................     (294)               (293)               (293)
                                                   -------             -------             -------
 
   Net loans receivable..........................  $33,047             $33,338             $35,955
                                                   =======             =======             =======
</TABLE>

                                       2
<PAGE>
 
     Loan Maturity Schedule.  The following table shows the maturity of the loan
portfolio at June 30, 1997.  The table does not reflect anticipated prepayments
or scheduled principal amortization.
<TABLE>
<CAPTION>
 
                                                             At June 30, 1997
                                            -----------------------------------------------------
                                                              Mortgage Loans
                                            -----------------------------------------------------
                                              One- To                 Commercial
                                               Four-                  and Other   Other
                                               Family    Multifamily   Property   Loans   Total
                                            -----------  -----------  ----------  -----  --------
                                                                (In Thousands)
<S>                                         <C>          <C>          <C>         <C>    <C>
 
Amount due:
 Within 1 year..........................    $       363  $        12  $       50  $ 613  $  1038
 
 After 1 year:
  1 to 3 years..........................            328            -          81    165      574
  3 to 5 years..........................          1,489            -         301    150    1,940
  5 to 10 years.........................          6,459            -         618     18    7,095
  10 to 20 years........................         16,566            -       1,915      8   18,489
  Over 20 years.........................          7,493            -         151      9    7,653
                                                -------  -----------      ------   ----  -------
 
    Total due after one year............         32,335            -       3,066    350   35,751
                                                -------  -----------      ------   ----  -------
 
    Total amounts due...................         32,698           12       3,116    963   36,789
                                                =======  ===========      ======   ====
 
Loans in process........................                                                    (285)
Deferred loan fees, net of deferred  
 loan costs.............................                                                    (256)
Allowance for loan losses...............                                                    (293)
                                                                                         -------
Loans receivable, net...................                                                 $35,955
                                                                                         =======
------------------------------------------
</TABLE>



     One- to Four-Family Residential Real Estate Loans.  The primary lending
activity currently consists of the origination of fixed rate one- to four-family
owner-occupied residential mortgage loans, virtually all of which are
collateralized by properties located in Fairfield County, South Carolina.  The
Savings Bank does originate some adjustable-rate first mortgage loans.  At June
30, 1997, $32.7 million, or 88.9% of the total loan portfolio, consisted of
one- to four-family residential real estate loans.  The Savings Bank also
originates one- to four-family construction loans that convert to permanent
loans after the initial construction period which generally does not exceed six
months.  The Savings Bank is a portfolio lender.  It has not sold loans in the
secondary mortgage market and does not intend to conduct secondary market sales
in the foreseeable future.  One- to four-family loans are underwritten and
originated according to policies approved by the Board of Directors.  In the
current lending environment, savings deposits and loan repayments have exceeded
demand for loans.

     The Savings Bank currently offers fixed rate and adjustable rate one- to
four-family residential mortgage loans with terms ranging up to 25 years. One-to
four-family residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms because borrowers may
refinance or prepay loans at their option. The average length of time that the
Savings Bank's one- to four-family residential mortgage loans remain outstanding
varies

                                       3
<PAGE>
 
significantly depending upon trends in market interest rates and other factors.
In recent years, the average maturity of the Savings Bank's mortgage loans has
decreased significantly due to unprecedented volume of refinancing activity.

     Originations of fixed rate mortgage loans are monitored on an ongoing basis
and are affected significantly by the level of market interest rates, the
Savings Bank's interest rate gap position, and loan products offered by the
Savings Bank's competitors.  The Savings Bank's mortgage loans amortize on a
monthly basis with principal and interest due each month.  To make the Savings
Bank's loan portfolio more interest rate sensitive, the Savings Bank currently
emphasizes the origination of loans with terms of 15 years or less.

     The Savings Bank's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Savings
Bank the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan.  Due-on-sale clauses are an
important means of adjusting the rates on the Savings Bank's fixed-rate mortgage
loan portfolio, and the Savings Bank has generally exercised its rights under
these clauses.

     Regulations limit the amount that a  savings bank may lend relative to the
appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination.  Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans.  The Savings Bank's lending policies limit the maximum loan-to-
value ratio on fixed rate loans without private mortgage insurance to 80% of the
lesser of the appraised value or the purchase price of the property to serve as
collateral for the loan.  The Savings Bank makes one- to four-family real estate
loans with loan-to-value ratios of up to 90%; however, for one- to four-family
real estate loans with loan-to-value ratios of between 80% and 90%, the Savings
Bank requires the amount of the loan that exceeds 80% of the appraised value to
be covered by private mortgage insurance.  The Savings Bank requires fire and
casualty insurance, as well as a certificate of title, on all properties
securing real estate loans made by the Savings Bank.

     Commercial and Other Real Estate Loans.  The Savings Bank originates
commercial and other real estate loans on a limited basis. Savings Bank lending
policies require that all commercial loans be secured solely by real estate,
with no security interest allowed in furniture and fixtures, inventory,
goodwill, or other assets of the business. At June 30, 1997, such loans had an
aggregate balance of $2.1 million, or 5.8%, of the total loan portfolio. The
commercial and other real estate loans are generally collateralized by, among
others, real estate used by small businesses, church property, convenience
stores, and small manufacturing operations. The Savings Bank generally does not
solicit such loans, and originates such loans selectively and on a case-by-case
basis. The Savings Bank rarely originates multifamily residential real estate
loans, and has purchased only one such loan, a participation interest with an
aggregate remaining principal balance of $5,000 at June 30, 1997. Multi-family
loans totalled $12,000, or .03% of the loan portfolio, at June 30, 1997. All of
the commercial real estate loans have fixed rates of interest. The Savings Bank
offers such loans with loan-to-value ratios of up to 75% and terms of up to 15
years. To compensate the Savings Bank for the increased credit risk associated
with commercial loans, interest rates are maintained at a level above that
charged for one- to four-family residential properties. Because of the increased
credit risk associated with such loans and

                                       4
<PAGE>
 
the low level of demand for such loans in the Savings Bank's primary market
area, the Savings Bank does not expect commercial and multifamily real estate
lending to constitute a significant part of loan originations in the foreseeable
future.

     Loans collateralized by commercial and multifamily residential real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans.  This increased credit risk is a result of several
factors, including the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans.  Furthermore, the repayment of loans secured by commercial
and multifamily residential real estate is typically dependent upon the
successful operation of the related real estate property.  If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.

     Unimproved Land Loans.   The Savings Bank also offers loans secured by
unimproved land, such as woodlands, pasture land, agricultural land,
recreational land, and other undeveloped land.  In recent years the Savings Bank
has reduced its originations of such loans.  Such loans totalled $1.0 million,
or 2.7%, of the total loan portfolio at June 30, 1997.  All of the Savings
Bank's unimproved land loans have fixed rates of interest.  The Savings Bank
offers such loans with loan to value ratios of up to 75% on tracts of 15 acres
or less, and loan to value ratios of up to 70% on tracts of land larger than 15
acres.  The Savings Bank considers the credit risks associated with large
acreage to be greater than normal, and will charge a higher rate of interest for
such loans.  The maximum term allowed for all land loans is 15 years.  The Board
of Directors reserves the right to disregard the value of any timber that may be
on the subject property, and may require a review by a recognized forester, in
addition to the appraisal, if it is deemed necessary.  The borrower may be
required to negotiate a release of timber rights prior to the harvesting of any
timber from the subject property.

     Loans collateralized by undeveloped land generally involve greater credit
risk than one- to four-family real estate loans.  The increased credit risk is
the result of several factors, including the dependency of repayments on the
successful operation or management of the real estate collateralizing the loan.
In turn, the success of the management and operations frequently depends on
general economic conditions, climate, and in the case of agricultural property,
prevailing prices of commodities.

     Consumer  Loans.  To a much lesser extent, the Savings Bank also originates
consumer loans consisting of passbook loans, home equity lines of credit and
installment loans, primarily as a service to its customers.  Such loans totalled
$1.0 million, or 2.6% of the total loan portfolio at June 30, 1997.

DELINQUENCIES AND CLASSIFIED ASSETS

     Collection Procedures.  The Savings Bank's policies provide for a 30-day
grace period on all payments. The Savings Bank's collection procedures provide
that if a payment is not received within the grace period, a computer-generated
delinquent notice is sent to the borrower requesting payment plus a late charge.
If delinquency continues 15 days past the end of the grace period, a second
delinquent notice is mailed requesting payment in full of the delinquency or
that the borrower contact the Savings Bank immediately to provide satisfactory
arrangements for the repayment of the debt. If a loan becomes 60 days past due
(inclusive of the 30 day grace period), the borrower is contacted personally, if
possible, by Savings Bank personnel to negotiate satisfactory arrangements for
the

                                       5
<PAGE>
 
repayment of the debt. If a loan becomes 90 days past due, the Savings Bank's
President is authorized to send a right-to-cure notice to the borrower advising
him of the delinquency and providing a 30-day period for repayment prior to the
initiation of legal action to collect on the collateral. At the end of this
period, if satisfactory arrangements have not been made for repayment, the
President may then forward the account to the Savings Bank's attorney for
further collection. The Attorney will provide notice to the borrower of pending
legal action, and allow a seven-day period for resolution prior to the
commencement of foreclosure. It is sometimes necessary and desirable to arrange
special repayment schedules with mortgagors to prevent foreclosure or filing for
bankruptcy. The mortgagors are required to submit a written repayment schedule
which is closely monitored for compliance.

     Delinquent Loans.  At June 30, 1995, 1996 and 1997 delinquencies in the
loan portfolio were as follows:
<TABLE>
<CAPTION>
 
                                            At June 30, 1995       At June 30, 1996    At June 30, 1997
                                         -----------------------  ------------------  ------------------
                                            Number    Principal   Number  Principal   Number  Principal
                                              of       Balance      of     Balance      of     Balance
                                            Loans      of Loans   Loans    of Loans   Loans    of Loans
                                         -----------  ----------  ------  ----------  ------  ----------
                                                           (Dollars in Thousands)
<S>                                      <C>          <C>         <C>     <C>         <C>     <C>
 
Period delinquent:
 Loans 60-89 days delinquent.............         12      $ 582        9      $ 238       13      $ 511
 Loans 90 days or more
 delinquent..............................         10        273       15        480       32        397
                                                  --      -----       --  ---------   ------  ---------
  Total loans delinquent 60 days
  or more................................         22      $ 855       24      $ 718       45      $ 908
                                                  ==      =====       ==  =========   ======  =========
 
Delinquent loan principal to
 total gross loans:
 Loans 60-89 days delinquent  to
 total gross loans.......................                  1.70%               0.69%               1.39%
 
 Loans 90 days or more delinquent
 to total gross loans....................                   .80%               1.40%               1.08%
</TABLE>

                                       6
<PAGE>
 
     Nonperforming Assets.  The following table sets forth information with
respect to non-performing assets for the periods indicated.  During the periods
shown, there were no restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
 
 
                                                       At June 30,
                                                  ----------------------
                                                   1995    1996    1997
                                                  ------  ------  ------
                                                  (Dollars in Thousands)
<S>                                               <C>     <C>     <C>
Loans accounted for on a non-accrual
  basis...................................        $ 144   $ 480   $ 397
 
Accruing loans which are
  contractually past due 90 days or more..          129       0       0
                                                  -----   -----   -----
 
Total of nonaccrual and accruing
  loans 90 days or more past due..........          273     480   $ 397
 
Foreclosed real estate, net of related....
  valuation allowance.....................          171     156      96
                                                  -----   -----   -----
 
        Total nonperforming assets........        $ 444   $ 636   $ 493
                                                  =====   =====   =====
 
Nonperforming loans to total gross loans..          .80%   1.40%   1.08%
Nonperforming assets to total assets......         1.01%   1.44%   1.06%
 
</TABLE>

     $27,850 in interest income was recognized during the year ended June 30,
1997 on loans accounted for as non-accrual on that date.  An additional $24,375
in interest income would have been recognized had those loans remained current
throughout the period.

     Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is deemed real estate owned ("REO") until such time as it is sold.
In general, collateral for a loan is considered to be in-substance foreclosed
if: (i) the borrower has little or no equity in the collateral; (ii) proceeds
for repayment of the loan can be expected to come only from the operation or
sale of the collateral; and (iii) the borrower has either formally or
effectively abandoned control of the collateral to the Savings Bank, or retained
control of the collateral but is unlikely to be able to rebuild equity in the
collateral or otherwise repay the loan in the foreseeable future.  Cash flow
attributable to in-substance foreclosures is used to reduce the carrying value
of the collateral.

     When REO is acquired or otherwise deemed REO, it is recorded at the lower
of cost or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations.  At June 30, 1995, 1996, 1997,  REO
totalled  $171,000, $156,000, and $96,000, respectively.

     Classification of Assets.  OTS regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets.  An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any.  "Substandard" assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if the
deficiencies are not

                                       7
<PAGE>
 
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payments, have exhibited
some potential weaknesses that, if not corrected, could increase the level of
risk in the future. At June 30, 1997, classified assets totalled $296,000, all
of which were classified substandard. In addition to such classified assets, at
June 30, 1997, there were $517,000 of assets designated special mention.

     Allowance for Loan Losses.  The Savings Bank provides a valuation allowance
for estimated losses from uncollectible loans.  Management's periodic evaluation
of the adequacy of the allowance for loan losses is based on loss experience,
known and inherent risk in the portfolio, prevailing market conditions, and
management's judgment as to collectibility.  The allowance for loss on loans is
increased by charges to income and decreased by charge-offs (net of recoveries).
No additions were made during the years ended June 30, 1995, 1996, or 1997. The
allowance for loan losses totaled $294,000 at June 30, 1995, $293,000 at June
30, 1996 and $293,000 at June 30, 1997.

     Analysis of the Allowance for Loan Losses.  The following table sets forth
the allowance for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
 
                                                                   At or for the
                                                                Year Ended June 30,
                                                             --------------------------
                                                               1995     1996     1997
                                                             --------  -------  -------
                                                               (Dollars in Thousands)
<S>                                                          <C>       <C>      <C>
 
Balance at beginning of period.......................        $   294   $  294   $  293
Provision for loan losses............................              -        -        -
Chargeoffs (1).......................................              -       (1)       -
Recoveries...........................................              -        -        -
                                                             -------   ------   ------
  Balance at end of period...........................        $   294   $  293   $  293
                                                             =======   ======   ======
 
Ratio of charge-offs during the period to
  average loans outstanding during the period........              -        -        -
Ratio of allowance for loan losses to nonperforming
  loans at end of period.............................         107.69%   61.04%   73.80%
Ratio of allowance for loan losses to total
  nonperforming assets at end of period..............          66.22%   46.07%   59.43%
Ratio of allowance for loan losses to net loans
  receivable at end of period........................            .89%     .88%     .78%
---------------------------------------------
</TABLE>
(1) All charge-offs related to loans secured by one- to four-family residential
    real estate.

                                       8
<PAGE>
 
     Allocation of Allowance for Loan Losses.  The following table sets forth
the allocation of the allowance for loan losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
 
                                                          At June 30,
                               ------------------------------------------------------------
                                         1995               1996                1997
                               ----------------------  ------------------ -----------------
Total                                         % of     Total     % of     Total     % of
                                 Amount     Loans (1)  Amount  Loans (1)  Amount  Loans (1)
                               -----------  ---------  ------  ---------  ------  ---------
                                                     (Dollars in Thousands)
<S>                            <C>          <C>        <C>     <C>        <C>     <C> 
Balance at end of period
 applicable to:
 One- to four-family
  residential................        $ 256     92.65%    $252     91.58%     264     88.88%
 Multifamily residential.....            1       .09        -       .06        -       .03
 Unimproved land.............           18      3.16       18      3.27       11      2.69
 Commercial and other........           19      3.50       23      4.27       14      5.78
 Consumer loans..............            -       .60        -       .82        4      2.62
                               -----------  ---------  ------  ---------  ------  ---------
  Total allowance for loan
   losses....................        $ 294    100.00%    $293    100.00%    $293    100.00%
                               ===========  =========  ======  =========  ======  =========
-------------------------

</TABLE>
(1) Represents the percent of the Savings Bank's total loan portfolio that is
    composed of loans in each specific loan category.


INVESTMENT ACTIVITIES

     Investment Portfolio.  The following table sets forth certain information
regarding the carrying and estimated market values of the investment securities
of the Company at the dates indicated.
<TABLE>
<CAPTION>
                                                      At June 30,
                                 -------------------------------------------------------
                                         1995               1996              1997
                                 -------------------  ----------------  ----------------
                                  Carrying    Market  Carrying  Market  Carrying  Market
                                    Value     Value    Value    Value    Value    Value
                                 -----------  ------  --------  ------  --------  ------
                                                     (In Thousands)
<S>                              <C>          <C>     <C>       <C>     <C>       <C>
Investment securities:
 U.S. Government and federal
  agency obligations...........       $6,183  $6,225    $4,749  $4,774    $3,352  $3,370
 FHLB stock....................          429     429       429     429       429     429
                                      ------  ------    ------  ------    ------  ------
 
  Total investment securities..       $6,612  $6,654    $5,178  $5,203    $3,781  $3,799
                                      ======  ======    ======  ======    ======  ======
</TABLE>

                                       9
<PAGE>
 
     Investment Portfolio Maturities.  The following table sets forth
information regarding the carrying value, weighted average yields, and
maturities of the investment securities of the Company at June 30, 1997.
<TABLE>
<CAPTION>
         

                                                                           At June 30, 1997  
                                                                           ---------------------------------------------
                              One Year or Less       One to Five Years     Five to Ten Years      More than Ten Years   
                             ---------------------   --------------------  ---------------------  -------------------   
                                       Annualized             Annualized             Annualized             Annualized              
                                        Weighted               Weighted               Weighted               Weighted               
                             Carrying    Average    Carrying    Average    Carrying    Average    Carrying    Average   
                              Value     Yield (1)    Value     Yield (1)    Value     Yield (1)    Value     Yield (1)  
                             --------  -----------  --------  -----------  --------  -----------  --------  ----------- 
<S>                          <C>       <C>          <C>       <C>          <C>       <C>          <C>       <C>         
                              (Dollars in Thousands)                                                                    
                                                                                                                        
U.S. Treasury obligations..    $1,797        6.73        699        6.74          -           -          -           -  
Federal Home Loan Bank                                                                                                  
 obligations...............         -                    656        6.89          -           -          -           -  
Federal National Mortgage                                                                                               
 Association obligations...       200        4.90          -           -          -           -          -           -  
Federal Home Loan Bank                                                                                                  
 stock (2).................         -                      -                                           429        7.25  
                             --------               --------               --------               --------              
  Total investments........    $1,979                 $1,355                      -                    429              
                             ========               ========               ========               ========              




                                    At June 30, 1997                                             
                                    -------------------------------------------------------      
                                    Total Investment Securities                                  
                                    -------------------------------------------------------      
                                                         Annualized                                          
                                                          Weighted                                           
                                     Carrying    Market    Average                                            
                                      Value      Value    Yield (1)                                          
                                     --------    ------   ----------
U.S. Treasury obligations..             2,496     2,509        6.73                                           
Federal Home Loan Bank                                                                                        
 obligations...............               656       662        6.89                                           
Federal National Mortgage                                                                                     
 Association obligations...               200       199        4.90                                           
Federal Home Loan Bank                                                                                        
 stock (2).................               429       429        7.25                                           
                                     --------    ------                                                       
  Total investments........             3,781     3,799        6.72                                            
                                     ========    ======
</TABLE>                                        
---------------------------------------------
(1) Annualized interest return as a percentage of acquisition cost.
(2) Federal Home Loan Bank stock has no stated maturity, and is assumed for
    these purposes to be held ten years.

                                       10
<PAGE>
 
SOURCES OF FUNDS

     General.  The Company's sources of funds are the net proceeds retained by
it in connection with the Conversion, and dividends from the Savings Bank.  In
1997 the Savings Bank paid $300,000 in dividends to the Company.  Deposits are
the major source of funds for lending and other investment purposes of the
Savings Bank.  The Savings Bank=s's deposit-gathering activities are currently
conducted from the Savings Bank=s's two facilities in Winnsboro, South Carolina.
In addition to deposits, the Savings Bank derives funds from the amortization
and prepayment of loans, the maturity of investment securities, and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions.  Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources or on a longer term basis for general business
purposes.

     Deposits.  Consumer and commercial deposits are attracted principally from
within the Savings Bank's market area through the offering of Now accounts,
statement savings, money market deposit, term certificate accounts and
individual retirement accounts.  Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors.  The Savings Bank
regularly evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the Savings Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate.  The
Savings Bank has sought to decrease the risk associated with changes in interest
rates by offering competitive rates on deposit accounts and by pricing
certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms.   Due to the current interest rate
environment, however, longer terms are not attractive to customers.  The Savings
Bank does not obtain funds through brokers or through  solicitations outside its
market area.

     The weighted-average interest rate on savings deposits was approximately
5.17% in 1996 and 4.84% in 1997.  Balances are tabulated as follows:
<TABLE>
<CAPTION>
 
                                                At June 30,
                          ----------------------------------------------------
                                 1995              1996             1997
                          -----------------  ----------------  ---------------
                                     % of              % of               % of 
Amount                      Total    Amount   Total   Amount   Total
------                    -------  --------  -------  ------   -----
                                      (Dollars in Thousands)
<S>                       <C>      <C>      <C>      <C>      <C>       <C>   
 
NOW Accounts............  $     -       -%  $     -       -%  $ 1,402     4.12%
Regular passbook........    2,293    7.62     2,323    7.43     3,024     8.89
Money-market passbook...    4,223   14.03     4,214   13.47     3,812    11.20
Certificates:
 3.99% and lower........        4     .01         -       -         2      .01
 4.00% - 4.99%..........    5,777   19.19       502    1.61        14      .04
 5.00% - 5.99%..........    7,520   24.98    20,056   64.13    22,301    65.54
 6.00% - 6.99%..........    9,093   30.20     4,178   13.36     2,103     6.18
 7.00% - 7.99%..........    1,196    3.97         -       -     1,559     4.58
 8.00% - 8.99%..........        -       -         -       -        12      .04
Deposit Premium.........        -       -         -       -      (205)    (.60)
                          -------  ------   -------  ------   -------   ------
  Total.................  $30,106  100.00%  $31,273  100.00%  $34,024   100.00%
                          =======  ======   =======  ======   =======   ======
 
</TABLE>

                                       11
<PAGE>
 
     At  June 30, 1997 the Savings Bank had savings accounts in amounts of
$100,000 or more maturing as follows:
 
        Maturity Period                                      Amount
        ---------------                                      ------
                                                         (In Thousands)
 
        One month through three months..................     $2,011
        Three through six months........................      1,935
        Six through 12 months...........................      1,695
        Over 12 months..................................        117
                                                             ------
            Total.......................................     $5,758
                                                             ======

REGULATION AND SUPERVISION

GENERAL

     The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS, and the FDIC as the deposit insurer.  The Savings Bank
is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the SAIF, which is managed by the FDIC.  The Savings Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions.  There are periodic examinations by the OTS and
the FDIC to test the Savings Bank's compliance with various regulatory
requirements.  This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors.  The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.  Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Company, the Savings Bank and their operations.
The Company, as a savings and loan holding company, is also required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS.  Certain of the regulatory requirements applicable to the Savings Bank and
to the Company are referred to below or elsewhere herein.

FEDERAL REGULATION OF SAVINGS INSTITUTIONS

     Business Activities.  The activities of savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act").  The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of non-
subsidiary savings institutions or savings and loan holding companies without
prior approval, and (5) permit bank holding companies to acquire healthy savings
institutions.

                                       12
<PAGE>
 
     The description of statutory provisions and regulations applicable to
savings banks set forth in this annual report does not purport to be a complete
description of such statutes and regulations and their effect on the Savings
Bank.  Moreover, because some of the provisions of FDICIA are still in the
process of being implemented through the adoption of regulations by the various
federal banking agencies, the Savings Bank cannot yet fully assess the impact of
these provisions on its operations.

     Loans to One Borrower.  Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower.  Generally,
savings institutions may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of unimpaired capital and surplus.  An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if such loan is secured by readily marketable collateral, which is defined to
include certain securities and bullion, but generally does not include real
estate.  At June 30, 1997, the Savings Bank was in compliance with its loans to
one borrower limitations.

     Qualified Thrift Lender Test.  The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test.  Under the QTL test, a savings bank
is required to maintain at least 65% of its "portfolio assets" (total assets
less (I) specified liquid assets up to 20% of total assets, (ii) intangibles,
including goodwill, and (iii) the value of property used to conduct business) in
certain "qualified thrift investments," primarily residential mortgages and
related investments, including certain mortgage-backed and related securities on
a monthly basis in 9 out of every 12 months.  A savings bank that fails the QTL
test must either convert to a bank charter or operate under certain
restrictions.  As of June 30, 1997, the Savings Bank satisfied the QTL test.

     Limitation on Capital Distributions.  OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital.  The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level.  An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Savings Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution.  As of June 30, 1997, the Savings Bank would qualify
as a Tier 1 Savings Bank.   In addition, the OTS could prohibit any proposed
capital distribution by the Savings Bank, which would otherwise be permitted by
the regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.

     Liquidity.  The Savings Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified U.S. Government, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial paper)
equal to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings.  This liquidity
requirement which is

                                       13
<PAGE>
 
currently 5%, may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings flow
of member institutions. The Savings Bank's liquidity ratio averaged 23.30%
during the month ended June 30, 1997. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet these liquidity requirements. During the
month ended June 30 1997, the Savings Bank's short-term liquidity ratio averaged
19.01%. At June 30, 1997, the Savings Bank was in compliance with its liquidity
requirements.

     Assessments.  Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS.  The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report.  Based on its assets
at March 31, 1997, the Savings Bank is required to pay a semi-annual assessment
of approximately $7,800.

     Community Reinvestment.  Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods.  The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA.  The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution.  The CRA rating system identifies four levels of
performance that may describe an institution's record of meeting community
needs:  outstanding, satisfactory, needs to improve and substantial non-
compliance.  The CRA also requires all institutions to make public disclosure of
their CRA ratings.  The CRA regulations were recently revised.  Effective July
1, 1995, the OTS will assess the CRA performance of a savings institution under
lending, service and investment tests, and based on such assessment, will assign
an institution in one of the four above-referenced ratings.  The Savings Bank
received an "outstanding" CRA rating under the current CRA regulations in its
most recent federal examination by the OTS.

     Transactions with Related Parties.  The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus.  Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited.  Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.  In addition, savings institutions
are prohibited from lending to any affiliate

                                       14
<PAGE>
 
that is engaged in activities that are not permissible for bank holding
companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary. At June 30, 1997, the Savings Bank was in
compliance with the transactions with affiliates rules governed by Sections 23A
and 23B.

     The Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder.  Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment.  Regulation O also places
individual and aggregate limits on the amount of loans the Savings Bank may make
to such persons based, in part, on the Savings Bank's capital position, and
requires certain approval procedures to be followed.

     Enforcement.  Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance.  Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day.  Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years.  Under the FDI Act, the FDIC has
the authority to recommend to the Director of OTS that enforcement action be
taken with respect to a particular savings institution.  If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances.

     The federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act.  The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired.  The standards set
forth in the Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; and compensation, fees and benefits.  The agencies
also adopted a proposed rule which proposes asset quality and earnings standards
which, if adopted, would be added to the Guidelines.  If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act.  The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.

     Capital Requirements.  The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard.  Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than

                                       15
<PAGE>
 
certain qualifying supervisory goodwill and certain purchased mortgage servicing
rights ("PMSRs"). The OTS regulations also require that, in meeting the tangible
ratio, leverage and risk-based capital standards, institutions must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. At June 30, 1997, the Savings Bank's ratio of tangible
capital to total assets, and its ratio of core (leverage) capital to total
assets, was 23.1%.

     The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively.  In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset.  The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard.  The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses.  Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%.  Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.  At June 30, 1997, the Savings Bank's ratio of core capital to
total adjusted assets was 23.1%, and its ratio of total capital to risk-weighted
assets was 48.7%.

     OTS regulatory capital rule also incorporates an interest rate risk
component.  Savings banks with "above normal" interest rate risk exposure are
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements.  A savings bank's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the Savings Bank's assets.  In
calculating its total capital under the risk-based rule, a savings bank whose
measured interest rate risk exposure exceeds 2%, must deduct an interest rate
component equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets.  A savings bank with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise.  The rule also provides
that the Director of the OTS may waive or defer an institution's interest rate
risk component on a case-by-case basis.

     At June 30, 1997, the Savings Bank was in compliance with all of its
capital requirements.

PROMPT CORRECTIVE REGULATORY ACTION

     Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized.  A savings institution that has a total
risk-based capital ratio of less than 6.0%, a Tier 1 core risk-based capital
ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered
to be "significantly undercapitalized" and a savings institution that has

                                       16
<PAGE>
 
a tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date
an institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.

INSURANCE OF DEPOSIT ACCOUNTS

     The Savings Bank is a member of the SAIF, which is administered by the
FDIC.  Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. Government.  As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
banks, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.

     The minimum annual deposit insurance premiums are currently assessed at the
rate of .065% of deposits for all SAIF-insured members.  The FDIC, however, is
authorized to raise premiums in certain circumstances related to fund losses and
severe economic circumstances and has exercised this authority several times
with respect to premiums paid to the Bank Insurance Fund ("BIF") by commercial
banks and BIF-member savings banks.

     In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996.  For the Savings Bank, the assessment amounted to $193,000 (or
$127,000 when adjusted for taxes), based on the Savings Bank's deposits on March
31, 1995.  In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and SAIF-insured
institutions.  The FICO assessment will be 1.29 basis points per $100 in BIF
deposits and 6.44 basis points per $100 in SAIF deposits.  Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits).

     The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings banks as of that date.  Several
bills have been introduced in the current Congress that would eliminate the
federal thrift charter and OTS.  The bills would require that all federal
savings banks convert to national banks or state depository institutions by no
later than January 1, 1998 in one bill and June 30, 1998 in the other and would
treat all state savings banks as state banks for purposes of federal banking
laws.  Subject to a narrow grandfathering, all savings

                                       17
<PAGE>
 
and loan holding companies would become subject to the same regulation as bank
holding companies under the pending legislative proposals. Under such proposals,
any lawful activity in which a savings bank participates would be permitted for
up to two years following the effective date of its conversion to the new
charter, with two additional one-year extensions which may be granted at the
discretion of the regulator. The legislative proposals would also abolish the
OTS and transfer its functions to the federal bank regulators with respect to
the institutions and to the Federal Reserve Board with respect to the regulation
of holding companies. The Savings Bank is unable to predict whether the
legislation will be enacted or, given such uncertainty, determine the extent to
which the legislation, if enacted, would affect its business. The Savings Bank
is also unable to predict whether the SAIF and BIF funds will eventually be
merged.

     While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Savings Bank, and BIF-
insured institutions will continue until at least January 1, 1999.  Under the
legislation, the Savings Bank anticipates that its ongoing annual SAIF premiums
will be approximately $21,200.

FEDERAL HOME LOAN BANK SYSTEM

     The Savings Bank is a member of the FHLB System, which consists of 12
regional FHLBs.  The FHLB provides a central credit facility primarily for
member institutions.  The Savings Bank, as a member of the FHLB, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB, whichever is greater.  The Savings Bank was
in compliance with this requirement with an investment in FHLB-Atlanta stock, at
June 30, 1997, of $429,000.

     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs.  These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts).  The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million.  The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements.  The Savings Bank is in compliance with the foregoing
requirements.  The balances maintained to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements imposed by the OTS.

                                       18
<PAGE>
 
HOLDING COMPANY REGULATION

     The Company is a non-diversified savings and loan holding company within
the meaning of the HOLA, as amended.  As such, the Company is registered with
the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements.  In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries.  Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution.  The Savings Bank is
required to notify the OTS 30 days before declaring any dividend to the Company.

     As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Savings Bank continues to be a QTL.  Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings institution
by the OTS, the Company would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would be
subject to extensive limitations on the types of business activities in which it
could engage.  The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and
activities authorized by OTS regulation.  The OTS is prohibited from approving
any acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS.  It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a non-subsidiary savings institution, a non-
subsidiary holding company, or a non-subsidiary company engaged in activities
other than those permitted by the HOLA; or acquiring or retaining control of an
institution that is not federally insured.  In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.

     Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the

                                       19
<PAGE>
 
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisition of control by such
person.

ITEM 2.   PROPERTIES
-------   ----------

     The Company conducts its business through two facilities located in
Winnsboro, Fairfield County, South Carolina.  The main office at its current
location  opened and has been owned by the Savings Bank since 1970. The branch
office acquired from First Palmetto is leased.  At June 30, 1997, the net book
value of the Company's property and equipment was $551,000.

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

     None.

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

     Not applicable.
                                 PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
-------   ---------------------------------------------------------------------

     As of June 30, 1997, the Company had 699,733 shares of common stock issued
and outstanding. At such date, the Company had 335 shareholders of record.  The
Company's common stock is traded on the NASDAQ Small-Cap market under the symbol
"SCCB."  Set forth below are the quarterly high and low bid prices for the
Common Stock, as reported on the NASDAQ Small Cap Market, for the last eight
quarters of trading.
<TABLE>
<CAPTION>
                                                    High    Low
                                                    -----  -----
<S>                                                 <C>    <C>
 
          Quarter ended September 30, 1995........  17.00  15.00
          Quarter ended December 31, 1995.........  17.50  17.00
          Quarter ended March 31, 1996............  17.50  17.00
          Quarter ended June 30, 1996.............  17.00  16.25
          Quarter ended September 30, 1996........  16.00  15.00
          Quarter ended December 31, 1996.........  15.00  15.00
          Quarter ended March 31, 1997............  19.75  16.50
          Quarter ended June 30, 1997.............  19.25  17.50
</TABLE>

     During 1996 and 1997, the Company declared semi-annual cash dividends of
$.30 per share.   For a discussion of limitations on the Company's ability to
pay cash dividends, see Item 1.  Business-Regulation and Supervision-Limitation
on Capital Distributions; and Notes 9 and 16 to the Notes to Consolidated
Financial Statements.

                                       20
<PAGE>
 
Item 5-A. Selected Financial Data
--------- -----------------------

     Set forth below are selected financial and other data of the Company.
<TABLE>
<CAPTION>
 
                                                                       At June 30,
                                                  ----------------------------------------------------------
                                                      1993         1994       1995        1996       1997
                                                  -----------   ----------  ---------   --------  ----------
                                                                      (In Thousands)
<S>                                               <C>           <C>         <C>         <C>       <C>
SELECTED FINANCIAL DATA:
 
Total assets................................          $39,885     $47,341     $43,947   $44,172  $46,598
Loans receivable, net.......................           31,869      32,445      33,047    33,338   35,955
Interest-earning deposits...................            2,991       8,307       2,836     4,171    5,242
Investment securities.......................            3,531       5,009       6,612     5,178    3,781
Foreclosed real estate, net.................              188         145         171       156       96
Deposits....................................           34,119      34,265      30,106    31,273   34,024
Stockholders equity.........................            5,500       6,152      13,350    12,309   11,962
 
 
 
 
                                                                For the Year Ended June 30,
                                                  ----------------------------------------------------------
                                                      1993         1994       1995        1996       1997
                                                  -----------   ----------  ---------   --------  ----------
                                                                       (In Thousands)
SELECTED OPERATING DATA:
 
Interest income.............................          $ 3,465     $ 3,196     $ 3,429   $ 3,406  $ 3,500
Interest expense on savings accounts                                          
  and borrowed money........................            1,748       1,442       1,351     1,643    1,635
                                                      -------     -------     -------   -------  -------
        Net interest income.................            1,717       1,754       2,078     1,763    1,865
                                                                              
  Provision for loan losses.................               11         151           -         -        - 
                                                      -------     -------     -------   -------  -------
        Net interest income after                                             
          provision for loan losses.........            1,706       1,603       2,078     1,763    1,865
                                                                              
Noninterest income..........................               47          42         110        35       88
                                                                              
Noninterest expense.........................              481         530         705       991    1,272
                                                      -------     -------     -------   -------  -------
                                                                              
Income before income taxes and                                                
  effect of change in accounting principle..            1,272       1,115       1,483       807      681
                                                                              
Income tax expense..........................              493         411         556       319      258
                                                      -------     -------     -------   -------  -------
                                                                              
Income before change                                                          
  in accounting principle...................              779         704         927       488      423
                                                                              
Cumulative effect of change in                                                
  accounting for income taxes...............                -         (52)          -         -        -
                                                      -------     -------     -------   -------  -------
                                                                              
Net income..................................          $   779     $   652     $   927   $   488  $   423
                                                      =======     =======     =======   =======  =======
                                                                              
Net income per share (1)....................              N/A         N/A     $  1.28   $   .67  $   .62
                                                                              =======   =======  =======
</TABLE>
____________________________________
(1)   There were no shares outstanding prior to the Company's initial offering
      of July 7, 1994

                                       21
<PAGE>

<TABLE>
<CAPTION>
 
                                                    At or for the Year Ended June 30,
                                             --------------------------------------------
                                                1993      1994     1995     1996    1997
                                             --------   -------   ------   ------  ------
 

SELECTED FINANCIAL RATIOS AND OTHER DATA:
<S>                                            <C>      <C>      <C>      <C>      <C>
  Return on average assets...................    1.96%    1.60%    2.10%    1.11%     .93%
  Return on average stockholders' equity.....   15.24    11.11     7.07     3.77     3.46
  Average equity to average assets...........   12.83    14.39    29.80    29.38    26.71
  Total equity to total assets...............   13.79    13.00    30.38    27.87    25.67
  Operating expenses to average assets.......    1.21     1.30     1.60     2.25     2.78
  Net interest income to operating expenses..  356.96   330.94   294.75   177.90   146.62
  Nonperforming loans to total loans (1).....    3.07     2.01      .80     1.40     1.08
  Nonperforming assets to total assets (2)...    3.01     1.74     1.01     1.44     1.06
------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans consist of non-accruing loans past due 90 days or more
    and accruing loans past due 90 days or more.
(2) Nonperforming assets consist of nonperforming loans and real estate acquired
    through foreclosure.



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

GENERAL

     The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets, consisting primarily of mortgage loans, interest-
bearing deposits at other institutions, and investment securities, and the
interest paid on interest-bearing liabilities consisting primarily of savings
deposits.  Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to
interest-bearing liabilities.  The Company's earnings also are affected by its
level of noninterest income including loan origination fees, gains on sale of
investment securities, and other noninterest income, and noninterest expense,
including primarily compensation and related costs, occupancy and equipment,
SAIF insurance premiums, data processing and other noninterest expense.
Earnings of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Company.

   The Company's total consolidated assets increased by approximately $2.2
million or 5.5% from $44.2 million at June 30, 1996 to $46.6 million at June 30,
1997. The increase in assets for the period was primarily attributable to the
acquisition of the branch facility.

   The composition of the Company's balance sheet has not been materially
affected by market conditions between June 30, 1996 and June 30, 1997. Net loans
increased $2.6 million or 7.9%. This increase resulted from the Company's
acquisition of approximately $2.2 million from the branch acquisition and normal
loan originations.

     Deposits increased $2.7 million  or 8.8%, from $31.3 million at June 30,
1996 to $34.0 million at June 30, 1997. The increase in deposits was primarily
attributable to a $1.5 million growth in Now accounts and 1.2 million growth in
certificates of deposit. This overall growth is directly the result of deposits
assumed with the branch acquisition.

                                       22
<PAGE>
 
On October 25, 1996 the Company closed on its agreement with First Palmetto
Savings Bank to acquire a branch office in Winnsboro, South Carolina. The
Company purchased branch loans of approximately $2.2 million and assumed deposit
account liabilities of approximately $4.0 million. In connection with the
acquisition of the deposit accounts, the Company paid a premium of approximately
$219,000. The Company also received cash at the closing of the deal of
approximately $1.5 million due to the fact that it assumed more liabilities than
assets purchased

     During fiscal 1997, the Company repurchased 35,677 shares of its Common
Stock at an aggregate cost of approximately $562,000.

                                       23
<PAGE>
 
AVERAGE BALANCE SHEET

     The following table sets forth certain information relating to the
Company's consolidated statement of financial condition at June 30, 1995, 1996
and 1997, and its consolidated statement of income for the years ended those
dates.  It reflects the average yield on assets and the average cost of
liabilities for the periods indicated.  Such yields and costs are derived by
dividing income or expense by the average balance of related assets or
liabilities for the periods shown.  Average loan and savings account balances
are derived from month-end balances as opposed to daily balances; management
does not believe that the use of month-end balances resulted in any material
effect on the information presented.  Loan interest includes fees which are
considered yield adjustments; average loan balances include non-accruing loans.

<TABLE>
<CAPTION>
 
 
                                                                                   Year Ended June 30,
                                            ----------------------------------------------------------------------------------------
                                                        1995                         1996                          1997
                                            ----------------------------  -----------------------------  ---------------------------
                                                                Average                        Average                       Average
                                             Average             Yield/   Average              Yield/    Average              Yield/
                                             Balance  Interest    Cost    Balance   Interest    Cost     Balance   Interest    Cost 
                                            --------  --------- --------  --------  ---------  --------  --------  ---------  ------
                                                                             (Dollars in Thousands)
<S>                                        <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>        <C>
Assets:
  Interest-earning assets:
    Loans receivable and mortgage-backed
      securities.............................  $33,216   $2,884    8.68%  $33,075   $2,817      8.52%    $35,254     $2,966   8.41% 
    Investment securities....................    6,992      388    5.55     5,188      333      6.42       4,108        279   6.79 
    Interest-earning deposits................    2,825      157    5.56     4,615      256      5.55       4,935        255   5.17
                                               -------    -----           -------    -----               -------   --------   
      Total interest-earning assets..........   43,033    3,429    7.97    42,878    3,406      7.94      44,297      3,500   7.90
                                               -------    -----           -------    -----               -------   --------      
  Noninterest-earning assets.................    1,058                      1,189                          1,408                 
                                               -------                    -------                        -------                 
        Total assets.........................  $44,091                    $44,067                         45,705                 
                                               =======                    =======                        =======                 
                                                                                                                                 
Liabilities and Equity:                                                                                                          
  Interest-bearing liabilities:                                                                                                  
     Now accounts............................  $     -        -           $     -        -               $   784         13   1.66
    Passbook savings accounts................    2,154       70    3.25     2,385       71      2.98       2,675         84   3.14
    Certificates and money market                                                                                                 
     savings accounts........................   28,438    1,281    4.50    28,331    1,572      5.55      29,306      1,538   5.25
Total interest-bearing liabilities...........   30,592    1,351    4.42    30,716    1,643      5.35      32,765      1,635   4.99
                                                          -----                      -----                         --------        
                                                                                                                                   
  Noninterest-bearing deposits...............        -                          -                            247                   
  Noninterest-bearing liabilities............      380                        406                            484                   
                                               -------                    -------                        -------                   
      Total liabilities......................   30,972                     31,122                         33,496                   
                                               -------                    -------                        -------                   
  Stockholders' Equity.......................   13,119                     12,945                         12,209                   
                                               -------                    -------                        -------                   
        Total liabilities and stockholders'                                                                                         
          equity earnings....................  $44,091                    $44,067                        $45,705                   
                                               =======                    =======                        =======                   
                                                                                                                                   
Net interest income/net interest                                                                                                   
  rate spread (1)............................  $ 2,078     3.55%          $ 1,763     2.59%              $ 1,865       2.91%       
                                               =======    =====           =======    =====               =======   --------        
                                                                                                                                   
Net earning assets/net interest                                                                                                    
  margin (2).................................              4.83%                      4.12%                            4.21%       
                                                          =====                      =====                         ========        
                                                                                                                                   
Ratio of interest-earning assets to                                                                                                
  interest-bearing liabilities...............   140.67%                    138.20%                        135.20%                  
                                               =======                    =======                        =======                   
</TABLE>
---------------------------------------------
(1) Interest rate spread represents the difference between the average rate on
    interest-earning assets and the average cost of interest-bearing
    liabilities.
(2) Net interest margin represents net interest income before the provision for
    loan losses divided by total interest-earning assets.

                                       24
<PAGE>
 
RATE/VOLUME ANALYSIS

     Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
the changing volume or amount of these assets and liabilities.  The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated.  Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
current volume), and (iii) the net change.  Changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
<TABLE>
<CAPTION>
 
                                                             Year Ending June 30,
                                            ---------------------------------------------------
                                                1996 vs. 1995                1997 vs. 1996
                                            -------------------------  ------------------------
                                            Increase/(Decrease)           Increase/(Decrease)
                                                   Due to                       Due to
                                            -------------------------  ------------------------
                                              Volume    Rate     Net   Volume    Rate    Net
                                            ---------  ------  ------  ------  ------  --------
                                                                (In Thousands)
<S>                                         <C>        <C>     <C>     <C>     <C>     <C>
 
Interest-earning assets:
  Net loans and mortgage-backed
      securities.....................          $ (13)  $ (54)  $ (67)   $186    $(37)    $149
  Investment securities..............           (100)     45     (55)    (69)     15      (54)
  Interest-earning deposits..........            100      (1)     99      18     (19)      (1)
                                               -----   -----   -----    ----    ----     ----
      Total interest-earning assets..          $ (13)  $ (10)  $ (23)   $135     (41)      94
                                               =====   =====   =====    ====    ====     ====

Interest-bearing liabilities:                                           
  NOW accounts.......................          $   -   $       $   -    $ 68    $(76)    $ (8)
  Savings accounts...................              6     286     292       -       -        -
                                               -----   -----   -----    ----    ----     ----
Total interest-bearing liabilities...          $   6   $ 286   $ 292    $ 68    $(76)    $ (8)
                                               =====   =====   =====    ====    ====     ====
                                                                        
Net change in net interest income....          $ (19)  $(286)  $(315)   $ 67    $ 35     $102
                                               =====   =====   =====    ====    ====     ====
 
</TABLE>
(1) All interest-earning assets are disclosed net of loans in process,
    unamortized yield adjustments, and valuation allowances.
(2) FHLB stock and interest-earning deposits in other financial institutions are
    included in investment securities.
(3) Escrow accounts are noninterest-bearing and are included in noninterest-
    bearing liabilities.


RESULTS OF OPERATIONS

     The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage loans, investment securities, and
interest-bearing deposits at other institutions, and the interest paid on
interest-bearing liabilities, which consist primarily of savings deposits.

NET INCOME. Net income decreased $65,000 or 13.3% from $488,000 for the fiscal
year ended June 30, 1996 to $423,000 for 1997. The return on average assets was
1.11% for the 1996 compared  to .93% for 1997. This decrease resulted primarily
from an increase of $281,000 in non-interest expenses offset by a $102,000
increase in net interest income and $53,000 increase in non-interest income.

NET INTEREST INCOME. Net interest income increased $102,000 or 5.8% from $1.8
million for 1996 to $1.9 million for 1997. The improvement in net interest
income primarily reflects an increase in average interest-earning assets for the
Company of  $1.4 million or 3.3% for the year ended June 30, 1997 as compared to
1996 as a result of the loan growth from the branch acquisition. The interest
rate spread increased from 2.59% for 1996 to 2.91% for the 1997.

                                       25
<PAGE>
 
INTEREST INCOME. Total interest income increased $94,000 from $3.4 million for
the year ended June 30, 1996 to $3.5 million for 1997. Interest on loans
increased $154,000, or 5.5%. Interest on investments decreased $54,000 as the
average portfolio decreased $1.1 million  in 1997 as compared to 1996.

INTEREST EXPENSE. Interest expense decreased $8,000 for the year ended June 30,
1997 compared to the year ended June 30, 1996. The decrease was the result of a
24 basis point decrease in the cost of funds offset by a $1.3 million increase
in average interest-bearing deposits. The majority of this deposit growth came
as a result of the branch acquisition.

PROVISION FOR LOAN LOSSES. The Company did not record any provision for loan
losses for either 1996 or 1997. Historically, management has emphasized the
Company's loss experience over other factors in establishing provisions for loan
losses. However, management has reviewed the allowance for loan losses in
relation to the Company's composition of its loan portfolio and observations of
the general economic climate and loan loss expectations. The ratio of allowance
to non-performing loans at June 30, 1997  was 96.1% and nonperforming loans to
total loans was only .83%.

     Management uses a systematic approach in determining the adequacy of its
loan loss allowance and the necessary provision for loan losses, through a
classification of assets program, whereby the loan portfolio is reviewed
generally and delinquent loan accounts are analyzed individually, on a quarterly
basis. Consideration is given to the account status, payment history, ability to
repay and probability of repayment, and loan-to-value percentages.  As a result
of this review and analysis, loans are classified in the appropriate categories
applicable to their circumstances.  After reviewing current economic conditions,
changes in delinquency status, and actual loan losses incurred, management
establishes an appropriate reserve percentage applicable to each category of
assets, and a provision for loan losses is recorded when necessary to bring the
allowance to a level consistent with this analysis.  Historically, the Savings
Bank's ratio of nonperforming loans to total loans has been higher in comparison
to its peers, while the ratio of its allowance for loan losses to nonperforming
loans has been lower in comparison to its peers.

NON-INTEREST INCOME.  Non-interest income has increase as a result of the new
products and services being offered. These products and services are fee income
sensitive.  This income was $35,000 for the year ending June 30, 1996 and
$88,000 for the same period in 1997.

NON-INTEREST EXPENSE. Non-interest expense increased by $281,000 from $991,000
for the year ending June 30, 1996 to $1.3 million for 1997. The increase was the
direct result of a $169,000 increase in deposit insurance and $53,000 increase
in other non-interest expenses.  The special deposit insurance assessment by the
Federal Deposit Insurance Corporation ("FDIC") for members of the Savings
Association Insurance Fund ("SAIF") was $193,000. Other non-interest expenses
increase as a result of additional expenses associated with the new branch
addition and the additional banking products being offered. Data processing
increased $31,000 with the addition of the new branch and additional volume of
new loan and deposit accounts.

LIQUIDITY AND CAPITAL RESOURCES

     The Savings Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations.  This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings.  The required ratio currently is 5.0%.
The Savings Bank maintains liquidity levels significantly in excess of
regulatory requirements.  The Savings Bank adjusts its liquidity levels in order
to meet funding needs of deposit outflows, payment of real estate taxes on
mortgage loans, repayment of borrowings and loan

                                       26
<PAGE>
 
commitments. The Savings Bank also adjusts liquidity as appropriate to meet its
asset and liability management objectives.

     The Company's sources of funds are the net proceeds retained by it in
connection with the Conversion, and dividends from the Savings Bank.  In 1997,
the Savings Bank paid $300,000 in dividends to the Company. The Savings Bank's
primary sources of funds are deposits, amortization and prepayment of loans,
maturities of investment securities, and earnings and funds provided from
operations.  While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition.  The
Savings Bank manages the pricing of its deposits to maintain a desired deposit
balance.  In addition, the Savings Bank invests in short-term interest-earning
assets, which provide liquidity to meet lending requirements.  At June 30, 1997,
$2.0 million, or 59.6%, of the Savings Bank's investment portfolio was scheduled
to mature in one year or less, $1.4 million, or 40.4%, was scheduled to mature
in one to five years.  For additional information about cash flows from the
Company's operating, financing, and investing activities, see Statements of Cash
Flows included in the Consolidated Financial Statements.

     A major portion of the Savings Bank's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities.  The primary sources of cash are net income, principal repayments on
loans, and increases in deposit accounts.  Liquidity management is both a daily
and long-term function of business management.  If the Savings Bank requires
funds beyond its ability to generate them internally, borrowing agreements exist
with the FHLB which provide an additional source of funds.

     At June 30, 1997, the Savings Bank had outstanding loan commitments of
$297,000.  This amount does not include the unfunded portion of loans in
process.  Savings certificates scheduled to mature in less than one year at June
30, 1997, totalled $23.4 million.  Based on prior experience, management
believes that a significant portion of such deposits will remain with the
Savings Bank.

IMPACT OF INFLATION AND CHANGING PRICES

     The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation.  The impact of inflation is reflected in the increased cost of
the Company's operations.  Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary.  As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Because Community Federal originates only fixed-
rate loans, its net interest income is influenced significantly by the movement
of interest rates in general. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

     Accounting for Stock-Based Compensation. In October 1995, the Financial
     ----------------------------------------                               
Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-
Based Compensation,"  establishing financial accounting and reporting standards
for stock-based employee compensation plans. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated fair value of the award
at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans

                                       27
<PAGE>
 
using the intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. Companies that elect
to remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net income and, if presented, earnings per
share, as if this statement had been adopted. The accounting requirements of
this statement are effective for transactions entered into in fiscal years that
begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. See Note 15 to the consolidated financial statements for the
effect of implementation of SFAS No. 123.
 
ITEM 7.    FINANCIAL STATEMENTS
-------    --------------------

     The following audited financial statements and related documents are
presented herein on the following pages:

     (a)  Independent Auditors' Report.....................................  30
     (b)  South Carolina Community Bancshares, Inc. and Subsidiary:
          (i)   Consolidated Balance Sheets................................  31
          (ii)  Consolidated Statements of Income..........................  32
          (iii) Consolidated Statements of Stockholders' Equity............  33
          (iv)  Consolidated Statements of Cash Flows......................  34
          (v)   Notes to Consolidated Financial Statements.................  36

     With the exception of the aforementioned sections, the Registrant's 1997
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 1997 Annual Report to Stockholders
are incorporated herein by this reference.

                                       28
<PAGE>
 
                                SOUTH CAROLINA
                          COMMUNITY BANCSHARES, INC.

                             Financial Statements

                            June 30, 1996 and 1997


                  (with Independent Auditors' Report thereon)
<PAGE>

            [LETTERHEAD OF CRISP HUGHES & CO., L.L.P. APPEARS HERE]

 
                         Independent Auditors' Report
                         ----------------------------

To the Board of Directors
South Carolina Community Bancshares, Inc.


We have audited the accompanying consolidated balance sheets of South Carolina
Community Bancshares, Inc. and Subsidiary (the "Company") as of June 30, 1996
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 financial position of the Company as of
June 30, 1996 and 1997, and the results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.


                                                  /s/ Crisp Hughes & Co., L.L.P.

Asheville, North Carolina
August 7, 1997
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                AND SUBSIDIARY

                          Consolidated Balance Sheets
                       (in thousands, except share data)

<TABLE>
<CAPTION>
 
                                                                 June 30,
                                                           ---------------------
                Assets                                       1996       1997
                ------                                       ----       ----   
<S>                                                        <C>        <C>
Cash and due from banks                                    $   416    $   436
Interest earning deposits                                    4,171      5,242
Investment securities, held to maturity                      4,749      3,352
Loans receivable, net                                       33,338     35,955
Mortgage-backed securities, held to maturity                    62         48
Premises and equipment, net                                    415        551
Federal Home Loan Bank stock                                   429        429
Interest receivable                                            347        340
Real estate                                                    156         96
Prepaid expenses and other assets                               89        149
                                                            ------     ------
 
     Total assets                                          $44,172    $46,598
                                                            ======     ======
 
 Liabilities and Stockholders' Equity
 ------------------------------------
 
Deposits                                                   $31,273    $34,024
Advance payments for taxes and insurance                        23         42
Accrued expenses and other liabilities                         385        374
Income taxes:
 Current                                                        68         78
 Deferred                                                      114        118
                                                            ------     ------
     Total liabilities                                      31,863     34,636
                                                            ------     ------
 
Stockholders' equity:
 Preferred stock ($.01 par value, 200,000
  shares authorized; none outstanding)                           -          -
 Common stock ($.01 par value, 1,400,000 shares 
  authorized; 780,275 shares issued; 735,410
  outstanding at June 30, 1996 and 699,733 at 
  June 30, 1997)                                                 8          8
 Paid in capital                                             7,279      7,321
 Retained earnings, substantially restricted                 6,769      6,801
 Treasury stock at cost (44,865 shares at June 30, 1996
  and 80,542 shares at June 30, 1997)                         (790)    (1,352)
 Unearned compensation:
  Employee Stock Ownership Plan                               (514)      (452)
  Management Recognition Plan                                 (443)      (364)
                                                            ------     ------
     Total stockholders' equity                             12,309     11,962
                                                            ------     ------
 
     Total liabilities and stockholders' equity            $44,172    $46,598
                                                            ======     ======

</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                AND SUBSIDIARY

                       Consolidated Statements of Income
                  (in thousands, except net income per share)

<TABLE>
<CAPTION>
 
                                                                Years Ended
                                                                  June 30,
                                                              ------------------
                                                                1996      1997
                                                                ----      ----
<S>                                                           <C>       <C>
Interest income:
 Loans                                                        $  2,810  $  2,964
 Mortgage-backed securities                                          7         2
 Investments                                                       333       279
 Interest earning deposits                                         256       255
                                                               -------   -------
     Total interest income                                       3,406     3,500
 
Interest expense:
 Deposits                                                        1,643     1,635
                                                               -------   -------
     Net interest income                                         1,763     1,865
 
Provision for loan losses                                          -         -
                                                               -------   -------
     Net interest income after provision for loan losses         1,763     1,865
                                                               -------   -------
Noninterest income:
 Loan fees and services                                            -          35
 Other                                                              35        53
                                                               -------   -------
     Total noninterest income                                       35        88
                                                               -------   -------
 
Noninterest expenses:
 Compensation and employee benefits                                585       588
 Net occupancy expense                                              52        77
 Deposit insurance premiums                                         69       238
 Data processing                                                    42        73
 Other                                                             243       296
                                                               -------   -------
     Total noninterest expenses                                    991     1,272
                                                               -------   -------
 
     Income before income taxes                                    807       681
 
Income tax expense                                                 319       258
                                                               -------   -------
 
     Net income                                               $    488  $    423
                                                               =======   =======
 
Weighted average common equivalent shares outstanding              729       678
 
Net income per share                                              $.67      $.62
 
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                AND SUBSIDIARY

                Consolidated Statements of Stockholders' Equity
                       (in thousands, except share data)

<TABLE>
<CAPTION>
 
 
                                                                                     Unearned Compensation
                                          Common  Paid-In  Retained   Treasury  -------------------------------
                                          Stock   Capital  Earnings     Stock    for ESOP   for MRP     Total
                                          ------  -------  ---------  ---------  ---------  --------  ---------
<S>                                       <C>     <C>      <C>        <C>        <C>        <C>       <C>
Balance at June 30, 1995                  $    8  $ 7,227   $ 6,704   $      -   $   (589)  $     -    $13,350
 
Net income                                     -        -       488          -          -         -        488
 
Cash dividends ($.60 per share)                -        -      (423)         -          -         -       (423)
 
Purchase of MRP shares                         -        -         -          -          -      (568)      (568)
 
ESOP and MRP compensation earned               -       52         -          -         75       125        252
 
Treasury stock purchased (44,865 shares)       -        -         -       (790)         -         -       (790)
                                          ------  -------   -------   --------   --------   -------    ------- 
 
Balance at June 30, 1996                       8    7,279     6,769       (790)      (514)     (443)    12,309
 
Net income                                     -        -       423          -          -         -        423
 
Cash dividends ($.60 per share)                -        -      (391)         -          -         -       (391)
 
ESOP and MRP compensation earned               -       42         -          -         62        79        183
 
Treasury stock purchased (35,677 shares)       -        -         -       (562)         -         -       (562)
                                          ------  -------   -------   --------   --------   -------    ------- 
 
Balance at June 30, 1997                  $    8  $ 7,321   $ 6,801   $ (1,352)  $   (452)  $  (364)   $11,962
                                          ======  =======   =======   ========   ========   =======    =======
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                                (in thousands)

<TABLE>
<CAPTION>
 
 
                                                                Years Ended
                                                                  June 30,
                                                              ---------------
                                                               1996     1997
                                                               ----     ----
<S>                                                           <C>      <C>
Operating activities:                   
 Net income                                                   $  488   $  423
 Adjustments to reconcile net income to 
  net cash provided by operating activities:                           
  Depreciation                                                    26       45
  (Gain) loss on sale of real estate owned                         5       (3)
  Deferred income taxes (benefit)                                (10)       4
  Amortization of deposit premium                                  -       14
  Accretion of discounts on investment securities, net            (7)      (4)
  Purchase of MRP shares                                        (568)       -
  Amortization of unearned compensation                          252      183
  Net decrease in deferred loan fees                             (22)     (41)
  Decrease in accrued interest receivable                         17        7
  Increase in prepaid expenses and other assets                   (3)     (60)
  Increase in income taxes payable                                56       10
  Increase (decrease) in accrued expenses and other
   liabilities                                                     4        -
                                                              ------   ------
     Net cash provided by operating     
      activities                                                 238      578
                                                              ------   ------
                                        
Investing activities:                   
 Net increase in loans                                          (317)    (323)
 Branch acquisition                                                -    1,576
 Capitalized costs on real estate owned                           (2)      (7)
 Proceeds from sale of real estate owned                          60       10
 Proceeds from maturities of investment securities             2,398    1,600
 Purchases of investment securities                             (957)    (199)
 Principal payments on mortgage-backed securities                 16       14
 Purchases of premises and equipment                              (1)    (181)
                                                              ------   ------
     Net cash provided by investing     
      activities                                               1,197    2,490
                                                              ------   ------ 
</TABLE>

                                                                     (continued)
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                                (in thousands)

<TABLE>
<CAPTION>
 
 
                                                               Years Ended
                                                                 June 30,
                                                            ------------------
                                                              1996      1997
                                                              ----      ----
<S>                                                         <C>       <C>
Financing activities:                    
 Net increase (decrease) in deposits                         $1,167    $(1,032)
 Acquisition of treasury stock                                 (790)      (562)
 Increase in advance payments for taxes and insurance            23         19
 Dividends paid                                                (397)      (402)
                                                             ------    -------
     Net cash provided (used) by         
      financing activities                                        3     (1,977)
                                                             ------    ------- 
Net increase in cash and cash equivalents                     1,438      1,091
                                                                 
Cash and cash equivalents at beginning of year                3,149      4,587
                                                             ------    ------- 
Cash and cash equivalents at end of year                     $4,587    $ 5,678
                                                             ======    =======
                                                                 
Supplemental disclosures of cash flow information
-------------------------------------------------
 Cash paid during the period for:                                
  Interest                                                   $1,657    $ 1,627
  Income taxes, net of refunds                                  254        244
                                                             ======    =======
                                                                 
 Noncash investing and financing activities:
  Real estate acquired in satisfaction of
   mortgage loans                                            $   48    $     -
  Loan to facilitate sale of real estate                          -         60
                                                             ======    =======
</TABLE>                                                        
                                                                
The accompanying notes are an integral part of these consolidated financial
statements.                                                      
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                AND SUBSIDIARY
                                                                
                  Notes to Consolidated Financial Statements
                                                                
                            June 30, 1996 and 1997
                        (Tabular amounts in thousands)
                                                                 
1. Summary of Significant Accounting Policies                    
   ------------------------------------------

   South Carolina Community Bancshares, Inc. (the "Holding Company") was formed
   in March 1994, as the holding company for Community Federal Savings Bank (the
   "Bank").

   The accounting and reporting policies of the Holding Company and the Bank
   (collectively referred to as the "Company") conform, in all material
   respects, to generally accepted accounting principles and to general
   practices with the savings and loan industry. The following summarize the
   more significant of these policies and practices.

   Nature of Operations - The Holding Company's only endeavor is its investment
   --------------------
   in the Bank, a federally chartered stock savings bank. The Bank's principal
   line of business is originating residential and nonresidential first mortgage
   loans. The loans are primarily with individuals.

   Estimates - The preparation of financial statements in conformity with
   ---------
   generally accepted accounting principles requires management to make
   estimates and assumptions that affect the reported amounts of assets and
   liabilities and disclosure of contingent assets and liabilities at the date
   of the consolidated financial statements and the reported amounts of revenues
   and expenses during the reporting period. Actual results could differ from
   those estimates.

   Principles of Consolidation - The consolidated financial statements include
   ---------------------------   
   the accounts of the Holding Company and its subsidiary, the Bank.
   Intercompany balances and transactions have been eliminated.

   Loans Receivable - Loans receivable are carried at their unpaid principal
   ----------------
   balance less, where applicable, deferred loan origination fees and allowances
   for losses. Additions to the allowance for loan losses are based on
   management's evaluation of the loan portfolio under current economic
   conditions and such other factors which, in management's judgment, deserve
   recognition in estimating loan losses. Interest accrual is discontinued when
   a loan becomes 90 days delinquent or impaired unless, in management's
   opinion, the loan is well secured and in process of collection. Interest
   income is subsequently recognized only to the extent cash payments are
   received until such time that, in management's opinion, the borrower will be
   able to meet payments as they become due.

   The Company's policy on first mortgage loans is to lend within its primary
   market area which is defined as Fairfield County and the surrounding counties
   in South Carolina. It is the Company's normal policy to limit an individual
   single-family mortgage loan to 80% of the appraised value of the property
   securing the loan. The Company normally requires the borrower to obtain
   private mortgage insurance for loans in excess of 80% of the 
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

   appraised value of the property securing the loan. The Company normally
   requires the borrower to obtain private mortgage insurance for loans in
   excess of 80% of the appraised value of the property.

   The Company's multi-family and nonresidential real estate loans consist of
   properties located in its primary market. The Company's policy is to limit
   loans on multi-family residential complexes and nonresidential loans to 75%
   of the appraised value of the property securing the loan, and land loans to
   70% of the appraised value.

   The Company's policy requires that consumer and other installment loans be
   supported primarily by the borrower's ability to repay the loan and
   secondarily by the value of the collateral securing the loan, if any.

   Management of the Company believes the allowance for loan losses is adequate.
   However, the estimates used by management in determining the adequacy of such
   allowance are susceptible to significant changes due primarily to unforeseen
   changes in economic and market conditions. In addition, various regulatory
   agencies periodically review the Company's allowance for loan losses as an
   integral part of their examination. Such agencies may require the Company to
   recognize additions to the allowance based on their judgments of information
   available to them at the time of their examination.

   Loan Fees - Loan fees result from the Company originating mortgage loans.
   ---------
   Such fees and certain direct incremental costs related to origination of such
   loans are deferred ("net deferred loan fees") and reflected as a reduction of
   the carrying value of mortgage loans. The net deferred fees (or costs) are
   amortized using the interest method over the contractual lives of the loans
   as adjusted for prepayments.

   Investment and Mortgage-Backed Securities - Investment securities and
   -----------------------------------------
   mortgage-backed securities held to maturity are stated at amortized cost
   since the Company has both the ability and intent to hold such securities to
   maturity. Premiums and discounts on the investment and mortgage-backed
   securities are amortized or accreted into income over the contractual terms
   of the securities using a level yield interest method. Gains and losses on
   the sale of these securities are calculated based on the specific
   identification method.

   Premises and Equipment - Land is carried at cost. Premises and equipment are
   ----------------------
   carried at cost less accumulated depreciation. Depreciation is computed on
   the straight-line method over the estimated useful lives of the assets
   ranging from 5 to 30 years.   The cost of maintenance and repairs is charged
   to expense as incurred while expenditures which materially increase property
   lives are capitalized.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

   Federal Home Loan Bank Stock - Investment in stock of the Federal Home Loan
   ----------------------------
   Bank is required by law of every federally insured savings and loan or
   savings bank. The investment is carried at cost. No ready market exists for
   the stock and it has no quoted market value.

   Real Estate - Real estate acquired through, or in lieu of, loan foreclosure
   -----------
   is initially recorded at fair value at the date of foreclosure or in-
   substance foreclosure. Subsequent to foreclosure, real estate is recorded at
   the lower of initial fair value or existing fair value less estimated cost to
   sell (net realizable value). Costs relating to development and improvement of
   property are capitalized, whereas costs relating to the holding of property
   are expensed.

   Valuations are periodically performed by management, and an allowance for
   losses is established by a charge to income if the carrying value of a
   property exceeds its estimated net realizable value.

   Income Taxes -   The Company utilizes the liability method of computing
   ------------
   income taxes in accordance with Statement of Financial Accounting Standard
   No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability
   method, deferred tax liabilities and assets are established for future tax
   return effects of temporary differences between the stated value of assets
   and liabilities for financial reporting purposes and their tax basis. The
   focus is on accruing the appropriate balance sheet deferred tax amount, with
   the statement of income effect being the result of changes in balance sheet
   amounts from period to period. Current income tax expense is provided based
   upon the actual tax liability incurred for tax return purposes.

   Income Per Share -   Income per share is computed by dividing net income by
   ----------------
   the weighted average number of shares and share equivalents outstanding
   during the year. Share equivalents include, if applicable, dilutive stock
   option share equivalents determined using the treasury stock method, ESOP
   shares, and MRP shares.

   Cash Flow Information - As presented in the consolidated statements of cash
   ---------------------
   flows, cash and cash equivalents include cash on hand and interest-earning
   deposits in other banks. The Company considers all highly liquid instruments
   with original maturities of three months or less to be cash equivalents.
   Approximately $100,000 of cash is pledged against certain deposits at June
   30, 1997.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

2. Investment Securities
   ---------------------

   The amortized cost and estimated market values of investments are summarized
   as follows:
<TABLE>
<CAPTION>
 
                                                      Gross         Gross         Estimated
                                     Amortized      Unrealized    Unrealized        Market
                                       Cost           Gains         Losses          Value
                                       ----           -----         ------          -----
    <S>                              <C>            <C>            <C>            <C>
    Held to maturity:
     June 30, 1996:
       U.S. government and
         agency obligations          $   4,749      $      34      $      (9)     $   4,774
                                      ========       ========       ========       ========
 
     June 30, 1997:
       U.S. government and
         agency obligations          $   3,352      $      21      $      (3)     $   3,370
                                      ========       ========       ========       ========
</TABLE> 
 
   The amortized cost and estimated market values of securities by contractual
   maturity are as follows:
<TABLE> 
<CAPTION> 
                                                                           Estimated
                                             Amortized Cost              Market Value
                                        ----------------------      ----------------------
                                          1996          1997          1996          1997
                                          ----          ----          ----          ----

    <S>                                 <C>           <C>           <C>           <C> 
    Due in one year or less             $  1,600      $  1,997      $  1,602      $  2,002
    Due in one year through
     five years                            2,890         1,355         2,911         1,368
    Due after 5 years                        259             -           261           -
                                         -------       -------       -------       -------
 
                                        $  4,749      $  3,352      $  4,774      $  3,370
                                         =======       =======       =======       =======
</TABLE>

   The Company had no investment securities pledged at June 30, 1996 and 1997.
   There were no investment securities sold during the fiscal years 1996 and
   1997.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

3.  Loans Receivable
    ----------------
 
    Loans receivable are summarized as follows:
<TABLE> 
<CAPTION> 
                                                              June 30,
                                                     ------------------------
                                                         1996         1997
                                                         ----         ----
     <S>                                             <C>           <C> 
     Real estate mortgage loans:
      One to four family                             $   31,067    $   32,317
      Construction                                          350           381
      Commercial real estate                              1,485         2,140
      Other real estate                                   1,121           988
                                                      ---------     ---------
          Total real estate loans                        34,023        35,826
                                                      ---------     ---------
 
     Consumer loans:
      Savings account loans                                 282           354
      Home equity lines of credit                             -           204
      Other                                                   -           405
                                                      ---------     ---------
                                                            282           963
                                                      ---------     ---------
                                                                 
          Total loans                                    34,305        36,789
                                                      ---------     ---------
 
     Less:
      Undisbursed portion of loans in process               377           285
      Net deferred loan fees                                297           256
      Allowance for loan losses                             293           293
                                                      ---------     ---------
                                                            967           834
                                                      ---------     ---------
                                                                
                                                     $   33,338    $   35,955
                                                      =========     =========
</TABLE> 
 
   The change in the allowance for loan losses is summarized as follows:
 
<TABLE> 
<CAPTION> 
                                                       Years Ending June 30,
                                                     ------------------------
                                                        1996         1997
                                                        ----         ----

     <S>                                             <C>           <C>  
     Beginning balance                               $      294    $      293
     Provision charged to income                              -             -
     Charge-offs                                             (1)            -
                                                      ---------     ---------
 
     Ending balance                                  $      293    $      293
                                                      =========     =========
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------
 
   In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
   Loan, no loans in non-homogenous groups were determined to be impaired for
   the year ended or as of June 30, 1996 and 1997, respectively. Commercial
   other real estate loans are included in the non-homogenous group.
 
   The loans in homogeneous groups, which are contractually past due ninety days
   or more, and are in nonaccrual status, total approximately $600,000 at June
   30, 1996 and $398,000 at June 30, 1997. The amount the Bank will ultimately
   realize from these loans could differ materially from their carrying value
   because of unanticipated future developments affecting the underlying
   collateral or the borrower's ability to repay the loans. If collection
   efforts are unsuccessful, these loans will be subject to foreclosure
   proceedings in the ordinary course of business. Management believes that the
   Bank has adequate collateral on these loans and that the Bank will not incur
   material losses in the event of foreclosure. Approximately $53,000 and
   $55,000 of interest is reserved on these loans at June 30, 1996 and 1997,
   respectively.

4. Mortgage-Backed Securities
   --------------------------

   The summary of mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
                                                      Gross         Gross         Estimated
                                     Amortized      Unrealized    Unrealized        Market
                                       Cost           Gains         Losses          Value
                                       ----           -----         ------          -----
    <S>                              <C>            <C>            <C>            <C>
    Held to maturity:
     June 30, 1996:
      FHLMC Certificates             $      41      $    -         $    -         $      41
      GNMA Certificates                     21           -              -                21
                                      --------       --------       --------       --------
                                     $      62      $    -         $    -         $      62
                                      ========       ========       ========       ========
 
     June 30, 1997:
      FHLMC Certificates             $      32      $       1      $    -         $      33
       GNMA Certificates                    16           -              -                16
                                      --------       --------       --------       -------- 
                                     $      48      $       1      $    -         $      49
                                      ========       ========       ========       ========
</TABLE>

   Although mortgage-backed securities are initially issued with a stated
   maturity date, the underlying mortgage collateral may be prepaid by the
   mortgagee and, therefore, such securities may not reach their maturity date.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

   The Company had no sales of mortgage-backed securities during the fiscal
   years 1996 and 1997. Mortgage-backed securities were not pledged at June 30,
   1996 and 1997.

5. Real Estate
   -----------
 
   Real estate is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                 June 30,
                                                           --------------------
                                                             1996        1997
                                                             ----        ----

     <S>                                                   <C>         <C>  
     Real estate acquired in settlement of loans           $     37    $     96
     In substance foreclosed real estate                        119         -
                                                            -------     -------
 
                                                           $    156    $     96
                                                            =======     =======
</TABLE> 

6. Interest Receivable
   -------------------
 
   Interest receivable is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                 June 30,
                                                           --------------------
                                                             1996        1997
                                                             ----        ----
 
     <S>                                                   <C>         <C> 
     Loans receivable                                      $    315    $    335
     Investment securities                                       84          57
     Interest earning deposits                                    1           3
     Allowance for uncollected interest                         (53)        (55)
                                                            -------     -------
                                                           $    347    $    340
                                                            =======     =======
</TABLE> 
 
7. Premises and Equipment
   ----------------------
 
   Premises and equipment are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                 June 30,
                                                           --------------------
                                                             1996        1997
                                                             ----        ----
 
     <S>                                                   <C>         <C> 
     Land                                                  $     48    $     48
     Building and improvements                                  384         393
     Furniture, fixtures and equipment                          158         330
                                                            -------     -------
                                                                590         771
     Less accumulated depreciation                              175         220
                                                            -------     -------
 
                                                           $    415    $    551
                                                            =======     =======
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

8. Deposits
   --------

   Deposit account balances are summarized as follows:

<TABLE>
<CAPTION>
                                                        Weighted Average  
                                       June 30,          Interest Rates   
                                   -------------------------------------- 
                                    1996      1997       1996      1997   
                                    ----      ----       ----      ----   
       <S>                         <C>      <C>        <C>       <C>      
       Noninterest bearing         $   -     $   485       -  %      -  % 
       NOW accounts                    -         917       -  %     1.75% 
       Money market accounts         4,214     3,812      3.36%     3.34% 
       Passbook accounts             2,323     3,024      3.30%     2.98% 
       Certificates of deposit      24,736    25,991      5.66%     5.48% 
       Deposit premium                   -      (205)      -         -    
                                   -------   -------   -------   -------  
                                                                          
                                   $31,273   $34,024      5.17%     4.84% 
                                   =======   =======   =======   =======   
</TABLE>

   In 1997, the Company purchased a branch and paid a premium of approximately
   $219,000 for its deposits. The premium is to be amortized over an eight year
   period as an adjustment to interest expense.

   The aggregate amount of deposits with a minimum denomination of $100,000 is
   approximately $6,565,000 and $8,258,000 at June 30, 1996 and 1997,
   respectively.

   Contractual maturities of certificate accounts are summarized as follows:

<TABLE>
<CAPTION>
 
                                                        June 30,      
                                                   ------------------ 
                                                     1996      1997   
                                                     ----      ----   
       <S>                                         <C>       <C>      
                                                                      
       12 months or less                            $20,482   $23,393 
       1-2 years                                      3,862     1,896 
       2-3 years                                        392       702 
                                                    -------   ------- 
                                                                      
                                                    $24,736   $25,991 
                                                    =======   =======  
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

   Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                                          June 30,     
                                                     ----------------- 
                                                       1996      1997  
                                                     --------  --------
                                                                       
       <S>                                           <C>       <C>     
       Passbook savings                               $   71    $   84 
       Money market and NOW                              159       139 
       Certificates of deposit                         1,413     1,398 
       Amortization of deposit premium                   -      $   14 
                                                      ------    ------ 
                                                                       
                                                      $1,643    $1,635 
                                                      ======    ======  
</TABLE> 

9. Income Taxes
   ------------

<TABLE> 
<CAPTION> 
                                          Federal     State       Total  
                                          -------     -----       -----  
       <S>                                <C>         <C>         <C> 
       1996                                                              
       ----                                                              
        Current                           $  302      $   27      $  329 
        Deferred                              (9)         (1)        (10)
                                          ------      ------      ------ 
                                                                         
                                          $  293      $   26      $  319 
                                          ======      ======      ====== 
       1997                                                              
       ----                                                              
        Current                           $  238      $   16      $  254 
        Deferred                               3           1           4 
                                          ------      ------      ------ 
                                                                         
                                          $  241      $   17      $  258 
                                          ======      ======      ====== 
</TABLE>

   The differences between actual income tax expense and the amount computed by
   applying the federal statutory income tax rate of 34% to income before income
   taxes are reconciled as follows:

<TABLE>
<CAPTION>
                                                     Years Ending June 30, 
                                                     ---------------------
                                                        1996        1997   
                                                        ----        ----   
       <S>                                              <C>        <C>       
       Computed income tax expense                      $ 274      $ 232   
       Increase (decrease) resulting from:                                 
        State income tax, net of                                           
         federal benefit                                   17         11   
       Nondeductible expenses                              22         23   
       Other                                                6         (8)  
                                                        -----      -----   
                                                                           
            Actual income tax expense                   $ 319      $ 258   
                                                        =====      =====    
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

   The components of the net deferred tax liability are as follows:

<TABLE>
<CAPTION>
                                                            June 30,   
                                                          ------------ 
                                                          1996   1997  
                                                          -----  ----- 
                                                                       
     <S>                                                  <C>    <C>   
     Deferred tax liabilities:                                         
      Accrued income                                      $ 155  $ 131 
      FHLB stock dividends                                   67     67 
      Section 481(a) adjustment - bad debt                             
       reserve                                              -       50 
      Other                                                  16     49 
                                                          -----  ----- 
                                                            238    297 
                                                          -----  ----- 
     Deferred tax assets:                                              
      Bad debt reserves                                      54    111 
      Loan origination fees                                  68     68 
      Other                                                   2    -   
                                                          -----  ----- 
                                                            124    179 
                                                          -----  ----- 
                                                                       
          Net deferred tax liability                      $ 114  $ 118 
                                                          =====  =====  
</TABLE>

   The Bank's annual addition to its reserves for bad debts allowed under the
   Internal Revenue Code may differ significantly from the bad debt experience
   used for financial statement purposes. Such bad debt deductions for income
   tax purposes are included in taxable income of later years only if the bad
   debt reserves are used for purposes other than to absorb bad debt losses.
   Since the Bank does not intend to use the reserves for purposes other than to
   absorb losses, no deferred income taxes have been provided on the amount of
   bad debt reserves for tax purposes that arose in tax years beginning before
   December 31, 1987, in accordance with SFAS No. 109. Therefore, retained
   earnings at June 30, 1996 and 1997, includes approximately $842,000,
   representing such bad debt deductions for which no deferred income taxes have
   been provided.

   With the repeal of the reserve method of accounting for thrift bad debt
   reserves for tax year beginning after December 31, 1995, the Bank will have
   to recapture into taxable income its post1987 excess reserves over a sixyear
   period. The Bank currently meets a recapture provision which allows it to
   delay the start of the recapture period due to loan origination volume. The
   amount of the post1987 excess is approximately $133,000. Since the tax effect
   of this excess had been previously recorded as deferred income taxes, the
   Bank will have no material impact on its results of operations when it begins
   recapture of the excess reserves.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

10.  Profit Sharing and Employee Savings Plan
     ----------------------------------------

     The Company has established a qualifying noncontributory profit sharing
     plan covering substantially all employees who have completed six months of
     service and have attained the age of twenty-one. All employer
     contributions, as determined by the Board of Directors, are irrevocable and
     the Company has reserved the right of amendment and termination of the
     Plan. No contributions were made for 1996 and 1997.

     The Company also sponsors an employee savings plan under Section 401(k) of
     the Internal Revenue Code. This plan covers substantially all full-time
     employees who have completed six months of service and have attained the
     age of twenty-one. Employees may contribute a percentage of their annual
     gross salary as limited by the federal tax laws. The Company can match
     employee contributions based on the plan guidelines. No contributions were
     made by the Company for the years ended June 30, 1996 and 1997.

11.  Regulatory Matters
     ------------------

     The Bank is subject to various regulatory capital requirements administered
     by the Office of Thrift Supervision (OTS). Failure to meet minimum capital
     requirements can initiate certain mandatory, and possibly additional
     discretionary, actions by regulators that, if undertaken, could have a
     direct material effect on the Bank's financial statements. 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 classification are also subject to
     qualitative judgments by the regulators about components, risk weightings,
     and other factors.

     Quantitative measures established by regulation to ensure capital adequacy
     require the Bank to maintain minimum amounts and ratios (set forth in the
     table below) of tangible and core capital (as defined in the regulations)
     to adjusted total assets (as defined), and of risk-based capital (as
     defined) to risk-weighted assets (as defined). Management believes, as of
     June 30, 1997, that the Bank meets all capital adequacy requirements to
     which it is subject. As of June 30, 1997, the most recent notification from
     the OTS categorized the Bank as well capitalized under the regulatory
     framework for prompt corrective action. To be categorized as well
     capitalized the Bank must maintain minimum total tangible, core, and risk-
     based ratios as set forth in the table. There are no conditions or events
     since that notification that management believes have changed the
     institution's category.

     The Bank's actual capital amounts (in thousands) and ratios are also
     presented in the table. Nothing was deducted from capital for interest-rate
     risk.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                               
                                                                                             To Be Well          
                                                                                          Capitalized Under    
                                                                 For Capital              Prompt Corrective    
                                          Actual              Adequacy Purposes           Action Provisions    
                                      --------------       ----------------------       --------------------- 
                                      Amount   Ratio        Amount         Ratio         Amount       Ratio   
                                      ------   -----        ------         -----         ------       -----   
     <S>                              <C>      <C>         <C>            <C>            <C>        <C>       
     As of June 30, 1996                                                                                      
      Tangible Capital                                     greater        greater                  greater 
                                                           than or        than or                  than or    
                                                           equal to       equal to                 equal to    
       (to adjusted total assets)     $10,163   24.0%      $    635         1.5%         $2,116         5%    
                                                                                                              
      Core Capital                                         greater        greater                  greater 
                                                           than or        than or                  than or    
                                                           equal to       equal to                 equal to    
       (to adjusted total assets)     $10,163   24.0%      $  1,270         3.0%         $2,116         5%    
                                                                                                              
      Risk-Based                                           greater        greater                  greater 
                                                           than or        than or                  than or    
                                                           equal to       equal to                 equal to    
       (to risk-weighted assets)      $10,400   53.1%      $  1,566         8.0%         $1,957        10%    
                                                                                                              
     As of June 30, 1997                                                                                      
      Tangible Capital                                     greater        greater                  greater
                                                           than or        than or                  than or    
                                                           equal to       equal to                 equal to    
       (to adjusted total assets)     $10,474   23.1%      $    681         1.5%         $2,268         5%    
                                                                                                              
      Core Capital                                         greater        greater                  greater 
                                                           than or        than or                  than or    
                                                           equal to       equal to                 equal to    
       (to adjusted total assets)     $10,474   23.1%      $  1,362         3.0%         $2,268         5%    
                                                                                                              
      Risk-Based                                           greater        greater                  greater 
                                                           than or        than or                  than or    
                                                           equal to       equal to                 equal to    
       (to risk-weighted assets)      $10,705   48.7%      $  1,760         8.0%         $2,200        10%     

</TABLE>

12.  Financial Instruments with Off-Balance-Sheet Risk
     -------------------------------------------------

     The Company 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 include commitments to extend credit and lines
     of credit. Those instruments involve, to varying degrees, elements of
     credit and interest-rate risk in excess of the amount recognized in the
     balance sheet. The contract or notional amounts of those instruments
     reflect the extent of the Company's involvement in particular classes of
     financial instruments.

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

     Financial instruments, the contract amounts of which represent credit risk
     for lines of credit, the balances outstanding, and amounts available for
     use at June 30, 1997, were approximately as follows (in thousands):

<TABLE>
<CAPTION>
                                 Financial     Balance    Available
                                Instruments  Outstanding   For Use
                                -----------  -----------   ------- 
<S>                             <C>          <C>          <C>
 Home equity and other lines    $      465   $       206  $     259
                                ===========  ===========  =========
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     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 Company
     evaluates each customer's creditworthiness. The amount of collateral
     obtained, if it is deemed necessary by the Company upon extension of
     credit, is based on management's credit evaluation of the counterparty.
     Collateral may include one to four family residences and nonresidential
     properties. The Company does not expect any significant losses as a result
     of the transactions.

     The Company had outstanding commitments to originate mortgage loans of
     approximately $609,000 and $297,000 at June 30, 1996 and 1997,
     respectively. The commitments to originate mortgage loans at June 30, 1996,
     were composed of fixed rate loans having interest rates ranging from 6.50%
     to 9.75% and terms ranging from 3 to 20 years. The commitments to originate
     mortgage loans at June 30, 1997, were composed of fixed rate loans having
     interest rates ranging from 7.00% to 9.75% and terms ranging from 15 to 25
     years.

13.  Employee Stock Ownership Plan (ESOP)
     ------------------------------------

     The Bank has established for eligible employees an Employee Stock Ownership
     Plan ("ESOP"). The ESOP borrowed approximately $624,000 from the Holding
     Company and purchased 62,422 common shares issued in the offering. The Bank
     is expected to make scheduled cash contributions to the ESOP sufficient to
     service the amount borrowed. The $624,000 in stock issued by the Holding
     Company was reflected in the accompanying consolidated financial statements
     as a charge to unearned compensation and a credit to common stock and paid-
     in capital. The unpaid balance of the ESOP loan has been eliminated in
     consolidation and the unamortized balance of unearned compensation is shown
     as a reduction of stockholders' equity. For the years ending June 30, 1996
     and 1997, the total contributions to the ESOP were used to fund principal
     and interest payments on the ESOP debt and totaled approximately $102,000
     and $95,000, respectively.

     For the years ending June 30, 1996 and 1997, compensation from the ESOP of
     approximately $127,000 and $104,000 was expensed, respectively.
     Compensation is recognized at the average fair value of the ratably
     released shares during the accounting period as the employees performed
     services. At June 30, 1997, the ESOP had 16,857 allocated shares and 45,565
     unallocated shares. The fair value of the unallocated shares at June 30,
     1997, was approximately $831,000.

     The ESOP plan states that dividends on unallocated shares will be used for
     debt service and dividends on allocated shares will be distributed to the
     Plan participants. For the purposes of
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     computing earnings per share, all ESOP shares committed to be released have
     been considered outstanding.

14.  Management Recognition and Retention Plan
     -----------------------------------------

     The Company established a management recognition and retention plan ("MRP")
     which reserved 31,211 shares of common stock for issuance. The shares were
     reserved for certain employees, officers, and directors of the Company who
     began vesting on December 13, 1995, and will be fully vested by December
     13, 1999. The number of shares granted to directors was 7,800 and to
     certain officers was 13,904. Compensation expense in the amount of the fair
     value of the common stock at the date of grant to the officer or director
     will be recognized during the periods the participants become vested. The
     unamortized balance of unearned compensation will be reflected as a
     reduction of stockholders' equity. During 1996, 31,211 shares of common
     stock were purchased to fund the MRP. For the years ended June 30, 1996 and
     1997, approximately $125,000 and $79,000 has been recognized as
     compensation expense, respectively.

15.  Stock Option Plans
     ------------------

     The Company adopted a stock option plan for the benefit of directors,
     officers, and other key employees of the Company. The plan provides for
     incentive options for officers and employees and non-incentive options for
     directors. The option exercise price cannot be less than the fair value of
     the underlying common stock as the date of the option grant, and the
     maximum option term cannot exceed ten years. The following table summarizes
     activity in the stock option plan.

<TABLE>
<CAPTION>
 
                                                        Weighted
                                                         Average
                                          Number of     Exercise
                                            Shares        Price
                                            ------        -----
<S>                                      <C>           <C>
Options outstanding, July 1, 1995        $     29,816  $     13.50
 Options granted                                    -            -
 Options exercised                                  -            -
                                         ------------  -----------
Options outstanding June 30, 1996              29,816  $     13.50
 Options granted                                    -            -
 Options exercised                                  -            -
                                         ------------  -----------
Options outstanding June 30, 1997              29,816  $     13.50
                                         ============  ===========
</TABLE> 
 
Options covering 20,846 shares were exercisable at June 30, 1997
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     Upon adoption of Statement of Financial Accounting Standards No. 123
     "Accounting for Stock--Based Compensation", (SFAS No. 123), the Bank
     elected to continue measuring compensation cost using APB Opinion No. 25,
     "Accounting for Stock Issued to Employees". The Bank made no grants of
     stock options during the years ended June 30, 1996 and 1997, and therefore
     no proforma disclosures are required as prescribed by SFAS No. 123.

16.  Stockholders' Equity
     --------------------

     At the time of its conversion to a stock savings bank, the Bank established
     a liquidation account in an amount equal to its total retained earnings as
     of June 30, 1994. The liquidation account will be maintained for the
     benefit of eligible account holders who continue to maintain their accounts
     at the Bank after the conversion. The liquidation account will be reduced
     annually to the extent that eligible account holders reduce their
     qualifying deposits. Subsequent increases will not restore an eligible
     account holder's interest in the liquidation account. In the event of a
     complete liquidation, each eligible account holder will be entitled to
     receive a distribution from the liquidation account in an amount
     proportionate to the current adjusted qualified balances for accounts then
     held.

     Subsequent to the conversion, the Bank may not declare or pay cash
     dividends on or repurchase any of its shares of common stock, if the effect
     would cause stockholders' equity to be reduced below the amount required
     for the liquidation account, applicable regulatory capital maintenance
     requirements, or if such declaration and payment would otherwise violate
     regulatory requirements.

     Unlike the Bank, the Holding Company is not subject to these regulatory
     restrictions on payment of dividends to its stockholders. However, the
     source of future dividends may be dependent upon dividends from the Bank.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

17.  Financial Instruments
     ---------------------

     The approximate stated and estimated fair value of financial instruments
     are summarized below (in thousands):

<TABLE> 
<CAPTION> 

                                                       June 30
                                    --------------------------------------------
                                           1996                   1997
                                    ---------------------  ---------------------
                                     Stated    Estimated    Stated    Estimated
                                     Amount    Fair Value   Amount    Fair Value
                                     ------    ----------   ------    ----------
<S>                                 <C>        <C>         <C>        <C>
Financial assets:
 Cash and interest earning      
  deposits                            $ 4,587     $ 4,587    $ 5,678     $ 5,678
 Loans receivable, net                 33,338      33,547     35,955      36,412
 Federal Home Loan Bank stock             429         429        429         429
 Interest receivable                      347         347        340         340
                                      -------     -------    -------     -------
 
                                      $38,701     $38,910    $42,402     $42,859
                                      =======     =======    =======     =======
Financial liabilities:
 Deposits                             $31,273     $31,404    $34,024     $33,998
 Other liabilities                        408         408        416         416
                                      -------     -------    -------     -------
 
                                      $31,681     $31,812    $34,440     $34,414
                                      =======     =======    =======     =======
</TABLE>

     The Company had off-balance sheet financial commitments, which include
     approximately $556,000 of commitments to originate and fund loans and lines
     of credit. Since these commitments are based on current market rates, the
     commitment amount is considered to be a reasonable estimate of fair market
     value.

     Statement of Financial Accounting Standards No. 107, "Disclosures about
     Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
     fair value information about financial instruments, whether or not
     recognized in the balance sheet, for which it is practicable to estimate
     that value. The following methods and assumptions were used by the Company
     in estimating its fair value disclosures for financial instruments:

     Cash - The carrying amount of such instruments is deemed to be a reasonable
     ----
     estimate of fair value.

     Loans - Fair values for loans held for investment are estimated by
     -----
     segregating the portfolio by type of loan and discounting scheduled cash
     flows using interest rates currently being offered for loans with similar
     terms, reduced by an estimate of credit losses inherent in the portfolio. A
     prepayment assumption is used as an estimate of the portion of loans that
     will be repaid prior to their scheduled maturity.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     Federal Home Loan Bank Stock - 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. Accordingly, the carrying amount is deemed
     to be a reasonable estimate of fair value.

     Deposits - The fair values disclosed for demand deposits are, as required
     --------
     by SFAS 107, equal to the amounts payable on demand at the reporting date
     (i.e., their stated amounts). The fair value of certificates of deposit are
     estimated by discounting the amounts payable at the certificate rates using
     the rates currently offered for deposits of similar remaining maturities.

     Other Assets and Other Liabilities - Other assets represent accrued 
     ----------------------------------
     interest receivable; other liabilities represent advances from borrowers
     for taxes and insurance and accrued interest payable. Since these financial
     instruments will typically be received or paid within three months, the
     carrying amounts of such instruments are deemed to be a reasonable estimate
     of fair value.

     Fair value estimates are made at a specific point of time, based on
     relevant market information and information about the financial instrument.
     These estimates do not reflect any premium or discount that could result
     from offering for sale the Company's entire holdings of a particular
     financial instrument. Because no active market exists for a significant
     portion of the Company's financial instruments, fair value estimates are
     based on judgments regarding future expected loss experience, current
     economic conditions, current interest rates and prepayments trends, risk
     characteristics of various financial instruments, and other factors. These
     estimates are subjective in nature and involve uncertainties and matters of
     significant judgment and therefore cannot be determined with precision.
     Changes in any of these assumptions used in calculating fair value also
     would affect significantly the estimates. Further, the fair value estimates
     were calculated as of a specific point in time. Changes in market interest
     rates and prepayment assumptions could change significantly the estimated
     fair value.

     Fair value estimates are based on existing on and off-balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments. For example, the Company has
     significant assets and liabilities that are not considered financial assets
     or liabilities including deposit franchise value, real estate, deferred tax
     liabilities, and premises and equipment.

18.  Employment and Severance Agreements
     -----------------------------------

     The Bank and the Holding Company entered into employment and severance
     agreements with certain key officers. The employment and severance
     agreements provide for up to three-year terms. Commencing on the first
     anniversary date and continuing each anniversary date thereafter, the
     respective boards of directors may extend the agreements for an additional
     year so that the remaining terms shall be up to three years, unless written
     notice of termination of 
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     the agreement is given. The agreements provide for severance payments and
     other benefits in the event of involuntary termination of employment in
     connection with any change in control of the employers. Severance payments
     also will be provided on a similar basis in connection with voluntary
     termination of employment where, subsequent to a change in control,
     officers are assigned duties inconsistent with their positions, duties,
     responsibilities and status immediately prior to such change in control.
     The severance payments will equal up to 2.99 times the executive officer's
     average annual compensation during the preceding three to five years for
     certain officers. The employment agreement provides for termination by the
     Bank or the Holding Company for just cause at any time. At June 30, 1996
     and 1997, the Company has not accrued any benefits for these postemployment
     agreements.

19.  Deposit Insurance Premiums
     --------------------------

     The Bank recorded an expense in 1997 for the onetime special assessment
     levied by the omnibus appropriation bill to recapitalize the Savings
     Association Insurance Fund (SAIF). The special assessment for deposit
     insurance premiums of approximately $193,000 has been reflected in income
     for the year ending June 30, 1997, with an after tax impact on net income
     of approximately $127,000. Effective January 1, 1997, the Bank began paying
     reduced premium assessments in accordance with the new SAIF assessment
     schedule.

20.  Branch Acquisition
     ------------------

     In October 1996, the Bank assumed the deposits, approximately $3,988,000,
     and purchased loans, approximately $2,193,000, of a certain branch from a
     financial institution. The transaction resulted in the Company receiving
     net liabilities in excess of assets of approximately $1,576,000 which the
     Company received in a cash settlement. The purchase resulted in paying a
     premium on deposits acquired of approximately $219,000.

21.  Condensed Parent Company Only Financial Statements
     --------------------------------------------------

     The following condensed balance sheets as of June 30, 1996 and 1997, and
     condensed statements of income and cash flows for the years ending June 30,
     1996 and 1997 for the Holding Company should be read in conjunction with
     the consolidated financial statements and the notes thereto.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
 
Parent Company Only                                               June 30,
Balance Sheets (in thousands)                                ------------------
                                                               1996       1997
                                                               ----       ----
<S>                                                          <C>        <C> 
Assets:                                  
 Interest earning deposits                                   $   412    $   414
 Investment securities (market value of $1,410 in                              
  1996 and $803 in 1997)                                       1,398        799
 Loans receivable from ESOP                                      515        452
 Equity in net assets of Bank                                 10,163     10,474
 Other                                                            47         33
                                                             -------    -------
                                         
     Total assets                                            $12,535    $12,172
                                                             =======    =======
                                         
Liabilities:                             
 Accrued income taxes payable                                $     2    $     -
 Accrued dividends                                               221        210
 Accrued expenses                                                  3          -
                                                             -------    -------
     Total liabilities                                           226        210
                                                             -------    -------
                                         
Stockholders' equity                                          12,309     11,962
                                                             -------    -------
                                         
     Total liabilities and               
      stockholders' equity                                   $12,535    $12,172
                                                             =======    ======= 

<CAPTION>

Parent Company Only                                        Years Ending June 30,
Statements of Income (in thousands)                        ---------------------
                                                             1996        1997
                                                             ----        ----
<S>                                                       <C>         <C>
Dividends from bank subsidiary                               $  -       $ 300
Interest income                                               156          83
                                                            -----       -----
     Total interest and dividends                             156         383
                                                             
Noninterest expenses                                          (95)        (90)
                                                            -----       -----
                                                             
Income before income taxes and equity in                     
 undistributed net income of bank subsidiaries                 61         293
Equity in undistributed net income of bank subsidiary         448         128
Income tax (expense) benefit                                  (21)          2
                                                            -----       -----
                                                             
     Net income                                             $ 488       $ 423
                                                            =====       =====
</TABLE> 
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

Parent Company Only                                        Years Ending June 30,
Statements of Cash Flows (in thousands)                    ---------------------
                                                              1996        1997
                                                              ----        ----
<S>                                                         <C>          <C>
Operating activities:                             
 Net income                                                 $   488      $ 423
 Undistributed equity earnings of Bank                         (448)      (128)
 Accretion of discounts on investment securities                 (3)        (1)
 (Increase) decrease in prepaid expenses          
   and other assets                                             (13)        14
 Increase (decrease) in accrued expenses                          3         (3)
 Decrease in income taxes payable                               (43)        (2)
                                                            -------      -----
     Net cash provided (used) by                  
      operating activities                                      (16)       303
                                                            -------      -----
                                                  
Investing activities:                             
 Proceeds from maturities of investment securities              500        600
 Repayments of ESOP loan                                         63         63
                                                            -------      -----
     Net cash provided by                         
      investing activities                                      563        663
                                                            -------      -----
                                                  
 Financing activities:                            
 Dividends paid                                                (397)      (402)
 Acquisition of treasury stock                                 (790)      (562)
                                                            -------      -----
     Net cash used by                             
      financing activities                                   (1,187)      (964)
                                                            -------      -----
                                                  
 Net increase (decrease) in cash                               (640)         2
 Cash at beginning of year                                    1,052        412
                                                            -------      -----
                                                  
 Cash at end of year                                        $   412      $ 414
                                                            =======      =====
</TABLE>
<PAGE>
 
Item 8.   Changes in and Disagreements with Accountants on Accounting and
-------   ---------------------------------------------------------------
          Financial Disclosure
          --------------------

     Not applicable.

                                 PART III


ITEM 9.   DIRECTORS AND OFFICERS OF THE REGISTRANT
-------   ----------------------------------------

     Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference. Information concerning executive officers of the Company during
fiscal year 1997, who were not also directors of the Company, is  provided
below.

     Terri C. Robinson, age 38, has been employed by the Savings Bank since 1984
in various capacities, most recently as Bookkeeper, Secretary-Treasurer and
since December 1993, as Chief Financial Officer.

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

     Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference.

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

     Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference.

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

     Information included in South Carolina Community Bancshares, Inc.'s Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference.


                                 PART IV

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

      (a) The following exhibits are filed as part of this report.

     3.1  Certificate of Incorporation of South Carolina Community Bancshares,
          Inc.*
     3.2  Bylaws of South Carolina Community Bancshares, Inc.*
     4.0  Stock Certificate of South Carolina Community Bancshares, Inc.*
    10.0  Community Federal Savings and Loan Association Employee Stock
          Ownership Plan*
    10.1  South Carolina Community Bancshares, Inc. 1994 Stock Option Plan**
    10.2  South Carolina Community Bancshares, Inc. 1994 Recognition and
          Retention Plan**
    10.3  Employment Agreement between the Savings Bank and Alan W. Pullen*
    23.0  Consent of Crisp Hughes & Co., L.L.P.
    27.0  EDGAR Financial Data Schedule

                                       56
<PAGE>
 
     (b)    Reports on Form 8-K

                 None

*    Incorporated herein by reference into this document from the Exhibits to
     Form S-1 Registration Statement, initially filed on March 18 , 1994,
     Registration No. 33-76676.

**   Incorporated by reference to the Appendix to the Company's Proxy Statement
     dated November 8, 1994.

                                       57
<PAGE>
 
                                 SIGNATURES
                                 ----------

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
     Exchange Act of 1934, the Registrant has duly caused this report to be
     signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S>                                           <C>
                                               SOUTH CAROLINA COMMUNITY BANCSHARES, INC.


Date:   September 25, 1997                     By: \s\ Alan W. Pullen
                                                   ---------------------------------
                                                   Alan W. Pullen, President and
                                                    Chief Executive Officer



     Pursuant to the requirements of the Securities Exchange of 1934, this
     report has been signed below by the following persons on behalf of the
     Registrant and in the capacities and on the dates indicated.



By:  \s\ Alan W. Pullen                        By:  \s\ Terri C. Robinson
     -----------------------------                  --------------------------------
     Alan W. Pullen, President, Chief               Terri C. Robinson, Secretary-
       Executive Officer and Director                 Controller and Chief Financial
       (Principal Executive Officer)                  Officer
                                                      (Principal Financial and
                                                       Accounting Officer)

Date: September 25, 1997                       Date: September 25, 1997



By:  \s\ Quay W. McMaster                      By:  \s\ Richard H. Burton
     -----------------------------                  --------------------------------
     Quay W. McMaster, Chairman of the Board        Richard H. Burton, Vice Chairman
                                                     of the Board

Date: September 25, 1997                       Date: September 25, 1997



By:  \s\ George R. Lauderdale, Jr.             By:  \s\ John S. McMeekin
     -----------------------------                  --------------------------------
     George R. Lauderdale, Jr., Director            John S. McMeekin, Director


Date: September 25, 1997                       Date: September 25, 1997



By:  \s\ Philip C. Wilkins
     -----------------------------        
     Phillip C. Wilkins, Director

Date: September 25, 1997
</TABLE> 

                                       58