<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 September 30, 1999

                                       OR

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

                         Commission File Number 1-5735
                                                ------

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

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

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

Issuer's telephone number, including area code:                                     (864) 427-9000
                                                                                    ---------------

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

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $.01 per share
                                                             --------------------------------------
                                                                     (Title of Class)
</TABLE>

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes    X    No ______
    -------

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

     The issuer's gross revenues for the fiscal year ended September 30, 1999
were approximately $15,238,000.

     As of November 5, 1999, there were issued and outstanding 1,357,562 shares
of the registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates, computed by reference to the average bid and asked price
on November 5, 1999, was approximately $15,109,665 (1,357,562 shares at $11.13
per share). It is assumed for purposes of this calculation that directors and
officers are not affiliates of the registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the Annual Report to Shareholders for the Fiscal Year Ended
     September 30, 1999 (Parts I and II).
2.   Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders
     (Part III).
<PAGE>

                                     PART I

Item 1. Business
----------------

General

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

     The Bank is a federally-chartered, capital stock savings bank headquartered
in Union, South Carolina. The Bank's operations are conducted through its main
office and five full-service banking centers, a mortgage banking center, and a
lending and investment center, all of which are located in the upstate area of
South Carolina. The Bank is a member of the Federal Home Loan Bank ("FHLB") and
its deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").

     The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on residential properties located
in Laurens ,Union and Fairfield County, South Carolina. The Bank also makes
commercial real estate, construction and consumer loans and invests in
obligations of the federal government and its agencies and of state and local
municipalities. The Bank purchases both fixed and adjustable rate mortgage-
backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. The Bank has
purchased fixed and variable rate mortgages originated by other organizations.
Historically, the Bank's primary lending focus has been on the origination of
long-term, fixed-rate mortgage loans for its portfolio. Beginning in fiscal year
1989, the Bank began originating adjustable-rate mortgage loans ("ARMs") and in
1992 began selling its fixed-rate loans in the secondary market. See "Lending
Activities." The principal sources of funds for the Bank's lending activities
include deposits received from the general public, interest and principal
repayments on loans and, to a lesser extent, borrowings from the FHLB-Atlanta.
The Bank's primary source of income is interest earned on loans and investments.
The Bank's principal expense is interest paid on deposit accounts and borrowings
and expenses incurred in operating the Bank.

     This discussion and analysis contains certain "forward-looking statements"
within the meaning of the federal securities laws. These forward-looking
statements include, but are not limited to, estimates and expectation of future
performance with respect to the financial condition and results of operations of
the Corporation and other factors. These forward-looking statements are not
guarantees of future performance and are subject to various factors that would
cause actual results to differ materially from these forward-looking statements.
These factors include, but are not limited to, changes in general economic and
market conditions and the legal and regulatory environment in which Union
Financial and the Bank operate and the development of an interest rate
environment that adversely affects the Corporation's interest rate spread or
other income anticipated from the Corporation's operations.

Competition

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

     The Corporation competes for loans principally through the interest rates
and loan fees it charges and the efficiency and quality of the services it
provides borrowers, real estate brokers and home builders. The Corporation's
competition for real estate loans comes principally from other thrift
institutions, commercial banks and mortgage banking companies.

                                       2
<PAGE>

     As of September 30, 1999, a local commercial bank and an office of a
regional commercial bank were located in Union County, South Carolina. The
Corporation is the largest financial institution based in Union County, South
Carolina.

     During the fiscal year 1997, the Corporation expanded to Laurens County
with the purchase of a First Union banking center. The makeup of the area and
the competition is similar to that of Union County.

Recent Developments

     On November 12, 1999, Union Financial completed its acquisition of South
Carolina Community Bancshares, Inc. and its wholly owned subsidiary, Community
Federal Savings Bank. Union Financial issued a total of 526,290 shares and paid
a total of $3,582,484 to the shareholders of South Carolina Community
Bancshares, Inc. The two offices of Community Federal Savings Bank became
offices of the Bank. At September 30, 1999, South Carolina Community Bancshares,
Inc. had total assets of $46.6 million, loans of $40.2 million and deposits of
$35.9 million.

Average Balances, Interest and Average Yields/Cost

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

                                       3
<PAGE>

<TABLE>
<CAPTION>
                                                               Year Ended September 30,
                                   -------------------------------------------------------------------------------------------------
                                               1999                            1998                             1997
                                   -----------------------------  ------------------------------  ------------------------------
                                                        Average                         Average                          Average
                                   Average               Yield     Average               Yield    Average                 Yield
                                   Balance   Interest     Cost     Balance   Interest     Cost    Balance     Interest     Cost
                                   --------  --------   --------  ---------  ---------  --------  --------   ---------   -------
                                                                     (Dollars in thousands)
<S>                               <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>         <C>
Interest-earning assets:
   Loans receivable, net (1)...    $142,020   $11,420      8.03%   $146,515   $11,865      8.10%  $120,542     $ 9,747     8.08%
   Mortgage-backed securities..      23,663     1,480      6.31       8,610       599      6.96      8,079         546     6.76
Investment securities:
   Taxable.....................      14,197     1,027      7.23      12,432       814      6.55     19,691       1,462     7.42
   Nontaxable..................         769        36      4.68         449        17      3.88        952          37     3.92
                                   --------   -------      ----    --------   -------             --------     -------
Total investment securities....      14,966     1,063      7.10      12,881       831      6.45     20,643       1,499     7.26
   Overnight deposits..........       3,079        83      2.70       3,103       110      3.54      2,076          63     3.03
                                   --------   -------      ----    --------   -------             --------     -------
         Total interest-earning
          assets...............     183,728    14,046      7.65     171,109    13,405      7.83    151,340      11,855     7.83
Non-interest-earning assets....      14,478                           6,055                          5,072
                                   --------                        --------                       --------
         Total assets..........    $198,206                        $177,164                       $156,412
                                   ========                        ========                       ========

Interest-bearing liabilities:
   Savings accounts............    $ 12,681       207      1.63    $ 11,527       253      2.20   $ 11,611         274     2.36
   Negotiable order of
    withdrawal ("NOW")
      accounts.................      30,392       410      1.34      24,056       411      1.71     20,493         353     1.72
   Certificate accounts........      96,733     5,089      5.26      88,492     4,880      5.51     75,008       4,038     5.38
   FHLB advances and other
    borrowings.................      39,452     1,992      5.04      35,197     2,005      5.70     35,237       1,982     5.62
                                   --------   -------      ----    --------   -------             --------     -------
         Total interest-bearing
          liabilities..........     179,258     7,698      4.29     159,272     7,549      4.74    142,349       6,647     4.67
   Non-interest-bearing
    liabilities................       3,652                           3,494                          1,180
                                   --------                        --------                       --------
         Total liabilities.....     182,910                         162,766                        143,529
   Shareholders' equity........      15,296                          14,398                         12,883
                                   --------                        --------                       --------
         Total liabilities and
            shareholders' equity   $198,206                        $177,164                       $156,412
                                   ========                        ========                       ========
Net interest income............               $ 6,348                         $ 5,856                          $ 5,208
                                              =======                         =======                          =======
Interest rate spread (2).......                            3.36%                           3.09%                           3.16%
Net interest margin (3)........                  3.46%                           3.42%                            3.44%
Ratio of average
 interest-earning assets to
   average interest-bearing
    liabilities................        1.02x                           1.07x                           1.06x
</TABLE>
________________________
(1)  Average loans receivable includes nonaccruing loans.  Interest income does
     not include interest on loans 90 days or more past due.
(2)  Represents difference between weighted average yield on all interest-
     earning assets and weighted average rate on all interest-bearing
     liabilities.
(3)  Represents net interest income before provision for loan losses as a
     percentage of average interest-earning assets.

                                       4
<PAGE>

Lending Activities

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

<TABLE>
<CAPTION>
                                                                           At September 30,
                                           ---------------------------------------------------------------------------
                                                   1999                       1998                      1997
                                           ----------------------    ----------------------    -----------------------
                                            Amount        Percent      Amount       Percent      Amount       Percent
                                           --------       -------    --------       -------    --------      ---------
<S>                                        <C>            <C>        <C>            <C>        <C>           <C>
First mortgage loans:
   Conventional......................      $108,266        72.47%    $114,383        80.44%    $105,242       80.98%
   Construction loans................        17,039        11.40       12,838         9.03       13,508       10.39
   Participation loans purchased.....           377         0.25          665         0.47        1,002        0.77
                                           --------       ------     --------       ------     --------      ------
      Total mortgage loans...........       125,682        84.12      127,886        89.94      119,752       92.14
                                           --------       ------     --------       ------     --------      ------
Second mortgage loans................         8,499         5.69        5,857         4.12        4,478        3.45
Consumer and installment loans.......        24,136        16.16       14,218        10.00       12,990       10.00
Savings account loans................         1,435         0.96        1,551         1.09          183        0.14
                                           --------       ------     --------       ------     --------      ------
      Total loans....................       159,752       106.93      149,512       105.15      137,403      105.73
                                                          ------                    ------                   ------

Less:
   Undisbursed loans in process......        (9,964)       (6.67)      (6,625)       (4.66)      (6,598)      (5.08)
   Allowance for loan losses.........          (836)       (0.56)        (827)       (0.59)        (928)      (0.71)
   Deferred loan fees................           449         0.30          142         0.10           80        0.06
                                           --------       ------     --------       ------     --------      ------
      Net loans receivable...........      $149,401       100.00%    $142,202       100.00%    $129,957      100.00%
                                           ========       ======     ========       ======     ========      ======
</TABLE>

     The following table sets forth, at September 30, 1999, certain information
regarding the dollar amount of principal repayments for loans becoming due
during the periods indicated (in thousands).  Demand loans (loans having no
stated schedule of repayments and no stated maturity) and overdrafts are
reported as due in one year or less.

<TABLE>
<CAPTION>
                                                            Due After      Due After     Due After
                                                 Due         1 Year         3 Years       5 Years
                                                Within       Through        Through       Through      Due After
                                               One Year      3 Years        5 Years      10 Years      10 Years       Total
                                             -----------    ---------      ---------    ----------    ----------    ---------
<S>                                          <C>            <C>            <C>          <C>           <C>           <C>
First mortgage loans:
   Conventional loans....................     $14,040         $8,868        $ 9,806      $20,204      $55,348       $108,266
   Construction loans (1)................      17,039             --              -           --            -         17,039
   Participation loans purchased.........           -             --              -           --          377            377
Second mortgage loans....................           -             --              -           --        8,499          8,499
Consumer and installment loans...........      11,396            955          1,492        6,071        4,222         24,136
Savings account loans....................       1,435              -              -            -            -          1,435
                                              -------         ------        -------      -------      -------       --------
      Total..............................     $43,910         $9,823        $11,298      $26,275      $68,446       $159,752
                                              =======         ------        -------      -------      -------       --------
</TABLE>
______________________________

(1)    Includes construction/permanent loans.

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

                                       5
<PAGE>

     The following table sets forth the dollar amount of loans due after
September 30, 2000 which have fixed rates of interest and which have adjustable
rates of interest (in thousands).

<TABLE>
<CAPTION>
                                             Fixed   Adjustable   Total
                                            -------  ----------  --------
<S>                                         <C>      <C>         <C>
Real estate mortgage loans...............   $39,386     $54,840  $ 94,226
Consumer and other loans.................    18,948       2,668    21,616
                                            -------  ----------  --------
      Total..............................   $58,334     $57,508  $115,842
                                            =======  ==========  ========
</TABLE>

     Real Estate Loans. The primary lending activity of the Corporation is the
origination of conventional mortgage loans to enable borrowers to purchase
existing single family homes or to construct new homes. The Corporation's
residential real estate loan portfolio also includes loans on multi-family
dwellings (more than five units).  At September 30, 1999, approximately $120.7
million, or 80.8% of the Corporation's total loan portfolio consisted of loans
secured by residential real estate (net of undisbursed principal). During the
current fiscal year the Corporation recorded a net reduction in conventional
first mortgage loans of $6.1 million or 5.34%. The Corporation also experienced
a significant reduction in loans held for sale from the previous fiscal year end
to the current fiscal year end.

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

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

     The Corporation offers a full complement of mortgage lending products with
both fixed and adjustable rates. Due to the nature of the Corporation's
marketplace, only a small percentage of "local" loans are adjustable-rate loans.
The majority of adjustable-rate loans in the portfolio are originated outside of
Union and Laurens County by third party originators. The Corporation has
established a network of third party loan brokers who originate loans for the
Corporation, as well as other originators, throughout the state of South
Carolina. These loans are originated and underwritten using the same terms and
conditions as loans originated by the Corporation. The Corporation offers ARMs
tied to U.S. Treasury Bills with a maximum interest rate adjustment of 2%
annually and 6% over the life of the loan. At September 30, 1999, the
Corporation had approximately $48.1 million of ARMs, or 32.2% of the
Corporation's net loans receivable.

     At September 30, 1999, 40.3% of the Corporation's loan portfolio consisted
of long-term, fixed-rate real estate loans.  Because of this high concentration
of fixed-rate loans, the Corporation is more vulnerable to a reduction in net
interest income during periods of increasing market interest rates.  Net
interest income depends to a large extent on how successful the Corporation is
in "matching" interest-earning assets and interest-bearing liabilities.  The
Corporation has taken steps to reduce its exposure to rising interest rates.
For a discussion of these steps, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report.

                                       6
<PAGE>

     The Corporation sells a portion of its loan production to Freddie Mac. The
Corporation sells fixed-rate loans with maturities ranging from ten to 30 years.
This activity is one method used by the Corporation to reduce its interest rate
risk exposure. The loans are sold without recourse and the Corporation retains
25 basis points for servicing these loans. During the year ended September 30,
1999, the Corporation sold approximately $108.7 million of its fixed-rate
mortgage loans.

     The Corporation purchases participation interests from other financial
institutions on a selected basis. These purchased interests are on adjustable-
rate loans and are collateralized by either residential or commercial real
estate. At September 30, 1999, these interests totaled approximately $377,000.

     Commercial real estate loans constituted approximately $3.2 million, or
2.1% of Union Financial's loan portfolio at September 30, 1999. Commercial real
estate loans consist of permanent loans secured by multi-family properties,
generally apartment houses, as well as commercial and industrial properties,
including office buildings, warehouses, shopping centers, hotels, motels and
other special purpose properties. Commercial real estate loans have been
originated and purchased for inclusion in the Corporation's portfolio. These
loans generally have 20 to 30 year amortization schedules and are callable or
have balloon payments after five to ten years. Typically, the loan documents
provide for adjustment of the interest rate every one to three years. Fixed-rate
loans secured by multi-family residential and commercial properties have terms
ranging from 20 to 25 years.

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

     Construction Loans.  The Corporation engages in construction lending that
is primarily secured by single family residential real estate and, to a much
lesser extent, commercial real estate. These loans are made for a maximum 12-
month construction period and require monthly interest payments. In some cases
these loans automatically convert to a permanent loan requiring monthly
principal and interest payments. The Corporation also grants construction loans
to individuals with a takeout for permanent financing from another financial
institution, and to approved builders on both presold and unsold properties.

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

     Construction financing overall is generally considered to involve a higher
degree of credit risk than the long-term financing of residential properties.
The Corporation's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction.  If the estimate of construction cost or the salability of the
property upon completion of the project proves to be inaccurate, the Corporation
may be required to advance funds beyond the amount originally committed to
permit completion of the development.  If the estimate of value proves to be
inaccurate, the Corporation may be confronted at or prior to the maturity of the
loan with a projection of a value which is insufficient to assure full
repayment. Although these loans afford the Corporation the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than do
single-family permanent mortgage loans, construction loans are generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending due to (i) the concentration of principal among relatively few
borrowers and development projects, (ii) the increased difficulty at the time
the loan is made of estimating the building costs and selling price of the
residence to be built, (iii) the increased difficulty and costs of monitoring
the loan, (iv) the higher degree of sensitivity to increases in market

                                       7
<PAGE>

rates of interest and (v) the increased difficulty of working out loan problems.
Speculative construction loans have the added risk associated with identifying
an end-purchaser for the finished home.

     At September 30, 1999, the Corporation had approximately $17.0 million
outstanding in construction loans, including approximately $9.9 million in
undisbursed proceeds. Of the $17.0 million in construction loans at
September 30, 1999, approximately $2.6 million were "speculative," meaning that,
at the time the loan was made, there was no sales contract or permanent loan in
place for the finished home. Substantially all of these loans were secured by
one- to four-family residences.

     Consumer Loans.  Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of the
institution's assets. In addition, a federal thrift institution has lending
authority above the 35% category for certain consumer loans, such as home equity
loans, property improvement loans, mobile home loans and loans secured by
savings accounts. The Corporation's consumer loan portfolio consists primarily
of automobile loans on new and used vehicles, mobile home loans, boat loans,
home equity loans, property improvement loans, loans secured by savings accounts
and unsecured loans. As of September 30, 1999, consumer loans amounted to $24.1
million, or 16.2% of the Corporation's total loan portfolio. The Corporation
experienced a $9.9 million net growth in consumer loans over the previous fiscal
year end primarily due to the successful efforts of the Lending and Investment
Center opened in the previous fiscal year along with a significant increase in
production from the Laurens facility acquired in 1997. The Corporation makes
consumer loans to serve the needs of its customers and as a way to improve the
interest-rate sensitivity of the Corporation's loan portfolio. Consumer loans
tend to bear higher rates of interest and have shorter terms to maturity than
residential mortgage loans; however, nationally, consumer loans have
historically tended to have a higher rate of default than residential mortgage
loans.

     Loan Solicitation and Processing. Loan originations come from both walk-in
customers and loan brokers. The loan origination process for walk-in customers
includes an initial interview with an officer of the Corporation for the purpose
of obtaining a formal application. Upon receipt of a loan application from a
prospective borrower, a credit report is ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. This
information may be further verified by personal contacts with other reference
sources. An appraisal of the real estate intended to secure the proposed loan is
undertaken by pre-approved, independent fee appraisers. As soon as the required
information has been obtained and the appraisal completed, the loan is submitted
to the authorized officer, loan committees or full Board of Directors for
review. The Corporation utilizes various officers and loan committees for the
approval of real estate loans. The President/Chief Executive Officer has the
authority to approve loan requests up to and including $500,000 in secured
credit and up to and including $150,000 in unsecured credit. The Board of
Directors has appointed an Executive Loan Committee comprised of seven senior
executive Bank officers. This Committee has the authority to approve all loan
requests up to and including $500,000 in secured credit and up to and including
$150,000 in unsecured credit. A quorum of two members is required for any
action. The Board of Directors has also appointed a Board Loan Committee
comprised of two members elected annually from the Board of Directors and four
senior executive officers of the Bank. A quorum of three members, including at
least one Board member, is required for any action. This Committee has the
authority to approve all secured and unsecured loan requests up to the Bank's
legal lending limit with the exception of a single loan request exceeding
$1,000,000 in secured credit and exceeding $300,000 in unsecured credit. Single
loan requests exceeding $1,000,000 in secured credit and $300,000 in unsecured
credit require approval of the entire Board of Directors.

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

     The Board of Directors has appointed a second review loan committee to
review all denied loan applications. This committee reviews the rationale used
to deny credit and reviews denied applications for the possibility of being

                                       8
<PAGE>

able to supply credit under a different loan program, or under different terms
and conditions. Every attempt is made to supply credit to creditworthy
applicants in a manner consistent with their needs.

     Loan Originations, Purchases and Sales.  The Corporation sells a portion of
its current long-term, fixed-rate loan production to Freddie Mac on a servicing-
retained basis.  These are cash sales with no recourse provisions.  The
Corporation receives 25 basis points for servicing these loans.

     During fiscal year 1997 the Corporation established Provident Mortgage
Corporation as a division of Provident Community Bank. The primary purpose of
the mortgage division is to purchase residential mortgage loans that will be
packaged as securities and sold in the secondary market. The mortgage division
purchases the loans from mortgage brokers primarily located in South Carolina.
The loan types purchased are primarily fixed rate residential along with some
adjustable rate residential. In addition, construction/permanent loans are also
purchased. The mortgage division had total purchases through the broker network
of $144.1 million with loan sales of $108.7 million. The mortgage division will
limit the Bank's interest rate risk exposure by purchasing forward commitments
whereby approximately 50% to 75% of projected closings will be presold. The
mortgage division retains the servicing of the loans in order to generate
additional fee income for the Bank. At September 30, 1999 the Bank was servicing
$257.9 million of loans for others.

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

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

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                        ----------------------------------------------------
                                                              1999                1998             1997
                                                        ----------------    ---------------   --------------
<S>                                                     <C>                 <C>               <C>
Loans originated:
First mortgage loans:
      Loans on existing property...................          $153,665            $150,924          $ 83,419
      Construction loans...........................            17,635              10,728            17,649
                                                             --------            --------          --------
         Total mortgage loans originated (1).......           171,300             161,652           101,068
Consumer and other loans...........................            29,208              23,351            15,984
                                                             --------            --------          --------
         Total loans originated....................          $200,508            $185,003          $117,052
                                                             ========            ========          ========

Loans purchased....................................                --                  --                --
Loans sold.........................................          $108,746            $123,676          $ 46,763
</TABLE>
_____________________________
(1)   Includes mortgage division loans purchased.

     Loan Commitments. The Corporation's commitments to make conventional
mortgage loans on existing residential dwellings are normally made for periods
of up to 30 days from the date of loan approval.  The Corporation's total loan
commitments outstanding as of September 30, 1999 were approximately $830,000.
See "Financial Condition, Liquidity and Capital Resources" in the Annual Report.

     Loan Origination and Other Fees.  In addition to interest earned on loans
and fees for making loan commitments, the Corporation charges origination fees
or "points" for originating loans. Loan origination fees are usually a
percentage of the principal amount of the mortgage loan, typically between 0.5%
and 2%, depending on the terms and conditions. The Corporation does not receive
origination fees on broker loans, but does receive a $150 review fee. The
Corporation also offers loan products that require no origination fees to walk-
in customers. Other fees collected include late charges applied to delinquent
payments and fees collected in connection with loan modifications. The
Corporation charges a 5% late charge fee on payments delinquent 15 days or more
on new loan originations, loan modifications, loan assumptions and loans
currently in the Corporation's portfolio where applicable. The 5% late charge is
calculated on the delinquent monthly principal and interest payment amount. Late
charges and modification

                                       9
<PAGE>

fees do not constitute a material source of income. Current accounting standards
require fees received (net of certain loan origination costs) for originating
loans to be deferred and amortized into interest income over the contractual
life of the loan. As of September 30, 1999, the Corporation had net deferred
loan fees of approximately $131,000.

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

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

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

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

                                       10
<PAGE>

     The following table sets forth information with respect to the
Corporation's non-performing assets for the periods indicated (dollars in
thousands). It is the policy of the Corporation to cease accruing interest on
loans 90 days or more past due. At the dates indicated, there were no
restructured loans within the meaning of Statement of Financial Accounting
Standards ("SFAS") No. 15 and no impaired loans as defined by SFAS No. 114 and
SFAS No. 118. Also, at the dates indicated, there were no loans which are not
disclosed in the following table about which there was known information of
possible credit problems of the borrowers' ability to comply with the present
repayment terms:

<TABLE>
<CAPTION>
                                                       At September 30,
                                               -------------------------------
                                                 1999        1998       1997
                                               --------    --------   --------
<S>                                            <C>         <C>        <C>
Loans accounted for on a nonaccrual basis:
Real estate:
      Residential..........................    $  43       $ 581      $ 751
      Commercial...........................       --          --         --
      Construction.........................       --          --         --
      Consumer.............................      141         115         27
                                               -----       -----      -----
         Total.............................      184         696        778
                                               -----       -----      -----

Accruing loans which are contractually
   past due 90 days or more................       --          --         --
Real estate owned, net.....................      241          35          1
                                               -----       -----      -----
         Total non-performing assets.......    $ 425       $ 731      $ 779
                                               =====       =====      =====

Percentage of loans receivable net.........     0.28%       0.55%      0.60%
                                               =====       =====      =====
</TABLE>

     Interest income that would have been recorded for the year ended
September 30, 1999 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $8,000. The amount of interest included
in interest income on such loans for the year ended September 30, 1999 amounted
to approximately $4,000.

     Allowance for Loan Losses.  In originating loans, the Corporation
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. To cover
losses inherent in the portfolio of performing loans, the Corporation maintains
an allowance for loan losses. Management's periodic evaluation of the adequacy
of the allowance is based on a number of factors, including management's
evaluation of the collectibility of the loan portfolio, the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Specific valuation allowances are
established to absorb losses on loans for which full collectibility may not be
reasonably assured. The amount of the allowance is based on the estimated value
of the collateral securing the loan and other analysis pertinent to each
situation.

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

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

                                       11
<PAGE>

factors. See Notes 1 and 3 of Notes to Consolidated Financial Statements for
information concerning the Corporation's provision and allowance for possible
loan losses.

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

<TABLE>
<CAPTION>
                                                     At September 30,
                                               ---------------------------
                                                1999       1998       1997
                                               ------     ------     -----
<S>                                            <C>        <C>        <C>
Balance at beginning of year................   $ 827      $ 928      $ 799
                                               -----      -----      -----
Loans charged off:
   Real estate:
      Residential...........................      --         --         --
      Commercial............................      --         --         --
   Consumer.................................    (106)      (127)      (165)
                                               -----      -----      -----
         Total charge-offs..................    (106)      (127)      (165)
                                               -----      -----      -----
Recoveries:
   Real estate:
      Residential...........................      --         --         --
      Commercial............................      --         --         --
   Consumer.................................      10         26         51
                                               -----      -----      -----
         Total recoveries...................      10         26         51
                                               -----      -----      -----
Net charge-offs.............................     (96)      (101)      (114)
                                               -----      -----      -----
Provision for loan losses (1)...............     105         --        243
                                               -----      -----      -----
Balance at end of year......................   $ 836      $ 827      $ 928
                                               =====      =====      =====
Ratio of net charge-offs to average gross
   loans outstanding during the period......    0.07%      0.07%      0.09%
                                               =====      =====      =====
</TABLE>
________________________________
(1)  See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations" in the Annual Report for a discussion of the factors
     responsible for changes in the provision for loan losses between the
     periods.

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

<TABLE>
<CAPTION>
                                                                               At September 30,
                                                 ----------------------------------------------------------------------------
                                                          1999                    1998                       1997
                                                 ------------------------  -----------------------   ------------------------
                                                              % of Loans               % of Loans                % of Loans
                                                                in Each                 in Each                   in Each
                                                              Category to             Category to               Category to
                                                 Amount      Total Loans   Amount     Total Loans    Amount     Total Loans
                                                 ------      ------------  ------     ------------   ------     -------------
<S>                                              <C>         <C>           <C>        <C>            <C>        <C>
Real estate:
   Residential.............................       $400          80.77%     $400          85.90%      $400         83.49%
   Commercial..............................         75           2.12       100           2.90        162          4.88
Consumer...................................        311          17.11       277          11.20        266         11.63
Unallocated................................         50           N/A         50           N/A         100          N/A
                                                  ----         ------      ----         ------       ----        ------
Total allowance for loan losses............       $836         100.00%     $827         100.00%      $928        100.00%
                                                  ====                     ====         ======       ====        ======
</TABLE>

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

                                       12
<PAGE>

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

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

     The following tables set forth the number and amount of classified loans at
September 30, 1999 (dollars in thousands):

<TABLE>
<CAPTION>
                         Loss               Doubtful             Substandard
                    ---------------    -------------------    ------------------
                    Number   Amount    Number       Amount    Number      Amount
                    ------   ------    ------       ------    ------      ------
<S>                 <C>      <C>       <C>          <C>       <C>         <C>
Real estate:
   Residential....     --    $--         --           $--      14         $191
   Commercial.....     --     --         --            --      --           --
Consumer..........      1      2         10            13      29          263
</TABLE>

Investment Activities

     The Bank is required under OTS regulations to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities and is
also permitted to make certain other investments. The Bank's liquidity
requirement at September 30, 1999 was $6.7 million. At that date, the Bank held
approximately $27.0 million in liquid funds, well in excess of regulatory
requirements. Such funds consisted of United States Treasury and Agency
obligations, certificates of deposits, overnight deposits, mortgage-backed
securities and municipal bonds.

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

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

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                                                   At September 30,
                                                   -----------------------------------------------------------------------------
                                                             1999                        1998                     1997
                                                   -----------------------------------------------------------------------------
                                                    Carrying    Percent of     Carrying    Percent of    Carrying    Percent of
                                                      Value     Portfolio       Value      Portfolio      Value      Portfolio
                                                   ----------  -----------     --------    ----------    --------    -----------
<S>                                                <C>         <C>             <C>         <C>           <C>         <C>
Available for sale:
Investment securities:
      U.S. Agency obligations...............       $13,930       50.96%        $ 7,682       28.60%      $10,341       65.22%
      Municipal securities..................         1,576        5.76             451        1.68           447        2.82
                                                   -------      ------         -------      ------       -------      ------
         Total investment securities........        15,506       56.72           8,133       30.28        10,788       68.04
                                                   -------      ------         -------      ------       -------      ------
   Mortgage-backed securities...............        11,829       43.28          18,723       69.72         5,067       31.96
                                                   -------      ------         -------      ------       -------      ------
         Total available for sale...........       $27,335      100.00%        $26,856      100.00%      $15,855      100.00%
                                                   =======      ======         =======      ======       =======      ======

Held to Maturity:
   Investment securities:
      U.S. Agency obligations...............       $     -           -%        $ 1,524       55.54%      $ 5,995       76.75%
      Mortgage-backed securities............         5,338      100.00           1,220       44.46         1,816       23.25
                                                   -------      ------         -------      ------       -------      ------
         Total held to maturity.............       $ 5,338      100.00%        $ 2,744      100.00%      $ 7,811      100.00%
                                                   =======      ======         =======      ======       =======      ======
</TABLE>

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

     The Corporation also purchases mortgage derivative securities in the form
of collateralized mortgage obligations ("CMOs") and structured notes. While
these securities possess minimal credit risk due to the Federal guarantee
backing the U. S. government agencies, they do posses liquidity risk and
interest rate risk. The amortized cost of the CMOs on the books at September 30,
1999 was approximately $5.9 million with a fair value of $4.7 million. The
Corporation has purchased structured notes for investment purposes. These
include step-up bonds, single-index floaters and dual-index floaters. While all
financial instruments are subject to interest rate risk and liquidity risk,
structured notes are more sensitive to changes in interest rates and differing
note structures (call provision, rate adjustments, etc.). The Corporation had
approximately $1.1 million in structured notes as of September 30, 1999 with a
fair value of approximately $1.1 million as of that date. See Note 2 of Notes to
Consolidated Financial Statements for more information regarding investment and
mortgage-backed securities.

                                       14
<PAGE>

     The following table sets forth at amortized cost the maturities and
weighted average yields of the Corporation's investment and mortgage-backed
securities portfolio at September 30, 1999 (dollars in thousands):

<TABLE>
<CAPTION>
                                                           Amount Due Or Repricing Within:
                                 --------------------------------------------------------------------------------------------------
                                      One Year           Over One to        Over Five to           Over
                                       or Less           Five Years          Ten Years           Ten Years             Total
                                 ------------------  ------------------  ------------------  ------------------  ------------------
                                           Weighted            Weighted            Weigthed            Weighted            Weighted
                                 Carrying  Average   Carrying  Average   Carrying  Average   Carrying   Average  Carrying   Average
                                  Value     Yield     Value     Yield     Value     Yield     Value      Yield    Value      Yield
                                 --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
<S>                              <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Available for Sale:
 Investment securities:
  U.S. Agency obligations....... $      -         -% $  1,000      4.60% $  1,138      6.42% $ 11,763      7.85% $ 13,901      7.50%
  Municipal securities(1).......      100      5.76        30      6.93         -         -     1,447      7.14     1,577      7.05
                                 --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
   Total investment securities..      100      5.76     1,030      4.67     1,138      6.42    13,210      7.77    15,478      7.45
 Mortgage-backed securities.....       38      7.70       431      6.85        30      6.75    11,358      5.10    11,857      5.18
                                 --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
   Total available for sale..... $    138      6.32% $  1,461      5.31% $  1,168      6.43% $ 24,568      6.54% $ 27,335      6.47%
                                 ========            ========            ========            ========            ========

Held to Maturity:
 Investment securities:          $      -         -% $      -         -% $      -         -% $      -         -% $     --         -%
  U.S. Agency obligations.......        -         -         -         -         -         -         -         -        --        --
  Mortgage-backed securities....        -         -         -         -         -         -     5,586      6.24     5,586      6.24
                                                                                             --------  --------  --------  --------
   Total held to maturity....... $      -         -% $      -         -% $      -         -% $  5,586      6.24% $  5,586      6.24%
</TABLE>

________________________________
(1)    Yields are presented on a fully taxable equivalent basis.

                                       15
<PAGE>

     At September 30, 1999, approximately $1.1 million of debt securities and
$577,000 of mortgage-backed securities were adjustable-rate securities.

     At September 30, 1999, the Corporation held obligations of Union County,
South Carolina, in the amount of approximately $99,000 with a fair value of
approximately $97,000 as of the same date.

Deposits and Borrowings

     Deposits are the major source of the Corporation's funds for lending and
other investment purposes.  In addition to deposits, the Corporation derives
funds from principal repayments and interest payments on loans and investment
and mortgage-backed securities.  Principal repayments and interest payments are
a relatively stable source of funds, although principal repayments tend to slow
when interest rates increase.  Deposit inflows and outflows may be significantly
influenced by general market interest rates and money market conditions.  During
fiscal year 1999, the Corporation experienced a net increase in deposits of
approximately $11.9 million.  The Corporation borrowed funds to support the
remaining growth experienced in fiscal 1999.

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

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

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

<TABLE>
<CAPTION>
                                         At September 30,
                                  ------------------------------
                                      1999     1998       1997
                                  ---------  --------  ---------
<S>                               <C>        <C>       <C>
Up to 4.0%.......................  $    558  $     37  $     22
4.01% to 6.0%....................    95,163    89,155    77,401
6.01% to 8.0%....................     5,972     3,956     5,342
                                   --------  --------  --------

  Total savings certificates.....  $101,693  $ 93,148  $ 82,765
                                   ========  ========  ========
</TABLE>

The following table sets forth the maturities of time deposits at September 30,
1999 (in thousands):

<TABLE>
<CAPTION>
                                             Amount
                                            --------
<S>                                         <C>
Within three months.......................  $ 25,617
After three months but within six months..    29,848
After six months but within one year......    34,365
After one year but within three years.....    10,870
After three years but within five years...       993
After five years but within ten years.....        --
                                            --------
      Total                                 $101,693
                                            ========
</TABLE>

     Certificates of deposit with maturities of less than one year increased
from $74.6 million at September 30, 1998 to $89.8 million at September 30, 1999.
Historically, the Bank has been able to retain a significant amount of its
deposits as they mature.  In addition, management of the Bank believes that it
can adjust the offering rates of savings certificates to retain deposits in
changing interest rate environments.

                                       16
<PAGE>

     The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1999 (in
thousands).  Jumbo certificates of deposit are certificates in amounts of
$100,000 or more.

<TABLE>
<CAPTION>
               Maturity Period                   Amount
               ---------------                 ---------
     <S>                                       <C>
     Three months or less...............        $ 5,779
     Over three through six months......          6,733
     Over six months through 12 months..          7,752
     Over 12 months.....................          2,758
                                                -------
          Total jumbo certificates......        $23,022
                                                =======
</TABLE>

     See Note 5 of Notes to Consolidated Financial Statements for additional
information about deposit accounts.

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

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

<TABLE>
<CAPTION>
                                                   At September 30,
                                             ---------------------------
                                              1999      1998      1997
                                             -------   -------   -------
<S>                                          <C>       <C>       <C>
Balance outstanding at end of period:
   FHLB advances and other borrowings......  $46,503   $41,441   $37,979

Weighted average rate paid on:
   FHLB advances and other borrowings......     5.17%     5.69%     6.00%
</TABLE>


<TABLE>
<CAPTION>
                                                     At September 30,
                                                ---------------------------
                                                 1999      1998      1997
                                                -------   -------   -------
<S>                                             <C>       <C>       <C>
Maximum amount of borrowings
  outstanding at any month end:
  FHLB advances and other borrowings........    $46,503   $41,441   $37,979

Approximate average short-term borrowings
  outstanding with respect to:
  FHLB advances and other borrowings........     39,452    35,197    35,237

Approximate weighted average rate paid on:
     FHLB advances and other borrowings.....       5.05%     5.70%     5.62%
</TABLE>

     At September 30, 1999, the Corporation had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $8.0 million.
These lines of credit are available on a one-to-ten day basis for general
purposes of the Corporation. All of the lenders have reserved the right to
withdraw these lines at their option. At September 30, 1999, the Corporation had
unused lines of credit with the FHLB of Atlanta totaling $14.8 million.

Subsidiary Activities

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

                                       17
<PAGE>

Employees

     The Corporation has 75 full-time employees and 14 part-time employees
including 12 full-time employees acquired in the recent merger with South
Carolina Community Bancshares, Inc..  None of the employees are represented by a
collective bargaining unit.  The Corporation believes that relations with its
employees are excellent.

REGULATION AND SUPERVISION

General

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

     Recent legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as Union
Financial, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired Union
Financial.

Holding Company Regulation

     Union Financial is a nondiversified unitary savings and loan holding
company within the meaning of federal law.  As a unitary savings and loan
holding company, Union Financial generally is not restricted under existing laws
as to the types of business activities in which it may engage, provided that the
Bank continues to be a qualified thrift lender.  See "--Federal Savings
Institution Regulation--QTL Test."  Upon any non-supervisory acquisition by
Union Financial of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by the
OTS, Union Financial would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would
generally be limited 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 certain activities authorized by OTS regulation.

     A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the

                                       18
<PAGE>

OTS and from acquiring or retaining control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.

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

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

Federal Savings Institution Regulation

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

     Capital Requirements.  The OTS capital regulations require savings
institutions to meet three minimum capital standards:  a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio.  Effective April
1, 1999, however, the minimum core capital ratio increased to 4% for all
institutions except those with the highest ratings on the CAMELS financial
institution rating system.  In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard.  The OTS
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.

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

     The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements.  For the present time, the OTS has deferred implementation
of the interest rate risk component.  At September 30, 1999, the Bank met each
of its capital requirements.

                                       19
<PAGE>

     The following table presents the Bank's capital position at September 30,
1999.

<TABLE>
<CAPTION>
                                                          Capital
                                                    --------------------
                    Actual     Required   Excess     Actual    Required
                    Capital    Capital    Amount     Percent    Percent
                   ---------  ---------  ---------  ---------  ---------
                              (Dollars in thousands)
<S>                <C>        <C>        <C>        <C>        <C>
Tangible            $13,648     $3,072    $10,576      6.66%      1.50%

Core (Leverage)      13,648      8,182      5,468      6.66       4.00

Risk-based           14,483      9,427      5,058     12.29       8.00
</TABLE>

     Prompt Corrective Regulatory Action.  The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized."  A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized."  Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized."  The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institution's assets or the amount which would
bring the institution into compliance with all capital standards. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

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

     In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF.  During 1998,
FICO payments for SAIF members, including the Bank, approximated 6.10 basis
points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points.  By
law, there will be equal sharing of FICO payments between SAIF and BIF members
beginning January 1, 2000. The FDIC has authority to increase insurance
assessments.  A significant increase in SAIF insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Bank.  Management cannot predict what insurance assessment rates will be in
the future.

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

     Loans to One Borrower.  Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks.  A savings institution may not make a loan or extend credit to

                                       20
<PAGE>

a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if secured by specified readily-marketable
collateral. At September 30, 1999, the Bank's limit on loans to one borrower was
$2 million, and the Bank's largest aggregate outstanding balance of loans to one
borrower was $1.3 million.

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

     A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter.  As of September 30, 1999, the Bank met the qualified thrift
lender test.  Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."

     Limitation on Capital Distributions.  OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger.  The rule effective in 1998
established three tiers of institutions based primarily on an institution's
capital level.  An institution that exceeded all capital requirements before and
after a proposed capital distribution ("Tier I Bank") and had not been advised
by the OTS that it was in need of more than normal supervision, could, after
prior notice but without obtaining approval of the OTS, make capital
distributions during the 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 the excess capital over its capital requirements at the beginning of
the calendar year or (ii) 75% of its net income for the previous four quarters.
Any additional capital distributions required prior regulatory approval.  At
September 30, 1999, the Bank was a Tier I Bank.  Effective April 1, 1999, the
OTS's capital distribution regulation changed.  Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
safety and soundness, compliance and Community Reinvestment Act examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS.  If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution.  In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted.  In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.

     Liquidity.  The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%.  Monetary penalties may
be imposed for failure to meet these liquidity requirements.  The Bank's has
never been subject to monetary penalties for failure to meet its liquidity
requirements.

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

     Transactions with Related Parties.  The Bank's authority to engage in
transactions with  "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law.  The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution.  The aggregate amount of covered

                                       21
<PAGE>

transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus.  Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law.  The
purchase of low quality assets from affiliates is generally prohibited.  The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.  In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.

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

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

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

Federal Home Loan Bank System

     The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks.  The Federal Home Loan Bank provides a
central credit facility primarily for member institutions.  The Bank, as a
member of the Federal Home Loan Bank-Atlanta, is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank-Atlanta in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank-Atlanta, whichever is
greater.  The Bank was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at September 30, 1999, of $2.0 million.  Federal
Home Loan Bank advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance.

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

                                       22
<PAGE>

Federal Reserve System

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts).  The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
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 $46.5
million.  The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements.  The Bank complies with the foregoing requirements.


                           FEDERAL AND STATE TAXATION

Federal Taxation

     General.  Union Financial and the Bank report their income on a fiscal
year, consolidated basis and the accrual method of accounting, and are subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below.  The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to Union Financial or the Bank.  For its 1999 taxable year, Union
Financial is subject to a maximum federal income tax rate of 34%.

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

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

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

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

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

                                       23
<PAGE>

redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in its income.

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

State Taxation

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

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

Item 2.  Description of Property
--------------------------------

     The Corporation owns its main office, located at 203 West Main Street in
Union, South Carolina, which was opened in 1977.  At September 30, 1999, the
Corporation also owned a banking center which opened in April 1989, located at
508 North Duncan By-Pass, Union, South Carolina ,a branch office, acquired in
1997, in Laurens, South Carolina, a lending and investment center located in
Union, South Carolina and a branch office in Jonesville, South Carolina. As a
result of the recently completed merger with South Carolina Community
Bancshares, the Corporation acquired two branch locations in Winnsboro, South
Carolina. The net book value of the Corporation's investment in premises and
equipment totaled approximately $4.5 million at September 30, 1999. See Note 4
of Notes to Consolidated Financial Statements. All property is in good condition
and meets the operating needs of the Corporation.

     The Corporation owns various bookkeeping and accounting equipment.  Certain
data processing services are provided by an outside data processing center under
a long-term contract.

Item 3.  Legal Proceedings
--------------------------

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

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1999.

                                       24
<PAGE>

                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

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

Item  6.  Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------

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

Item 7.  Financial Statements
-----------------------------

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

Item 8.  Changes In and Disagreements With Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

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


                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
----------------------------------------------------------------------
Compliance with Section 16(a) of the  Exchange Act
--------------------------------------------------

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

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

<TABLE>
<CAPTION>
                            Position as of
Name                Age(1)  September 30, 1999
----                ------  ------------------
<S>                 <C>     <C>
Dwight V. Neese      49     President, Chief Executive Officer and Director
Richard H. Flake     51     Executive Vice President - Chief Financial Officer
Gerald L. Bolin      37     Senior Vice President - Chief Operating Officer
Wanda J. Wells       43     Vice President - Corporate Secretary
</TABLE>

--------------------
(1)  At September 30, 1999.

     Dwight V. Neese was appointed as President and Chief Executive Officer of
the Bank effective September 5, 1995.  Prior to joining Union Financial, Mr.
Neese was Executive Vice President and Chief Operating Officer of Home Federal
Savings Bank of South Carolina in Rock Hill.  As President and Chief Executive
Officer of Provident Community Bank and the Corporation, Mr. Neese is
responsible for daily operations of the Bank and implementation of the policies
and procedures approved by the Board of Directors.

                                       25
<PAGE>

     Richard H. Flake joined Union Financial in September 1995.  Prior to
joining Union Financial, Mr. Flake was Senior Vice President and Corporate
Accounting Manager for United Financial Corporation in Greenwood, South
Carolina.

     Gerald L. Bolin joined Union Financial in September 1995.  Prior to joining
Union Financial, Mr. Bolin was Vice President and Director of Internal Audit and
Compliance with Home Federal Savings Bank of South Carolina in Rock Hill.

     Wanda J. Wells has been employed by Union Financial since 1975 and serves
as the Corporation's Corporate Secretary.

Item  10.  Executive Compensation
---------------------------------

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

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

     (a) Security Ownership of Certain Beneficial Owners

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

     (b) Security Ownership of Management

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

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

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" and "Transactions
with Management" in the Proxy Statement.

                                       26
<PAGE>

                                    PART IV

Item 13.   Exhibits and Reports on Form 8-K
-------------------------------------------

      (a)  Exhibits
           2(a)  Agreement and Plan of Merger, dated as of July 1, 1999, by and
                 between Union Financial Bancshares, Inc. and South Carolina
                 Community Bancshares, Inc.(1)
           3(a)  Certificate of Incorporation(2)
           3(b)  Bylaws
           3(c)  Certificate of Amendment of Certificate of Incorporation dated
                 January 22, 1997(3)
          10(a)  Employment Agreement with Dwight V. Neese(4)
          10(b)  Employment Agreement with Richard H. Flake
          10(c)  Union Financial Bancshares, Inc. 1995 Stock Option Plan(5)
          13     1999 Annual Report to Stockholders
          21     Subsidiaries of the Registrant
          23     Consent of Independent Auditor
          27     Financial Data Schedule

      (b) On July 9, 1999, Union Financial filed an 8-K to announce that it had
          entered into an Agreement and Plan of Merger with South Carolina
          Community Bancshares, Inc. The Merger Agreement provided that South
          Carolina Community will be merged with and into Union Financial and
          that South Carolina Community's subsidiary, Community Federal Savings
          Bank will merge with and into the Bank. The Agreement and Plan of
          Merger and press release announcing the merger were filed by exhibit.

__________________________________
(1)   Incorporated herein by reference to Union Financial's Form 8-K filed on
      July 9, 1999.
(2)   Incorporated herein by reference to Union Financial's Registration
      Statement on Form S-4 (File No. 33-80808) filed with the Securities and
      Exchange Commission on June 29, 1994.
(3)   Incorporated herein by reference to Exhibit 3(c) to Union Financial's
      Form 10-KSB for the year ended September 30, 1997.
(4)   Incorporated herein by reference to Union Financial's Form 10-KSB for
      the year ended September 30, 1996.
(5)   Incorporated herein by reference to Exhibit A to Union Financial's
      Proxy Statement for its 1996 Annual Meeting of Stockholders.

                                       27
<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.

                                  UNION FINANCIAL BANCSHARES, INC.


Date:  December 21, 1999          By:  /s/ Dwight V. Neese
                                       ____________________________________
                                       Dwight V. Neese
                                       President and Chief
                                       Executive Officer - Duly Authorized
                                       Representative


     Pursuant to the requirements of the Securities Exchange Act 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.


       /s/ Dwight V. Neese                   /s/ James W. Edwards
By:    _____________________________   By:   _____________________________
       Dwight V. Neese                       James W. Edwards
       (Principal Executive Officer)         Director

Date:  December 21, 1999               Date: December 21, 1999

       /s/ Richard H. Flake                  /s/ David G. Russell
By:    _____________________________   By:   _____________________________
       Richard H. Flake                      David G. Russell
       (Principal Financial and              Director
       Accounting Officer)

Date:  December 21, 1999               Date: December 21, 1999


       /s/ Mason G. Alexander                /s/ Louis M. Jordan
By:    _____________________________   By:   _____________________________
       Mason G. Alexander                    Louis M. Jordan
       Director                              Director

Date:  December 21, 1999               Date: December 21, 1999

       /s/ William M. Graham                 /s/ Carl L. Mason
By:    _____________________________   By:   _____________________________
       William M. Graham                     Carl L. Mason
       Director                              Director

Date:  December 21, 1999               Date: December 21, 1999

                                             /s/ John S. McMeekin
By:    _____________________________   By:   _____________________________
       Quay W. McMaster                      John S. McMeekin
       Director                              Director

Date:  December __, 1999               Date: December 21, 1999

       /s/ Philip C. Wilkins
By:    _____________________________
       Philip C. Wilkins
       Director

Date:  December 21, 1999