<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, 1998
                          -------------

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

                   South Carolina Community Bancshares, Inc.
          ----------------------------------------------------------
            (Exact name of registrant as specified in its charter)

            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)                                                       
  

                       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 closing price of such stock on the
NASDAQ SmallCap Market on September 14, 1998 was approximately $10,086,000.  For
the purpose of this calculation, officers and directors of the Registrant are
considered nonaffiliates.

     The Registrant's revenues for the fiscal year ended June 30, 1998 were
$3,651,000.

     The number of shares outstanding of the Registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of September 14, 1998
was 579,664.

                      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 1998 Annual Meeting of Shareholders are incorporated by reference
     into certain items of Part III.
<PAGE>
 
                   SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                  FORM 10-KSB
 
                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
                                                                           Page
<S>                                                                        <C> 
PART I.....................................................................  1
 
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............................................  21
 
Item 5-A. Selected Financial Data.........................................  22
 
Item 6.   Management's Discussion and Analysis of Financial Condition
           and Results of Operation.......................................  23
 
Item 7.   Financial Statements............................................  30
 
Item 8.   Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure............................  57
 
PART III..................................................................  57
 
Item 9.   Directors and Officers of the Registrant........................  57
 
Item 10.  Executive Compensation..........................................  57
 
Item 11.  Security Ownership of Certain Beneficial Owners and Management..  57
 
Item 12.  Certain Relationships and Related Transactions..................  57
 
PART IV ..................................................................  57
 
Item 13.  Exhibits and Reports on Form 8-K................................  57
          (a)  Exhibits Required by Securities and Exchange Commission
                Regulation S- B...........................................  57
          (b)  Reports on Form 8-K........................................  58
</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, 1998 the assets of the Company consisted of its ownership of the capital
stock of the Savings Bank, the loan to the ESOP, $190,000 of interest earning
deposits, and $444,500 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, 1998, the
Company had total assets of $48.0  million, total deposits of $38.0 million, and
stockholders' equity of $9.4 million.

          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, 1998, mortgage loans
secured by one- to four-family residential real estate totaled $32.3 million, or
87.8%, of the total loan portfolio, loans secured by commercial and other
property totaled $2.5 million, or 6.9%, of the total loan portfolio, loans
secured by unimproved land totaled $1.0 million, or 2.8%, of the total loan
portfolio, and consumer  loans totaled $1.0 million, or 2.6%, of the total loan
portfolio.  The Company also invests in United States Government and agency
obligations, which  investments totaled $1.8 million, or 3.7%, of total assets
at June 30, 1998, and interest-earning deposits in other financial institutions,
which totaled $8.1 million, or 16.9%, of total assets at June 30, 1998.

       The Savings Bank's principal sources of funds are deposits and principal
and interest payments on loans and maturing investment securities.  Principal
sources of income are interest 
<PAGE>
 
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, 1998, total loans receivable were $36.8
million, of which $32.3 million, or 87.8% were  one- to four-family residential
real estate mortgage loans, $1.0 million, or 2.8% were unimproved land loans,
$2.5 million, or 6.9%, 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,
                                                  --------------------------------------------------------------
                                                           1996                 1997               1998 
                                                  ----------------------  ------------------  ------------------
                                                     Amount     Percent    Amount   Percent    Amount   Percent
                                                  ------------  --------  --------  --------  --------  --------
                                                                      (Dollars in Thousands)
<S>                                               <C>           <C>       <C>       <C>       <C>       <C>
Mortgage loans:
 One- to four-family.............................     $31,417     91.58%  $32,698     88.88%  $32,276     87.76%     
 Multifamily.....................................          21       .06        12      0.03         5      0.01      
 Commercial and other property...................       1,464      4.27     2,128      5.78     2,532      6.88      
 Unimproved land.................................       1,121      3.27       988      2.69     1,014      2.76      
                                                      -------    ------   -------    ------   -------    ------
   Total mortgage loans..........................      34,023     99.18    35,826     97.38    35,827     97.41   
 
  Other loans:
 Loans on savings accounts.......................         282       .82       354      0.96       284      0.77   
 Installment loans...............................          --        --       609      1.66       667      1.82   
                                                      -------    ------   -------    ------   -------    ------
 
   Total loans receivable........................      34,305    100.00%   36,789    100.00%   36,778    100.00%   
                                                                 ======              ======              ======
Less:
 Loans in process................................        (377)               (285)               (246)     
 Unearned loan fees, net of deferred loan costs..        (297)               (256)               (232)     
 Allowance for loan losses.....................          (293)               (293)               (293)     
                                                      -------             -------             -------
 
   Net loans receivable..........................     $33,338             $35,955             $36,007   
                                                      =======             =======             =======
</TABLE>

                                       2
<PAGE>
 
       Loan Maturity Schedule. The following table shows the maturity of the
loan portfolio at June 30, 1998. The table does not reflect anticipated
prepayments or scheduled principal amortization. 

<TABLE>
<CAPTION>
                                                              At June 30, 1998 
                                           -----------------------------------------------------         
                                                               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...........................    $   178   $         5 $   112     $   546 $    841        
                                                                                                     
 After 1 year:                                                                                       
  1 to 3 years...........................         596            --      10         176      782       
  3 to 5 years...........................         550            --     107         192      849       
  5 to 10 years..........................       1,855            --      64          --    1,919       
  10 to 20 years.........................      26,302            --   3,253          37   29,592       
  Over 20 years..........................       2,795            --      --          --    2,795        
                                              -------   ----------- -------     -------   ------
                                                                                                     
    Total due after one year.............      32,098            --   3,434         405   35,937         
                                              -------   ----------- -------     -------   ------
                                                                                                     
    Total amounts due....................     $32,276   $         5 $ 3,546     $   951   36,778         
                                              =======   =========== ======      =======   
                                                                                                     
    Loans in process.....................                                                   (246)     
    Deferred loan fees, net of deferred..                                                   (232)     
 loan costs..............................                                                   (293)     
                                                                                         -------      
 Allowance for loan losses...............                                                $36,007      
                                                                                         =======      
 Loans receivable, net...................
</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, 1998, $32.3 million, or 87.8% 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 30 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, 1998, such loans had an
aggregate balance of $2.5 million, or 6.9%, 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, 1998.  Multi-family
loans totaled $5,000, or .01% of the loan portfolio, at June 30, 1998.  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 

                                       4
<PAGE>
 
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 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 totaled $1.0 million, or
2.8%, of the total loan portfolio at June 30, 1998.  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 totaled
$1.0 million, or 2.6% of the total loan portfolio at June 30, 1998.

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 

                                       5
<PAGE>
 
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 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, 1996, 1997 and 1998 delinquencies in the
loan portfolio were as follows:

<TABLE>
<CAPTION>
                                            At June 30, 1996       At June 30, 1997    At June 30, 1998
                                    ----------------------------  ------------------  ------------------
                                         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.......         9              $ 238       13      $ 511       24     $  650
 Loans 90 days or more                               
 delinquent........................        15                480       32        397       36        827
                                        -----              -----     ----  ---------   ------  ---------
   Total loans delinquent 60 days                     
   or more..........................       24              $ 718       45      $ 908       60     $1,477
                                        =====              =====     ====  =========   ======  =========
 
Delinquent loan principal to
 total gross loans:
 Loans 60-89 days delinquent  to
 total gross loans.................                         0.69%               1.39%               1.77%
 
 Loans 90 days or more delinquent
 to total gross loans..............                         1.40%               1.08%               2.25%
</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,
                                             ---------------------------
                                                1996      1997     1998
                                             ---------  --------  ------
                                               (Dollars in Thousands)
<S>                                          <C>        <C>       <C>
Loans accounted for on a non-accrual
  basis...................................        $ 480   $ 397   $ 827
 
Accruing loans which are
  contractually past due 90 days or more..           --      --      --
                                                  -----   -----   -----
 
Total of nonaccrual and accruing
  loans 90 days or more past due..........          480     397     827
 
Foreclosed real estate, net of related....
  valuation allowance.....................          156      96      71
                                                  -----   -----   -----
 
        Total nonperforming assets........        $ 636   $ 493   $ 898
                                                  =====   =====   =====
 
Nonperforming loans to total gross loans..         1.40%   1.08%   2.25%
Nonperforming assets to total assets......         1.44%   1.06%   1.87%
</TABLE>

     $24,000 in interest income was recognized during the year ended June 30,
1998 on loans accounted for as non-accrual on that date.  An additional $19,000
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, 1996, 1997, 1998,  REO
totaled $156,000, $96,000 and $71,000, 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

                                       7
<PAGE>
 
possibility" that the savings institution will sustain "some loss" if the
deficiencies are not 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, 1998, classified assets totaled
$826,500, of which $822,000 were classified substandard and 4,500 were
classified as doubtful.  In addition to such classified assets, at June 30,
1998, there were $638,000 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, 1996, 1997, or 1998. The
allowance for loan losses totaled $293,000 at June 30, 1996, 1997 and 1998.

     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,
                                                         ------------------------------
                                                            1996       1997      1998
                                                         ----------  ---------  -------
                                                            (Dollars in Thousands)
<S>                                                      <C>         <C>        <C>
Balance at beginning of period.......................         $  294   $  293   $  293
Provision for loan losses............................             --       --       --
Chargeoffs (1).......................................             (1)      --       --
Recoveries...........................................             --       --       --
                                                              ------   ------   ------
  Balance at end of period...........................         $  293   $  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.............................          61.04%   73.80%   35.43%
Ratio of allowance for loan losses to total
  nonperforming assets at end of period..............          46.07%   59.43%   32.63%
Ratio of allowance for loan losses to net loans
  receivable at end of period........................            .88%     .81%     .81%
</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,
                                           ---------------------------------------------------------------
                                                    1996                  1997               1998
                                           ----------------------  -----------------  --------------------
                                              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.........     $ 252       91.58%      $ 264    88.88%   $ 263    87.76%    
 Multifamily residential.................         -         .06          --      .03       --      .01     
 Unimproved land.........................        18        3.27          11     2.69       11     2.76     
 Commercial and other....................        23        4.27          14     5.78       16     6.88     
 Consumer loans..........................         -         .82           4     2.62        3     2.59     
                                              -----      ------       -----   ------    -----   ------     
                                                                                                           
  Total allowance for loan losses........     $ 293      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,
                                 ------------------------------------------------------------------
                                          1996               1997                   1998
                                 --------------------  ------------------   -----------------------
                                  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...........    $4,749     $4,774     $3,352   $3,370     $1,755      $1,771 
 FHLB stock....................       429        429        429      429        321         321 
 Other(1)......................        --         --         --       --        147         147 
                                   ------     ------     ------   ------     ------      ------ 
                                                                                                
  Total investment securities..    $5,178     $5,203     $3,781   $3,799     $2,223      $2,239 
                                   ======     ======     ======   ======     ======      ====== 
</TABLE> 

________________________
(1)  Consists of certificate of deposit and equity securities.

                                       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, 1998.

<TABLE>
<CAPTION> 
                                                                     At June 30, 1998
                             ---------------------------------------------------------------------------------------------------
                               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)    
                             --------  -----------   ---------  -----------   ----------  -----------   ----------  ------------    
                                                                (Dollars in Thousands)                          
<S>                          <C>       <C>           <C>        <C>           <C>         <C>          <C>          <C>
U.S. Treasury obligations..   $600       6.59%        $  500      6.38%        $    --           --       $   --         --      
Federal Home Loan Bank                                                                                                           
 obligations...............    200       6.06%           455      6.53%             --           --           --         --      
Federal Home Loan Bank                                                                                                           
 stock (2).................     --         --             --        --              --           --          321       7.25%     
Other(3)...................    147       3.91%            --        --              --           --           --         --      
                              ----                    ------                   -------                    ------                 
Total investments..........   $947                    $  955                   $    --                    $  321                 
                              ====                    ======                   =======                    ======                 

<CAPTION> 
                                                             Total Investment Securities           
                                                       ------------------------------------------  
                                                                                     Annualized    
                                                         Carrying        Market       Average      
                                                          Value          Value         Yield (1)   
                                                        ----------     ----------     -----------  
<S>                                                     <C>            <C>            <C>       
U.S. Treasury obligations..                              $1,100          $1,106         6.49%     
Federal Home Loan Bank obligations...............           655             655         6.39%      
Federal Home Loan Bank stock (2)................            321             321         7.25%    
Other(3)...................                                 147             147         3.91%   
                                                         ------          ------         ----          
Total investments..........                              $2,223          $2,239         6.40%   
                                                         ======          ======         ====     
</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.
(3)  Consists of certificate of deposit and equity securities.

                                       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
1998 the Savings Bank paid $2,550,000 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
4.84% at June 30, 1997 and 4.75% at June 30, 1998.  Balances are tabulated as
follows:

<TABLE>
<CAPTION>
                                                  At June 30,
                          ---------------------------------------------------
                                 1996             1997               1998
                          ----------------  -----------------  --------------
                                     % 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%  $ 1,906   5.01%  
Regular passbook........    2,323    7.43     3,024     8.89     3,248   8.55   
Money-market passbook...    4,214   13.47     3,812    11.20     3,282   8.64   
Certificates:                                                            
 3.99% and lower........        -       -         2      .01        42    .11   
 4.00% - 4.99%..........      502    1.61        14      .04       479   1.26   
 5.00% - 5.99%..........   20,056   64.13    22,301    65.54    28,297  74.47   
 6.00% - 6.99%..........    4,178   13.36     2,103     6.18       921   2.42   
 7.00% - 7.99%..........        -       -     1,559     4.58        --     --   
 8.00% - 8.99%..........        -       -        12      .04        --     --   
Deposit Premium.........        -       -      (205)    (.60)     (178)  (.46)
                          -------  ------   -------   ------   ------- ------   
  Total.................  $31,273  100.00%  $34,024   100.00%  $37,997 100.00%  
                          =======  ======   =======   ======   ======= ======   
</TABLE>

                                       11
<PAGE>
 
     At  June 30, 1998 the Savings Bank had certificates of deposits in amounts
of $100,000 or more maturing as follows:

<TABLE>
<CAPTION>
     Maturity Period                                        Amount
     ---------------                                        -------
                                                         (In Thousands)
     <S>                                                    <C>
     One month through three months...................      $ 4,443
     Three through six months.........................        3,091
     Six through 12 months............................        3,196
     Over 12 months...................................        1,065
                                                            -------
      Total...........................................      $11,795
                                                            =======
</TABLE>

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, 1998, 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, 1998, 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, 1998, 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 as defined by OTS regulations.  This liquidity
requirement, which is currently 4%, may be changed from time to time by the OTS
to any amount within the range of 4% to 10% depending 

                                       13
<PAGE>
 
upon economic conditions and the savings flow of member institutions. The
Savings Bank's liquidity ratio averaged 18.99% during the month ended June 30,
1998. Monetary penalties may be imposed for failure to meet these liquidity
requirements. At June 30, 1998, 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, 1998, the Savings Bank is required to pay a semi-annual assessment
of approximately $7,900.

     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 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,

                                       14
<PAGE>
 
1998, 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, 1998, the Savings Bank's ratio of tangible
capital to total assets, and its ratio of core (leverage) capital to total
assets, was 17.5%.

     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, 1998, the Savings Bank's ratio of core capital to
total adjusted assets was 17.5%, and its ratio of total capital to risk-weighted
assets was 37.1%.

OTS regulatory capital rules also incorporate 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. The OTS
has indefinitely deferred the implementation of the interest rate risk component
in the computation of an institution's risk-based capital requirements. 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. The OTS continues to
monitor the interest rate risk of individual institutions and retains the right
to impose additional capital requirements on individual institutions. At June
30, 1998, the Bank was not required to maintain any additional risk-based
capital under this rule.

                                       16
<PAGE>
 
     The following table presents the pro forma computations of the Company's
net portfolio value as of June 30, 1998.

<TABLE>
<CAPTION>
         Change in                                         
      Interest Rates                                      
      in Basis Points          Net Portfolio Value              
                        --------------------------------- 
       (Rate Shock)     Amount      $ Change     % Change 
     -----------------  ----------  ----------   -------- 
                            (Dollars in thousands)            
     <S>                <C>         <C>          <C>       
            400              5,315      (4,066)      (43)%
            200              7,484      (1,897)      (20)%
              -              9,381           -         - 
           (200)            10,394       1,013        11%
           (400)            11,325       1,944        21% 
</TABLE>

     At June 30, 1998, 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 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, 

                                       17
<PAGE>
 
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, 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  are now paid jointly
by BIF-insured institutions and SAIF-insured institutions.  The FICO assessment
is 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 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.  The Savings
Bank's annual SAIF premiums for the fiscal year ended June 30, 1998 were
$21,000.

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, 1998, of $321,000.

     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 

                                       18
<PAGE>
 
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.

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, 

                                       19
<PAGE>
 
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 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, 1998, the net book
value of the Company's property and equipment was $547,000.

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

     None.

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

     Not applicable.

                                       20
<PAGE>
 
                                    PART II

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

     As of June 30, 1998, the Company had 579,664 shares of common stock issued
and outstanding. At such date, the Company had 321 shareholders of record, 
excluding shareholders who have registered their common stock in street name.  
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, 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
          Quarter ended September 30, 1997..  25.25  18.50
          Quarter ended December 31, 1997...  24.50  21.50
          Quarter ended March 31, 1998......  23.63  21.50
          Quarter ended June 30, 1998.......  21.88  21.00
</TABLE>

     During 1997 and 1998, the Company declared semi-annual cash dividends of
$.30 and $.32 per share, respectively.  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.

                                       21
<PAGE>
 
ITEM 5-A. SELECTED FINANCIAL DATA
---------------------------------

     Set forth below are selected financial and other data of the Company.

<TABLE>
<CAPTION>
                                                                       At June 30,
                                                      ------------------------------------------------------
                                                         1994      1995          1996        1997     1998
                                                      ---------  ---------  --------------  -------  -------
                                                                      (In Thousands)
<S>                                                   <C>        <C>        <C>             <C>      <C>
SELECTED FINANCIAL DATA:
 
Total assets................................          $47,341      $43,947        $44,172   $46,598  $47,992
Loans receivable, net.......................           32,445       33,047         33,338    35,955   36,007
Interest-earning deposits...................            8,307        2,836          4,171     5,242    8,100
Investment securities.......................            5,009        6,612          5,178     3,781    2,223
Foreclosed real estate, net.................              145          171            156        96       71
Deposits....................................           34,265       30,106         31,273    34,024   37,997
Stockholders equity.........................            6,152       13,350         12,309    11,962    9,414
</TABLE> 
 
<TABLE> 
<CAPTION>  
                                                                   FOR THE YEAR ENDED JUNE 30,
                                                        ----------------------------------------------------
                                                          1994         1995         1996      1997     1998
                                                        -------      -------      -------   -------  -------
                                                                            (In Thousands)
<S>                                                     <C>          <C>          <C>       <C>      <C>   
SELECTED OPERATING DATA:                                                   
                                                                           
Interest income.............................            $ 3,196      $ 3,429      $ 3,406   $ 3,500  $ 3,519
Interest expense on savings accounts                                       
  and borrowed money........................              1,442        1,351        1,643     1,635    1,715
                                                        -------      -------      -------   -------  -------
        Net interest income.................              1,754        2,078        1,763     1,865    1,804
                                                                           
  Provision for loan losses.................                151           --           --        --       --
                                                        -------      -------      -------   -------  -------
        Net interest income after                                          
          provision for loan losses.........              1,603        2,078        1,763     1,865    1,804
                                                                           
Noninterest income..........................                 42          110           35        88      132
                                                                           
Noninterest expense.........................                530          705          991     1,272    1,266
                                                        -------      -------      -------   -------  -------
                                                                           
Income before income taxes and                                             
  effect of change in accounting principle..              1,115        1,483          807       681      670
                                                                           
Income tax expense..........................                411          556          319       258      262
                                                        -------      -------      -------   -------  -------
                                                                           
Income before change                                                       
  in accounting principle...................                704          927          488       423      408
                                                                           
Cumulative effect of change in                                             
  accounting for income taxes...............                (52)          --           --        --       --
                                                        -------      -------      -------   -------  -------
                                                                           
Net income..................................            $   652      $   927      $   488   $   423  $   408
                                                        =======      =======      =======   =======  =======
Basic earnings per share....................                N/A        $1.28         $.67      $.62     $.70
                                                                     =======      =======   =======  =======
Diluted earnings per share..................                N/A        $1.28         $.67      $.62     $.68
                                                                     =======      =======   =======  =======
</TABLE>

---------------------------------
(1)  There were no shares outstanding prior to the Company's initial offering of
July 7, 1994

                                       22
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                         AT OR FOR THE YEAR ENDED JUNE 30,
                                                  ----------------------------------------------
                                                   1994      1995      1996      1997      1998
                                                  ------    ------    ------    ------    ------
<S>                                               <C>       <C>       <C>       <C>       <C> 
SELECTED FINANCIAL RATIOS AND OTHER DATA:
  Return on average assets...................       1.60%     2.10%     1.11%      .93%      .88%
  Return on average stockholders' equity.....      11.11      7.07      3.77      3.46      4.00     
  Average equity to average assets...........      14.39     29.80     29.38     26.71     22.06     
  Total equity to total assets...............      13.00     30.38     27.87     25.67     19.62     
  Operating expenses to average assets.......       1.30      1.60      2.25      2.78      2.74     
  Net interest income to operating expenses..     330.94    294.75    177.90    146.62    142.50     
  Nonperforming loans to total loans (1).....       2.01       .80      1.40      1.08      2.25     
  Nonperforming assets to total assets (2)...       1.74      1.01      1.44      1.06      1.87      
</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
         -------------

FORWARD-LOOKING STATEMENTS

     In addition to historical information, this document contains forward-
looking statements. The forward looking statements contained in the following
sections are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed. Readers should not place undue reliance on
these forward-looking statements, as they reflect management's analysis as of
the date of this report. The Company has no obligation to update or revise these
forward-looking statements to reflect events or circumstances that occur after
the date of this report. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the SEC,
including quarterly reports on Form 10-QSB and current reports filed on Form 8-
K.

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.

                                       23
<PAGE>
 
FINANCIAL CONDITION

     The Company's total consolidated assets increased by approximately $1.4
million or 3.0% from $46.6 million at June 30, 1997 to $48.0 at June 30, 1998.
The increase in assets for the year was primarily attributable to a $4.0 million
growth in deposits which helped fund the $2.8 million in stock repurchases.

     The composition of the Company's balance sheet has not been materially
affected by market conditions between June 30, 1997 and June 30, 1998. Net loans
increased $52,000 or .15%. This increase was primarily as a result of new loan
originations slightly exceeding principal repayments and refinancing payoffs.

     Deposits increased $4.0 million or 11.7%, from $34.0 million at June 30,
1997 to $38.0 million at June 30, 1998. The increase in deposits was primarily
attributable to a $2.4 million governmental deposit and $1.6 million of new
deposit growth.

     During fiscal 1998, the Company repurchased 120,429 shares of its Common
Stock at an aggregate cost of approximately $2.8 million.

                                       24
<PAGE>
 
AVERAGE BALANCE SHEET

     The following table sets forth certain information relating to the
Company's consolidated statement of financial condition at June 30, 1996, 1997
and 1998, 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,
                                          ------------------------------------------------------------------------------------------
                                                       1996                            1997                         1998
                                         ------------------------------ ------------------------------ -----------------------------
                                                               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...........................  $ 33,075   $  2,817     8.52%  $ 35,254   $  2,966     8.41%  $ 35,874   $  2,999  8.36%
  Investment securities.................     5,188        333     6.42      4,108        279     6.79      3,821        272  7.12%
  Interest-earning deposits.............     4,615        256     5.55      4,935        255     5.17      5,191        248  4.78%
                                          --------   --------            --------   --------            --------   --------
    Total interest-earning assets.......    42,878      3,406     7.94     44,297      3,500     7.90     44,886      3,519  7.84%
                                                     --------                       --------                       --------
 Noninterest-earning assets.............     1,189                          1,408                          1,351
                                          --------                       --------                       --------
    Total assets........................  $ 44,067                         45,705                       $ 46,237
                                          ========                       ========                       ========
 
Liabilities and Equity:
 Interest-bearing liabilities:
  Checking accounts.....................  $     --         --            $    784         13     1.66   $  1,231         20  1.62%
  Passbook savings accounts.............     2,385         71     2.98      2,675         84     3.14      3,083         88  2.85%
  Certificates and money market
   savings accounts.....................    28,331      1,572     5.55     29,306      1,538     5.25     30,793      1,607  5.22%
                                          --------   --------            --------   --------            --------   --------
Total interest-bearing liabilities......    30,716      1,643     5.35     32,765      1,635     4.99     35,107      1,715  4.89%
                                                     --------                       --------                       --------
 
 Noninterest bearing deposits...........        --                            247                            606
 Noninterest bearing liabilities........       406                            484                            326
                                          --------                       --------                       --------
    Total liabilities...................    31,122                         33,496                         36,039
                                          --------                       --------                       --------
 Stockholders' Equity...................    12,945                         12,209                         10,198
                                          --------                       --------                       --------
    Total liabilities and stockholders'
     equity earnings....................  $ 44,067                       $ 45,705                       $ 46,237
                                          ========                       ========                       ========
Net interest income.....................             $  1,763                       $  1,865                       $  1,804
                                                     ========                       ========                       ========
Net interest rate spread (1)............                          2.59%                          2.91%                       2.95%
                                                                  ====                           ====                        ====
Net interest margin (2).................                          4.11%                          4.21%                       4.02%
                                                                  ====                           ====                        ====
Ratio of interest-earning assets to
 interest-bearing liabilities...........    139.59%                        135.20%                        127.85%
                                          ========                       ========                       ========
</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.

                                       25
<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,                               
                                             -----------------------------------------------------------------------    
                                                         1997 vs. 1996                          1998 vs. 1997           
                                             -----------------------------------   ---------------------------------    
                                                      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.........................           $186          $(37)     $149          $ 52          $(19)      $ 33      
Investment securities...............            (69)           15       (54)          (19)           12         (7)     
Interest-earning deposits...........             18           (19)       (1)           13           (20)        (7)     
                                               ----          ----      ----          ----          ----       ----      
 Total interest-earning assets......           $135           (41)       94          $ 46          $(27)      $ 19      
                                               ====          ====      ====          ====          ====       ====      
                                                                                                                        
Interest-bearing liabilities:                                                                                           
Savings accounts....................           $ 68          $(76)     $ (8)         $104          $(24)      $ 80      
                                               ----          ----      ----          ----          ----       ----      
Total interest-bearing liabilities..           $ 68          $(76)     $ (8)         $104          $(24)      $ 80      
                                               ====          ====      ====          ====          ====       ====      
                                                                                                                        
Net change in net interest income...           $ 67          $ 35      $102          $(58)         $ (3)      $(61)     
                                               ====          ====      ====          ====          ====       ====       
</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.

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 $15,000 or 3.5% from $423,000 for the year
ended June 30, 1997 to $408,000 for the year ended June 30, 1998. The return on
average assets was .93% for 1997 as compared to .88% for 1998. This decrease
resulted primarily from net interest income decreasing by $61,000.

     Net Interest Income. Net interest income decreased $61,000 or 3.3% from
$1.9 million for 1997 to $1.8 million for 1998. The decline net interest income
primarily reflects an increase in average interest-earning assets for the
Company of only $589,000 or 1.3% while averaging interest bearing liabilities
increased by $2.3 million. The majority of the deposit growth was in
certificates of deposits which 

                                       26
<PAGE>
 
carried the highest cost of funds. The interest rate spread increased from 2.91%
for 1997 to 2.95% for 1998.

       Interest Income. Total interest income increased $19,000 for 1998
compared to 1997.  Interest on loans increased by only $32,000, or 1.1%.
Interest on investments decreased $7,000 as the average portfolio decreased and
provided funds for the stock repurchase program.

       Interest Expense.  Interest expense increased $80,000 for the year ended
June 30, 1998 compared to the year ended June 30, 1997.  The increase for the
year ending June 30, 1998 was the result of $2.3 million increase in the average
interest-bearing deposits outstanding offset by a 10 basis point decrease in the
average cost of funds.  The majority of this deposit growth came as a result of
an increase in certificates of deposit accounts.

       Provision for Loan Losses. The Company did not record any provision for
loan losses for either 1997 or 1998.  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, 1998 was 35.4% and nonperforming loans to
total loans was 2.25%.

       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 continues to increase as a
result of new products and services being offered that generate fee income. This
income was $88,000 for the year ending June 30, 1997 and $122,000 for the same
period in 1998.

       Non-Interest Expense. Non-interest expense decreased by $6,000 in 1998
compared to 1997.  The decrease was the direct result of increases in
compensation expense and employee benefits and other operating expenses offset
by the $217,000 reduction in deposit insurance premiums subsequent to the SAIF
assessment in 1997.

                                       27
<PAGE>
 
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 4.0%.
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 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 1998,
the Savings Bank paid $2,550,000 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, 1998,
$747,000 million, or 49.7%, of the Savings Bank's investment portfolio was
scheduled to mature in one year or less, $755,000 million, or 50.3%, 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, 1998, the Savings Bank had outstanding loan commitments of
approximately $42,000.  This amount does not include the unfunded portion of
loans in process and unfunded lines of credit.  Savings certificates scheduled
to mature in less than one year at June 30, 1998, totaled $25.4 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 purchase 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 

                                       28
<PAGE>
 
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.

YEAR 2000 COMPLIANCE

       The Company has established a plan to address Year 2000 issues.
Successful implementation of this plan will eliminate any extraordinary expenses
related to the Year 2000 issue.  The Company has received confirmation from its
sole data processing company regarding their Year 2000 plans and compliance.
The Company has requested its data processing company information that would
enable it to test all critical systems by 1998 in order to ensure compliance by
December 31, 1998.  The Company has a reasonable basis to conclude that the Year
2000 issue will not materially affect future financial results, or cause
reported financial information not to be necessarily indicative of future
operating results or future financial condition.

IMPACT OF NEW ACCOUNTING STANDARDS

       Comprehensive Income.  SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements.  It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements.  SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Comparative financial statements are required to be reclassified to reflect the
provisions of this statement.  SFAS No. 130 was adopted by the Company for the
June 30, 1998 financial statements.

       Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," issued in February 1998, standardizes disclosure requirements for
pensions and other postretirement benefits and requires additional disclosure on
changes in benefit obligations and fair values of plan assets in order to
facilitate financial analysis.  SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997, with earlier application encouraged.

       Accounting for Derivative Instruments and Hedging Activities.  In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities."  This statement establishes accounting and reporting
standards for derivative instruments and requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position.  Under this standard, all derivative instruments should be measured at
fair value.  At the date of initial application, an entity may transfer any
held-to-maturity securities into the available-for-sale category or the trading
category, 

                                       29
<PAGE>
 
although the Company has no intention of doing so. An entity will then be able
in the future to designate a security transferred into the available-for-sale
category as a hedged item. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Because the Company and the Savings
Bank do not invest in derivative instruments or enter into hedging transactions,
adoption of this statement is not anticipated to have a significant effect on
the Company's financial position or results of operations.

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

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

       (a)    Independent Auditors' Report  31
       (b)    South Carolina Community Bancshares, Inc. and Subsidiary:
              (i)      Consolidated Balance Sheets....................  32
              (ii)     Consolidated Statements of Income..............  33
              (iii)    Consolidated Statements of Stockholders' Equity  34
              (iv)     Consolidated Statements of Cash Flows..........  35
              (v)      Notes to Consolidated Financial Statements.....  37

       With the exception of the aforementioned sections, the Registrant's 1998
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 1998 Annual Report to Stockholders
are incorporated herein by this reference.

                                       30
<PAGE>
 
              [LETTERHEAD OF CRISP HUGHES EVANS LLP 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, 1997
and 1998, 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1997 and 1998, 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 Evans LLP

Asheville, North Carolina
August 14, 1998
<PAGE>
 
                    SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                       June 30,
                                                                           -----------------------------  
           Assets                                                               1997           1998       
           ------                                                               ----           ----       
<S>                                                                          <C>            <C>           
Cash and due from banks                                                      $      436     $      578    
Interest earning deposits                                                         5,242          8,100    
Investment securities, held to maturity                                           3,352          1,855    
Investment securities, available for sale                                          --               47    
Loans receivable, net                                                            35,955         36,007    
Mortgage-backed securities, held to maturity                                         48             35    
Premises and equipment, net                                                         551            547    
Federal Home Loan Bank stock                                                        429            321    
Interest receivable                                                                 340            301    
Real estate                                                                          96             71    
Prepaid expenses and other assets                                                   149            130    
                                                                             ----------     ----------    
                                                                                                          
         Total assets                                                        $   46,598     $   47,992    
                                                                             ==========     ==========    
                                                                                                          
   Liabilities and Stockholders' Equity                                                                   
   ------------------------------------                                                                   
                                                                                                          
Deposits                                                                     $   34,024     $   37,997    
Advance payments for taxes and insurance                                             42             38    
Accrued expenses and other liabilities                                              374            361    
Income taxes:                                                                                             
  Current                                                                            78             58    
  Deferred                                                                          118            124    
                                                                             ----------     ----------    
         Total liabilities                                                       34,636         38,578    
                                                                             ----------     ----------    
                                                                                                          
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; 699,733 outstanding at June 30, 1997                                           
    and 579,664 at June 30, 1998)                                                    8               8    
  Paid in capital                                                                7,321           7,389    
  Retained earnings, substantially restricted                                    6,801           6,865    
  Treasury stock at cost (80,542 shares at June 30, 1997                                                  
    and 200,611 shares at June 30, 1998)                                        (1,352)         (4,185)   
  Unearned compensation:                                                                                  
    Employee Stock Ownership Plan                                                 (452)           (392)   
    Management Recognition Plan                                                   (364)           (271)   
                                                                             ----------     ----------    
         Total stockholders' equity                                              11,962          9,414    
                                                                             ----------     ----------    
                                                                                                          
         Total liabilities and stockholders' equity                          $   46,598     $   47,992    
                                                                             ==========     ==========    
</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,
                                                                           -----------------------------
                                                                                1997           1998
                                                                                ----           ----
<S>                                                                          <C>            <C> 
Interest income:
  Loans                                                                      $    2,964     $    2,996
  Mortgage-backed securities                                                          2              3
  Investments                                                                       279            272
  Interest earning deposits                                                         255            248
                                                                             ----------     ----------
         Total interest income                                                    3,500          3,519

Interest expense:
  Deposits                                                                        1,635          1,715
                                                                             ----------     ----------
         Net interest income                                                      1,865          1,804

Provision for loan losses                                                            --             --
                                                                             ----------     ----------
         Net interest income after provision for loan losses                      1,865          1,804
                                                                             ----------     ----------

Noninterest income:
  Loan fees and services                                                             35             50
  Other                                                                              53             82
                                                                             ----------     ----------
         Total noninterest income                                                    88            132
                                                                             ----------     ---------- 

Noninterest expenses:
  Compensation and employee benefits                                                588            701
  Net occupancy expense                                                              77             92
  Deposit insurance premiums                                                        238             21
  Data processing                                                                    73             82
  Other                                                                             296            370
                                                                             ----------     ----------
         Total noninterest expenses                                               1,272          1,266
                                                                             ----------     ----------

         Income before income taxes                                                 681            670

Income tax expense                                                                  258            262
                                                                             ----------     ----------

         Net income                                                          $      423     $      408
                                                                             ==========     ==========

Net income per common share:
  Basic                                                                      $      .62     $      .70
  Diluted                                                                           .62            .68
                                                                             ==========     ==========

Weighted-average shares:
  Basic                                                                             671            581
  Diluted                                                                           680            599
                                                                             ==========     ==========
</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, 1996                      $      8    $  7,279     $  6,769     $   (790)    $   (514)    $   (443)    $ 12,309

Net income                                          --          --          423           --           --           --          423

Cash dividends declared ($.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

Net income                                          --          --          408           --           --           --          408

Cash dividends declared ($.64 per share)            --          --         (344)          --           --           --         (344)


ESOP and MRP compensation earned                    --          70           --           --           60           93          223

Exercise of stock options (360 shares)              --          (2)          --            7           --           --            5

Treasury stock purchased (120,429 shares)           --          --           --       (2,840)          --           --       (2,840)

                                              --------    --------     --------     --------     --------     --------     --------

Balance at June 30, 1998                      $      8    $  7,389     $  6,865     $ (4,185)    $   (392)    $   (271)    $  9,414
                                              ========    ========     ========     ========     ========     ========     ========
</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,
                                                                           -----------------------------
                                                                                1997           1998
                                                                                ----           ----
<S>                                                                          <C>            <C> 
Operating activities:
  Net income                                                                 $      423     $      408
  Adjustments to reconcile net income to net cash          
    provided by operating activities:                      
    Depreciation                                                                     45             54
    Gain on sale of real estate owned                                                (3)            (6)
    Deferred income taxes                                                             4              6
    Amortization of deposit premium                                                  14             27
    Accretion of discounts on investment securities, net                             (4)            (4)
    Amortization of unearned compensation                                           183            223
    Net decrease in deferred loan fees                                              (41)           (24)
    Decrease in accrued interest receivable                                           7             39
    (Increase) decrease in prepaid expenses and other assets                        (60)            19
    Increase (decrease) in income taxes payable                                      10            (20)
    Increase in accrued expenses and other liabilities                               --             11
                                                                             ----------     ----------
        Net cash provided by operating activities                                   578            733
                                                                             ----------     ----------

Investing activities:
  Net increase in loans                                                            (323)           (68)
  Branch acquisition                                                              1,576             --
  Capitalized costs on real estate owned                                             (7)            (1)
  Proceeds from sale of real estate owned                                            10             72
  Proceeds from maturities of                                                                         
    investment securities                                                         1,600          2,200
  Proceeds from sale of FHLB stock                                                   --            108
  Purchases of investment securities                                               (199)          (746)
  Principal payments on mortgage-backed securities                                   14             13
  Purchases of premises and equipment                                              (181)           (50)
                                                                             ----------     ----------
        Net cash provided by investing activities                                 2,490          1,528
                                                                             ----------     ---------- 
</TABLE> 

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

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE> 
<CAPTION> 
                                                                                    Years Ended
                                                                                      June 30,
                                                                           -----------------------------
                                                                                1997           1998
                                                                                ----           ----
<S>                                                                          <C>            <C> 
Financing activities:
  Net increase (decrease) in deposits                                        $    (1,032)   $    3,946
  Acquisition of treasury stock                                                    (562)        (2,840)
  Increase (decrease) in advance payments for taxes  
    and insurance                                                                    19             (4)
  Proceeds from stock options exercised                                              --              5
  Dividends paid                                                                   (402)          (368)
                                                                             ----------     ----------
       Net cash provided (used) by financing activities                          (1,977)           739
                                                                             ----------     ----------

Net increase in cash and cash equivalents                                         1,091          3,000

Cash and cash equivalents at beginning of year                                    4,587          5,678
                                                                             ----------     ----------

Cash and cash equivalents at end of year                                     $    5,678     $    8,678
                                                                             ==========     ==========

Supplemental disclosures of cash flow information
-------------------------------------------------
  Cash paid during the period for:
    Interest                                                                 $    1,627     $    1,714
    Income taxes, net of refunds                                                    244            278
                                                                             ==========     ==========

  Noncash investing and financing activities:
    Real estate acquired in satisfaction of  
      mortgage loans                                                         $       --     $       40
    Loan to facilitate sale of real estate                                           60             --
    Decrease in accrued dividend payable                                             11             24
                                                                             ==========     ==========
</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, 1997 and 1998
                         (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 within 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 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 
<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.

     Investment securities available for sale are carried at fair value. The
     Company has identified their holdings in certain equity securities as
     available for sale. The unrealized holding gains or losses on securities
     available for sale are reported, net of related income tax effects, as a
     separate component of stockholders' equity until realized. Gains or losses
     on sales of securities available for sale are 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 
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.                                 
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     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.

     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. 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 bases. 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 - Basic and diluted income per share amounts are based on
     ----------------
     the average number of shares outstanding during the period in accordance
     with Statement of Financial Accounting Standards No. 128, "Earnings Per
     Share" (SFAS 128). Income per share amounts for 1997 have been restated to
     conform with SFAS 128. Unallocated ESOP shares are not considered as
     outstanding for purposes of this calculation. Diluted income per share
     includes the effect of dilution for stock options and stock awards.

     For the years ended June 30, 1997 and 1998, net income available to the
     common stockholders in both the basic and diluted computations was equal to
     net income. For purposes of the diluted income per share calculation,
     additional common stock equivalents for the stock option plan of 9,100 and
     18,342 were included as weighted average common shares outstanding for the
     years ended June 30, 1997 and 1998, respectively.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.                                 
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     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, 1998.

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, 1997:
               U.S. government and
                 agency obligations               $        3,352   $           21   $           (3)  $        3,370
                                                   =============    =============    =============    =============

             June 30, 1998:
               U.S. government and
                 agency obligations               $        1,755   $           16   $            -   $        1,771
               Certificate of deposit                        100                -                -              100
                                                   -------------    -------------    -------------    -------------

                                                  $        1,855   $           16   $            -   $        1,871
                                                   =============    =============    =============    =============
           Available for sale:
             June 30, 1998:
               Equity securities                  $           47   $            -   $            -   $           47
                                                   =============    =============    =============    =============
</TABLE>

      The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:

<TABLE>
<CAPTION>
                                                                                                Estimated
                                                           Amortized Cost                      Market Value
                                                    ------------------------------    -------------------------------
                                                         1997           1998               1997            1998
                                                         ----           ----               ----            ----
<S>                                                 <C>            <C>                <C>             <C>          
           Held to maturity:
             Due in one year or less                $       1,997  $         800      $       2,002   $         803
             Due in one year through
               five years                                   1,355            955              1,368             968
                                                     ------------    -----------       ------------    ------------

                                                    $       3,352   $       1,755     $       3,370   $       1,771
                                                     ============    ============      ============    ============
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.                                 
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     The Company had no investment securities pledged at June 30, 1997 and 1998.
     There were no investment securities sold during the fiscal years 1997 and
     1998.

3.   Loans Receivable
     ----------------

     Loans receivable are summarized as follows:

                                                                   June 30,
                                                           ---------------------
                                                             1997          1998
                                                             ----          ----
Real estate mortgage loans:
  One to four family                                       $32,317       $32,212
  Construction                                                 381           414
  Commercial real estate                                     2,140         2,187
  Other real estate                                            988         1,014
                                                           -------       -------
      Total real estate loans                               35,826        35,827
                                                           -------       -------

Consumer loans:
  Savings account loans                                        354           284
  Home equity lines of credit                                  204           158
  Other                                                        405           509
                                                           -------       -------
                                                               963           951
                                                           -------       -------
      Total loans                                           36,789        36,778
                                                           -------       -------

Less:
  Undisbursed portion of loans in process                      285           246
  Net deferred loan fees                                       256           232
  Allowance for loan losses                                    293           293
                                                           -------       -------
                                                               834           771
                                                           -------       -------

                                                           $35,955       $36,007
                                                           =======       =======

     The change in the allowance for loan losses is summarized as follows:

                                                           Years Ending June 30,
                                                           ---------------------
                                                            1997           1998
                                                            ----           ----

Beginning balance                                           $293           $293
Provision charged to income                                   --             --
Charge-offs                                                   --             --
                                                            ----           ----

Ending balance                                              $293           $293
                                                            ====           ====
<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, 1997 and 1998, respectively.
     Commercial and 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 $397,000 at
     June 30, 1997 and $827,000 at June 30, 1998. 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 $55,000 and $74,000 of interest is reserved on these loans at
     June 30, 1997 and 1998, 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, 1997:
               FHLMC Certificates                   $       32   $        1    $        -   $       33
               GNMA Certificates                            16            -             -           16
                                                     ---------    ---------     ---------    ---------

                                                    $       48   $        1    $        -   $       49
                                                     =========    =========     =========    =========
             June 30, 1998:
               FHLMC Certificates                   $       24   $        -    $        -   $       24
               GNMA Certificates                            11            -             -           11
                                                     ---------    ------------------------------------

                                                    $       35   $        -    $        -   $       35
                                                     =========    =========     ============ =========
</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 1997 and 1998. Mortgage-backed securities were not pledged at June
     30, 1997 and 1998.

5.   Real Estate
     -----------

     Real estate is summarized as follows:
                                                                   June 30,
                                                             ------------------
                                                             1997          1998
                                                             ----          ----
                                                             
         Real estate acquired in settlement of loans         $ 96          $ 71
                                                             ====          ====

6.    Interest Receivable
      -------------------

      Interest receivable is summarized as follows:

                                                                   June 30,
                                                             ------------------
                                                             1997          1998
                                                             ----          ----
         Loans receivable                                    $335          $345
         Investment securities                                 57            25
         Interest earning deposits                              3             5
         Allowance for uncollected interest                   (55)          (74)
                                                             ----          ----

                                                             $340          $301
                                                             ====          ====

7.    Premises and Equipment
      ----------------------

      Premises and equipment are summarized as follows:
                                                                   June 30,
                                                             ------------------
                                                             1997          1998
                                                             ----          ----
                                                             
         Land                                                $ 48          $ 53
         Building and improvements                            393           423
         Furniture, fixtures and equipment                    330           345
                                                             ----          ----
                                                              771           821
         Less accumulated depreciation                        220           274
                                                             ----          ----
                                                             
                                                             $551          $547
                                                             ====          ====
<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
                                                --------------------------------    ---------------------------------
                                                     1997             1998               1997             1998
                                                     ----             ----               ----             ----
           <S>                                  <C>              <C>                <C>                   <C>    
           Noninterest bearing                  $         485    $         863                  -%               -%
           NOW accounts                                   917            1,043               1.75%            1.43%
           Money market accounts                        3,812            3,282               3.34%            2.75%
           Passbook accounts                            3,024            3,248               2.98%            2.16%
           Certificates of deposit                     25,991           29,739               5.48%            5.51%
           Deposit premium                               (205)            (178)                 -%               -%
                                                 ------------     ------------

                                                $      34,024    $      37,997               4.84%            4.75%
                                                 ============     ============
</TABLE>

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

     The aggregate amount of deposits with a minimum denomination of $100,000 is
     approximately $8,258,000 and $12,647,000 at June 30, 1997 and 1998,
     respectively.

     Contractual maturities of certificate accounts are summarized as follows:

                                                                June 30,
                                                      --------------------------
                                                        1997              1998
                                                       ------            ------

12 months or less                                     $23,393            $25,384
1-2 years                                               1,896              3,812
2-3 years                                                 702                543
                                                      -------            -------

                                                      $25,991            $29,739
                                                      =======            =======
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.                                 
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

     Interest expense on deposits is summarized as follows:

                                                                  June 30,
                                                          ----------------------
                                                            1997           1998
                                                           ------         ------

Passbook savings                                          $   84          $   65
Money market and NOW                                         139             108
Certificates of deposit                                    1,398           1,515
Amortization of deposit premium                           $   14          $   27
                                                          ------          ------

                                                          $1,635          $1,715
                                                          ======          ======

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

     The components of income tax expense are summarized as follows:

                                   Federal           State            Total
                                   -------           -----            -----
   1997       
   ----       
   Current                          $238             $ 16             $254
   Deferred                            3                1                4
                                    ----             ----             ----
              
                                    $241             $ 17             $258
                                    ====             ====             ====
   1998       
   ----       
   Current                          $239             $ 17             $256
   Deferred                            5                1                6
                                    ----             ----             ----
              
                                    $244             $ 18             $262
                                    ====             ====             ====

     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:

                                                           Years Ending June 30,
                                                           ---------------------
                                                            1997           1998
                                                            ----           ----

Computed income tax expense                                $ 232          $ 228
Increase (decrease) resulting from:
  State income tax, net of
    federal benefit                                           11             12
  Nondeductible expenses                                      23             25
  Other                                                       (8)            (3)
                                                           -----          -----

      Actual income tax expense                            $ 258          $ 262
                                                           =====          ===== 
<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:

                                                            JUNE 30,
                                                -------------------------------
                                                      1997            1998
                                                      ----            ----
Deferred tax liabilities:                                           
  Accrued income                                  $         131   $         127
  FHLB stock dividends                                       67              67
  Section 481(a) adjustment - bad debt reserve               50              34
  Other                                                      49              64
                                                  -------------   -------------
                                                            297             292
                                                  -------------   -------------
 Deferred tax assets:                                               
  Bad debt reserves                                         111             113
  Loan origination fees                                      68              51
  Other                                                       -               4
                                                  -------------   -------------
                                                            179             168
                                                  -------------   -------------
                                                                    
     Net deferred tax liability                   $         118   $         124
                                                  =============   =============

   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, 1997 and 1998, 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 post-1987 excess reserves over a six-
   year period. The Bank began recapture of this reserve in the year ended June
   30, 1997. The remaining amount of the post-1987 excess is approximately
   $89,000. 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 as a result of the 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 1997 and 1998.

    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, 1997 and 1998.

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,
    1998, that the Bank meets all capital adequacy requirements to which it is
    subject. As of June 30, 1998, 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.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

    The Bank's actual capital amounts (in thousands) and ratios are also
    presented in the table. No adjustments to capital for interest-rate risk
    have been required.

<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, 1997                                                 (greater                      (greater 
 Tangible Capital                                                   than or                       than or  
  (to adjusted total assets)          $10,474   23.1%       $  681  equal to) 1.5%        $2,268  equal to) 5%
                                                                    (greater                      (greater 
 Core Capital                                                       than or                       than or  
  (to adjusted total assets)          $10,474   23.1%       $1,362  equal to) 3.0%        $2,268  equal to) 5%
                                                                    (greater                      (greater 
 Risk-Based                                                         than or                       than or  
  (to risk-weighted assets)           $10,705   48.7%       $1,760  equal to) 8.0%        $2,200  equal to) 10%
                                                                                  
As of June 30, 1998                                                 (greater                      (greater 
 Tangible Capital                                                   than or                       than or  
  (to adjusted total assets)          $ 8,277   17.5%       $  709  equal to) 1.5%        $2,364  equal to) 5%
                                                                    (greater                      (greater 
 Core Capital                                                       than or                       than or  
  (to adjusted total assets)          $ 8,277   17.5%       $1,891  equal to) 4.0%        $2,364  equal to) 5%
                                                                    (greater                      (greater 
 Risk-Based                                                         than or                       than or  
  (to risk-weighted assets)           $ 8,562   37.1%       $1,849  equal to) 8.0%        $2,311  equal to) 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.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

    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, 1998, were approximately as follows (in thousands):

<TABLE>
<CAPTION>
                                   Financial       Balance        Available
                                  Instruments    Outstanding       For Use
                                  -----------    -----------       -------       
<S>                               <C>            <C>             <C>                               
 Home equity and other lines      $       511    $       160     $      351
                                  ===========    ===========     ==========
</TABLE>

    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 $297,000 and $42,000 at June 30, 1997 and 1998, respectively.
    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. The commitments to originate mortgage
    loans at June 30, 1998, were composed of fixed rate loans having interest
    rates ranging from 6.875% to 7.25% and terms ranging from 5 to 30 years.

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

    The Bank has established for eligible employees an Employee Stock Ownership
    Plan ("ESOP"). The Bank is expected to make scheduled cash contributions to
    the ESOP sufficient to service the amount borrowed from the Holding Company.
    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, 1997 and 1998, the total
    contributions to the ESOP were used to fund principal and interest payments
    on the ESOP debt and totaled approximately $95,000 and $90,000,
    respectively.

    For the years ending June 30, 1997 and 1998, compensation from the ESOP of
    approximately $104,000 and $130,000 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, 1998, the ESOP had 23,809 allocated shares and 38,613 unallocated
    shares. The fair value of the unallocated shares at June 30, 1998, was
    approximately $813,000.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

    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.

14. Management Recognition And Retention Plan
    -----------------------------------------

    The Company's 1994 management recognition and retention plan ("MRP")
    reserved 31,211 shares of common stock for issuance. The shares were
    reserved for certain employees, officers, and directors of the Company and
    the initial grants began vesting on December 13, 1995, and will be fully
    vested by December 13, 1999. The number of shares granted to directors under
    the Plan is currently 7,803, and to certain officers and employees is
    14,654. Compensation expense in the amount of the fair value of the common
    stock at the date of grant will be recognized during the periods the
    participants become vested. The unamortized balance of unearned compensation
    is reflected as a reduction of stockholders' equity. For the years ended
    June 30, 1997 and 1998, approximately $79,000 and $93,000 has been
    recognized as compensation expense, respectively.

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

    The Company's 1994 stock option 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 1994 stock
    option plan.

                                                                     Weighted
                                                                      Average
                                                  Number Of          Exercise
                                                   Shares              Price
                                                   ------              -----

 Options outstanding June 30, 1996                   48,212         $    13.50
  Options granted                                         -                  -
  Options exercised                                       -                  -
                                                 ----------         ----------
 Options outstanding June 30, 1997                   48,212              13.50
  Options granted                                         -                  -
  Options exercised                                     360              13.50
                                                 ----------         ----------
                                            
 Options outstanding June 30, 1998                   47,852         $    13.50
                                                 ==========         ==========

    Options covering 28,567 shares were exercisable at June 30, 1998. Options
    covering 29,816 shares are available to grant at June 30, 1998.

    Upon adoption of Statement of Financial Accounting Standards No. 123
    "Accounting for Stock-Based Compensation", (SFAS No. 123), the Bank elected
    to continue measuring 
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

    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, 1997 and 1998, 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.

17. FINANCIAL INSTRUMENTS
    ---------------------

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

<TABLE>
<CAPTION>
                                                                             JUNE 30
                                                -----------------------------------------------------------------
                                                           1997                                  1998
                                                ----------------------------         ----------------------------
                                                 STATED          ESTIMATED             STATED          ESTIMATED
                                                 AMOUNT         FAIR VALUE             AMOUNT         FAIR VALUE
                                                 ------         ----------             ------         ----------     
<S>                                             <C>             <C>                  <C>              <C>
Financial assets:
  Cash and interest earning deposits           $    5,678       $    5,678           $    8,678       $    8,678
  Investment securities                             3,352            3,370                1,902            1,918
  Loans receivable, net                            35,955           36,412               36,007           36,595
  Mortgage-backed securities                           48               49                   35               35
  Federal Home Loan Bank stock                        429              429                  321              321
  Interest receivable                                 340              340                  301              301
                                               ----------       ----------           ----------       ----------
 
                                               $   45,802       $   46,278           $   47,244       $   47,848
                                               ==========       ==========           ==========       ==========
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            JUNE 30
                                               ------------------------------------------------------------------
                                                          1997                                 1998
                                               ----------------------------          ----------------------------
                                                 Stated          Estimated             Stated          Estimated
                                                 Amount         Fair Value             Amount         Fair Value
                                                 ------         ----------             ------         ----------   
<S>                                            <C>              <C>                  <C>              <C>
Financial liabilities:
  Deposits                                     $   34,024       $   33,998           $   37,997       $   37,658
  Other liabilities                                   416              416                  399              399
                                               ----------       ----------           ----------       ----------
                                              
                                               $   34,440       $   34,414           $   38,396       $   38,057
                                               ==========       ==========           ==========       ==========
</TABLE>

    The Company had off-balance sheet financial commitments, which include
    approximately $393,000 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.

    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
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

    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 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, 1997 and 1998, the Company has not accrued any benefits for
    these postemployment agreements.
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

19. DEPOSIT INSURANCE PREMIUMS
    --------------------------

    The Bank recorded an expense in 1997 for the one-time industry-wide 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, 1997 and 1998, and
    condensed statements of income and cash flows for the years ending June 30,
    1997 and 1998 for the Holding Company should be read in conjunction with the
    consolidated financial statements and the notes thereto.

<TABLE>
<CAPTION>
                                                                               JUNE 30,
PARENT COMPANY ONLY                                                    --------------------------
BALANCE SHEETS (IN THOUSANDS)                                           1997                1998
-----------------------------                                           ----                ----            
<S>                                                                    <C>                 <C> 
Assets:
  Interest earning deposits                                            $   414             $  190
  Investment securities (market value of $803 in
   1997 and $448 in 1998)                                                  799                447
  Loans receivable from ESOP                                               452                393
  Equity in wholly owned subsidiary                                     10,474              8,559
  Other                                                                     33                 18
                                                                       -------             ------
 
     Total assets                                                      $12,172             $9,607
                                                                       =======             ======
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 June 30,
                                                                 --------------------------------------
                                                                         1997               1998
                                                                         ----               ----           
<S>                                                                    <C>                 <C>
 Liabilities:
  Accrued dividends                                                    $   210             $  186
  Accrued expenses                                                           -                  7
                                                                       -------             ------
     Total liabilities                                                     210                193
                                                                       -------             ------
 
 Stockholders' equity                                                   11,962              9,414
                                                                       -------             ------
 
     Total liabilities and stockholders' equity                        $12,172             $9,607
                                                                       =======             ======
</TABLE>

    The bank subsidiary paid the parent company cash dividends of $300,000 and
    $2,550,000 during the year ended June 30, 1997 and 1998, respectively.

<TABLE>
<CAPTION>

                                                                          YEARS ENDING JUNE 30,
PARENT COMPANY ONLY                                                 ----------------------------------
STATEMENTS OF INCOME (IN THOUSANDS)                                       1997               1998
-----------------------------------                                       ----               ----             
<S>                                                                      <C>               <C>
 Dividends from bank subsidiary                                          $ 300             $ 2,550
 Interest income                                                            83                  53
 Other                                                                       -                   9
                                                                         -----             -------
     Total interest and dividends                                          383               2,612
 
 Noninterest expenses                                                      (90)                (72)
                                                                         -----             -------
 
 Income before income taxes and equity in
  undistributed net income of bank subsidiaries                            293               2,540
 
 Equity in undistributed net income of bank subsidiary                     128                   -
 Dividends from bank subsidiary in excess of
  current year net income                                                    -              (2,136)
 Income tax benefit                                                          2                   4
                                                                         -----             -------
 
     Net income                                                          $ 423             $   408
                                                                         =====             =======
</TABLE>
<PAGE>
 
SOUTH CAROLINA
COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY             Notes to Consolidated Financial Statements, Continued
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           YEARS ENDING JUNE 30,
PARENT COMPANY ONLY                                                 -------------------------------------
STATEMENTS OF CASH FLOWS (IN THOUSANDS)                                   1997                1998
---------------------------------------                                   ----                ----           
<S>                                                                      <C>                <C> 
Operating activities:
  Net income                                                             $ 423              $   408
  Undistributed equity earnings of Bank subsidiary                        (128)                   -
  Distributed equity earnings of Bank subsidiary                             -                1,421
  Accretion of discounts on investment securities                           (1)                  (1)
  Decrease in prepaid expenses and other assets                             14                   15
  Increase (decrease) in accrued expenses                                   (3)                   7
  Increase (decrease) in income taxes payable                               (2)                   -
                                                                         -----              -------
     Net cash provided by operating activities                             303                1,850
                                                                         -----              -------
 
 Investing activities:
  Proceeds from maturities of investment securities                        600                  700
  Purchases of investment securities                                         -                 (347)
  Repayments of ESOP loan                                                   63                   59
  Return of capital from Bank                                                -                  717
                                                                         -----              -------
     Net cash provided by investing activities                             663                1,129
                                                                         -----              -------
 
 Financing activities:
  Dividends paid                                                          (402)                (368)
  Proceeds from stock options exercised                                      -                    5
  Acquisition of treasury stock                                           (562)              (2,840)
                                                                         -----              -------
     Net cash used by financing activities                                (964)              (3,203)
                                                                         -----              -------
 
 Net increase (decrease) in cash                                             2                 (224)
 Cash at beginning of year                                                 412                  414
                                                                         -----              -------
 
 Cash at end of year                                                     $ 414              $   190
                                                                         =====              =======
 
 Noncash financing activities:
  Decrease in accrued dividend payable                                   $  10              $    24
                                                                         =====              =======
</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 1998 Annual Meeting of Shareholders is incorporated herein by
reference. Information concerning executive officers of the Company during
fiscal year 1998, who were not also directors of the Company, is  provided
below.

     Terri C. Robinson, age 39, 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 1998 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 1998 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 1998 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**                                                  

                                       57
<PAGE>
 
     10.3    Employment Agreement between the Savings Bank and Alan W. Pullen*
     23.0    Consent of Crisp Hughes Evans LLP
     27.0    EDGAR Financial Data Schedule

         (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.

                                       58
<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.


                                      SOUTH CAROLINA COMMUNITY BANCSHARES, INC.


Date:   September 24, 1998            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   
     (Principal Executive Officer)          Chief Financial Officer           
                                           Principal Financial and Accounting 
                                            Officer)    

Date: September 24, 1998              Date: September 24, 1998



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

Date: September 24, 1998              Date: September 24, 1998
 


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

Date: September 24, 1998              Date: September 24, 1998
 


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

Date: September 24, 1998

                                       59