<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, 1998

                                       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>
<CAPTION>
 
<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)
                                                       
Registrant's telephone number, including area code:          (864) 427-9000
                                                             --------------
</TABLE>
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)

     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 registrant's gross revenues for the fiscal year ended September 30,
1998 were approximately $14,443,000.

     As of September 30, 1998, there were issued and outstanding 1,278,250
shares of the registrant's Common Stock.  The aggregate market value of the
voting stock, including that held by insiders, computed by reference to the
average bid and asked price on September 30, 1998, was approximately $18,215,062
(1,278,250 shares at $14.25 per share).

                      DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the Annual Report to Shareholders for the Fiscal Year Ended
     September 30, 1998 (Parts I and II).
2.   Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders
     (Part III).
<PAGE>
 
                                     PART I

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

GENERAL

     Union Financial Bancshares, Inc. ("Union Financial") was incorporated in
the State of Delaware in April 1994 for the purpose of becoming a savings and
loan holding company for Provident Community Bank (formerly known as Union
Federal Savings Bank, (the "Bank").  On August 24, 1994, the stockholders of the
Bank approved a plan to reorganize the Bank into the holding company form of
ownership.  The reorganization was completed on November 9, 1994, on which date
the Bank became the wholly-owned subsidiary of Union Financial, and the
shareholders of the Bank became shareholders of Union Financial.  Prior to
completion of the reorganization, Union Financial had no material assets or
liabilities and engaged in no business activities.  Subsequent to the
acquisition of Union Federal,  Union Financial has engaged in no significant
activity other than holding the stock of the Bank and certain passive investment
activities.  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, which was originally chartered in 1934 as a
mutual savings and loan association, converted from mutual to stock form in
1987.  The Bank was known as Union Federal Savings and Loan Association until
1992, when it converted its charter to a federal savings bank charter and
changed its name to Union Federal Savings Bank.  In 1997, the Bank changed its
name to Provident Community Bank.  The Bank conducts its operations through its
main office, which is located at 203 West Main Street, Union, South Carolina,
and three full service banking centers located in Union, Jonesville, and
Laurens, South Carolina.  The Jonesville banking center was approved by the OTS
in March 1994 and opened with a temporary office in July 1994.  A permanent
facility  is being  constructed on the site with a projected completion date of
April, 1999.  The Bank acquired its Laurens banking center in 1997 in a purchase
and assumption agreement with First Union National Bank of South Carolina.  For
additional information, see "Properties."  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 and  Union 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 Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA").  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.

RECENT DEVELOPMENTS

     On October 5, 1998, the Corporation, through its subsidiary, Provident
Community Bank, entered into a definitive agreement with CCB Financial's wholly-
owned subsidiary, American Federal Bank, FSB to purchase the deposits of
American Federal's Union, South Carolina banking center. At September 30, 1998,
this branch had $14,756,000 in deposits. This transaction is expected to close
in February, 1999.

                                       2
<PAGE>
 
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,
                             ------------------------------------------------------------------------------------------------------ 
                                         1998                                         1997                            1996
                             ------------------------------------------  ------------------------------  --------------------------
                                                               Average                         Average                       Average
                                    Average                     Yield/    Average               Yield/   Average              Yield/
                                    Balance         Interest     Cost     Balance   Interest     Cost    Balance   Interest   Cost
                             ---------------------  ---------  --------  ---------  ---------  --------  --------  ---------  -----
<S>                          <C>                    <C>        <C>       <C>        <C>        <C>       <C>       <C>        <C>
                                                                       (Dollars in Thousands)
Interest-earning assets:
 Loans receivable, net (1)...             $146,515   $11,865      8.10%   $120,542   $ 9,747      8.08%  $ 73,026    $6,436   8.81%
 Mortgage-backed securities                  8,610       599      6.96%      8,079       546      6.76     16,867     1,105   6.55
Investment securities:
 Taxable.....................               12,432       814      6.55%     19,691     1,462      7.42     18,891     1,249   6.61
 Nontaxable..................                  449        17      3.88%        952        37      3.92      2,665       122   4.58
                                          --------   -------              --------   -------             --------    ------
Total investment securities                 12,881       831      6.45%     20,643     1,499      7.26     21,556     1,371   6.36
                                          --------   -------              --------   -------             --------    ------
 Overnight deposits..........                3,103       110      3.54%      2,076        63      3.03      2,747        92   3.35
                                                                          --------   -------             --------    ------
   Total interest-earning
    assets...................              171,109    13,406      7.83%    151,340    11,855      7.83    114,196     9,004   7.88
 
Non-interest-earning assets                  6,055                           5,072                          3,821
                                          --------                        --------                       --------
   Total assets..............             $177,164                       :$156,412                       $118,017
                                          ========                                                       ========
 
Interest-bearing
 liabilities:
 Savings accounts............               11,527       253      2.20%     11,611       274      2.36   $ 11,641       302   2.59
 Negotiable order of
  withdrawal ("NOW")
  accounts...................               24,056       411      1.71%     20,493       353      1.72     12,581       264   2.10
 Certificate accounts........               88,492     4,880      5.51%     75,008     4,038      5.38     70,069     3,913   5.58
 FHLB advances and other
  borrowings.................               35,197     2,005      5.70%     35,237     1,982      5.62      9,499       571   6.01
                                          --------   -------              --------   -------             --------    ------
   Total interest-bearing
    liabilities..............              159,272     7,549      4.74%    142,349     6,647      4.67    103,790     5,050   4.87
                                                                                                                     ------
 
 Non-interest-bearing
  liabilities................                3,494                           1,180                          1,936
                                          --------                        --------                       --------
   Total liabilities.........              162,766                         143,529                        105,726
                                                                          --------                       --------
 
 Shareholders' equity........               14,398                          12,883                         12,291
                                          --------                        --------                       --------
   Total liabilities and
    shareholders' equity.....             $177,164                        $156,412                       $118,017
                                          ========                        ========                       ========
 
 Net interest income.........                        $ 5,856                         $ 5,208                         $3,954
                                                     =======                         =======                         ======
 Interest rate spread (2)....                                     3.09%                           3.16%                       3.01%
 Net interest margin (3).....                           3.42%                           3.44%                          3.46%
 Ratio of average
  interest-earning
  assets to average
   interest-bearing
  liabilities................                1.07x                           1.06x                          1.10x
 
---------------------------
</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.   The principal lending activity of the Corporation has
historically been the origination of conventional single family residential
mortgage loans.  The Corporation's net loan portfolio totaled approximately
$142.2 million at September 30, 1998, representing approximately 75.0% of total
assets.  At September 30, 1998, approximately $65.7 million, or 46.2% of the
Corporation's total loan portfolio, consisted of long-term, fixed-rate mortgage
loans.  As of September 30, 1998, ARMs represented approximately $48.7 million,
or 34.2% of the total loan portfolio.  See "Real Estate Loans."

     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,
                                   ---------------------------------------------------------------
                                            1998                  1997                1996
                                   ----------------------  -------------------  ------------------
                                     Amount      Percent    Amount    Percent    Amount   Percent
                                   -----------   --------  ---------  --------  --------  --------
<S>                                <C>           <C>       <C>        <C>       <C>       <C>
                                      
First mortgage loans:                 
  Conventional...................     $114,383     80.44%  $105,242     80.98%  $70,959     82.51%
  Construction loans.............       12,838      9.03     13,508     10.39     4,627      5.38
  Participation loans purchased..          665      0.47      1,002       .77     1,133      1.32
                                      --------    ------   --------    ------   -------    ------
    Total mortgage loans.........      127,886     89.94    119,752     92.14    76,719     89.21
                                      --------    ------   --------    ------   -------    ------
Second mortgage loans............        5,857      4.12      4,478      3.45     1,484      1.73
Consumer and installment              
  loans..........................       14,218     10.00     12,990     10.00     9,871     11.48
Savings account loans............        1.551      1.09        183       .14       414      0.48
                                      --------    ------   --------    ------   -------    ------
    Total loans..................      149,512    105.15    137,403    105.73    88,488    102.90
                                                                       ------   -------    ------
Less:                                 
  Undisbursed loans in process...       (6,625)    (4.66)    (6,598)    (5.08)   (1,644)    (1.91)
  Allowance for loan losses......         (827)     (.59)      (928)     (.71)     (799)    (0.93)
  Deferred loan fees.............          142       .10         80       .06       (48)    (0.06)
                                      --------    ------   --------    ------   -------    ------
    Net loans receivable.........     $142,202    100.00%  $129,957    100.00%  $85,997    100.00%
                                      ========    ======   ========    ======   =======    ======
</TABLE>
                                       5
<PAGE>
 
     The following table sets forth, at September 30, 1998, 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............   $15,206  $16,270  $17,537   $45,053   $20,317   $114,383
  Construction loans (a)........    12,838                                           12,838
  Participation loans
  purchased.....................                                             665        665
Second mortgage loans...........                                           5,857      5,857
Consumer and installment loans..     4,965    3,782    2,333     2,031     1,107     14,218
Savings account loans...........     1,551                                 -----      1,551
                                  --------  -------  -------  --------  --------  ---------
  Total.........................   $34,560  $20,052  $19,870   $47,084   $27,946   $149,512
                                   =======  =======  =======  ========  ========  =========
</TABLE> 
------------------------
(a) These construction loans include 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.

     The following table sets forth the dollar amount of loans due after
September 30, 1999 which have fixed rates of interest and which have adjustable
rates of interest (in thousands).
<TABLE>
<CAPTION>
 
 
                              Fixed Rate  Adjustable Rate   Total
                              ----------  ---------------  --------
<S>                           <C>         <C>              <C>
 
Real estate mortgage loans..     $50,506      $48,671      $ 99,177
Consumer and other loans....       9,918        5,857        15,775
                                 -------      -------      --------
    Total                        $60,424      $54,528      $114,952
                                 =======      =======      ========
</TABLE>
                                       6
<PAGE>
 
     REAL ESTATE LOANS. The primary lending activity of the Corporation has been
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, 1998, approximately  85.9% of
the Corporation's total loan portfolio consisted of loans secured by residential
real estate (net of undisbursed principal).

     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, 1998, the
Corporation had approximately $48.7 million of ARMs, or 34.2% of the
Corporation's total outstanding loan portfolio.

    At September 30, 1998, 46.2% 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.

    Beginning in fiscal year 1992, the Corporation began selling a portion of
current year loan production to the FHLMC.  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, 1998, the
Corporation sold approximately $123.7 million of its fixed-rate mortgage loans.

    The Corporation purchases participation interests from other financial
institutions on a selected basis.  These purchased interests are adjustable-rate
loans and are collaterized by either residential or commercial real estate.  At
September 30, 1998, these interests totaled approximately $665,000.

                                       7
<PAGE>
 
    Commercial real estate loans constituted approximately $4.2  million, or
2.9% of Union Financial's loan portfolio at September 30, 1998.  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 of 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 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, 1998, the Corporation had approximately $12.8 million
outstanding in construction loans, including approximately $6.6  million in
undisbursed proceeds.  Of the $12.8 million in construction loans at September
30, 1998, approximately $2.1 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.

                                       8
<PAGE>
 
    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, 1998, consumer loans amounted to $14.2
million, or 10% of the Corporation's total loan portfolio.  The Corporation
makes consumer loans to serve the needs of its customers and as a way to improve
the interest-rate sensitivity of the Corporation's loan portfolio.  Consumer
loans tend to bear higher rates of interest and have shorter terms to maturity
than residential mortgage loans; however, nationally, consumer loans have
historically tended to have a higher rate of default than residential mortgage
loans.

    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 consisting of the President/Chief Executive Officer, the
Executive Vice President/Chief Financial Officer, the Vice President/Chief
Operating Officer, the Vice President/Credit Administration Manager, Assistant
Vice President/Consumer Loan Manager, Vice President/Mortgage Loan Acquisitions
and  and Vice President/Mortgage Lending Sales Manager.  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 Corporation originated approximately $20.2 million in mortgage
loans from walk-in customers during fiscal year 1998.

    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 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.  Prior to fiscal year 1992, all
mortgage loans originated by the Corporation were retained in the Corporation's
loan portfolio.  Most of these loans were long-term, fixed-rate real estate
loans.  Beginning in 1992, the Corporation began selling a portion of its
current long-term, fixed-rate loan production 

                                       9
<PAGE>
 
to FHLMC on a servicing-retained basis. These were 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 will also
be purchased. The mortgage division had total purchases through the broker
network  of  $141.4 million with loan sales of $123.7 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, 1998 the Bank was
servicing $164.4 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,
                                                           --------------------------------
                                                             1998         1997       1996
                                                           --------     --------    -------
                                                                        
<S>                                                     <C>          <C>          <C>
Loans originated:                                                       
  First mortgage loans:                                                 
   Loans on existing property.........................     $150,924     $ 83,419     $25,853
   Construction loans.................................       10,728       17,649       2,516
                                                           --------     --------     -------
     Total mortgage loans                                                        
      originated  (1).................................      161,652      101,068      28,369
  Consumer and other loans............................       23,351       15,984       8,139
                                                           --------     --------     -------
     Total loans originated...........................     $185,003     $117,052     $36,508
                                                           ========     ========     =======
Loans purchased.......................................           --           --     $   570
Loans sold............................................     $123,676     $ 46,763     $   810
</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.  Union Financial's total loan
commitments outstanding as of September 30, 1998 were approximately $2,736,000.
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 .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 

                                      10
<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, 1998, the Corporation had net deferred
loan fees of approximately $142,000.

    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 Note 3 of Notes to 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.
 
    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,
                               ----------------------
                                1998    1997    1996
                               ------  ------  ------
<S>                            <C>     <C>     <C>
Loans accounted for
  on a nonaccrual basis:
   Real estate:
     Residential.............  $ 581   $ 751   $1,049
     Commercial..............     --      --       74
     Construction............     --      --       --

</TABLE> 
                                      11
<PAGE>
<TABLE> 
<S>                            <C>     <C>     <C>
   Consumer..................    115      27       --
                               -----   -----   ------
       Total.................  $ 696   $ 778   $1,123
                               -----   -----   ------
Accruing loans which are                       
 contractually past due                        
 90 days or more.............     --      --       --
Real estate owned, net.......     35       1       19
                               -----   -----   ------
Total non-performing assets..  $ 779   $   1   $  142
                               =====   =====   ======
                                               
Percentage of loans                            
   receivable net............    .55%    .60%    1.33%
                               =====   =====   ======
</TABLE>

     Interest income that would have been recorded for the year ended September
30, 1998 had non-accruing loans been current in accordance with their original
terms amounted to approximately $20,000.  The amount of interest included in
interest income on such loans for the year ended September 30, 1998 amounted to
approximately $0.

     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 GAAP, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to increase
significantly 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 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,
                                       ----------------------
                                        1998    1997    1996
                                       ------  ------  ------
<S>                                    <C>     <C>     <C>
 
Balance at beginning of period:        $ 928   $ 799   $ 878
                                       -----   -----   -----
Loans charged-off:

</TABLE> 
                                      12
<PAGE>

<TABLE> 
<S>                                    <C>     <C>     <C>
  Real estate:
    Residential......................     --      --      (6)
    Commercial.......................     --      --      --
  Consumer...........................   (127)   (165)    (88)
                                       -----   -----   -----
      Total charge-offs..............   (127)   (165)    (94)
                                       -----   -----   -----
Recoveries:
  Real estate:
    Residential......................     --      --      --
    Commercial.......................     --      --      --
  Consumer...........................     26      51      15
                                       -----   -----   -----
      Total recoveries...............     26      51      15
                                       -----   -----   -----
Net (charge-offs) recoveries.........   (101)   (114)    (79)
                                       -----   -----   -----
Provision for loan losses(1).........     --     243      --
                                       -----   -----   -----
Balance at end of period.............  $ 827   $ 928   $ 799
                                       =====   =====   =====
Ratio of net charge-offs to average
  gross loans outstanding during
  the period.........................    .07%    .09%    .11%
                                       =====   =====   =====
</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.

                                      13
<PAGE>
 
    The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans for the periods indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. The allocation of the
allowance to each category is not necessarily indicative of further losses and
does not restrict the use of the allowance to absorb losses in any category
(dollars in  thousands):
<TABLE>
<CAPTION>
 
                                                        At September 30,
                            -------------------------------------------------------------------------
                                     1998                     1997                    1996
                            -----------------------  -----------------------  -----------------------
                                    % of Loans in            % of Loans in            % of Loans in
                                    Each Category            Each Category            Each Category
                            Amount  to Total Loans   Amount  to Total Loans   Amount  to Total Loans
                            ------  ---------------  ------  ---------------  ------  ---------------
<S>                         <C>     <C>              <C>     <C>              <C>     <C>
 
Real estate:
 Residential..............   $ 400       85.90%       $ 400        83.49%       $400        82.81%
 Commercial...............     100        2.90          162         4.88         125         3.50
 Consumer.................     277       11.20          266        11.63         174        13.69
Unallocated...............      50         N/A          100          N/A         100          N/A
                             -----      ------        -----       ------        ----       ------
Total allowance for loan                                                                 
  losses..................   $ 827      100.00%       $ 928       100.00%       $799       100.00%
                             =====      ======        =====       ======        ====       ======
</TABLE>

     The Corporation maintains an allowance for losses on real estate acquired
in settlement of loans when needed. At September 30, 1998, Union Financial had
an allowance for losses on real estate acquired in settlement of loans of
approximately $0.  These values reflect current market conditions and sales
experience.  See Notes 1 and 3 of Notes to Consolidated Financial Statements.

     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 discussed below.

     ASSET CLASSIFICATION.  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.

     As of September 30, 1998, the Corporation had approximately $1,446,000  of
loans classified as substandard assets, which included  real estate loans
totaling $1,195,000 and  consumer loans totaling $251,000.  The Corporation had
loans totaling approximately $182,000 classified as doubtful and approximately
$1,979,000 designated as special mention at September 30, 1998, which included
real estate loans totaling $1,491,000 and  consumer loans totaling 

                                      14
<PAGE>
 
$488,000. The Corporation carefully monitors its delinquent loans and real
estate owned account as to changes in collectibility and other characteristics
of asset and borrower quality.

INVESTMENT ACTIVITIES

     The Corporation 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 Corporation's
liquidity requirement at September 30, 1998 was $5.2 million.  At that date the
Corporation held approximately $19.1 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.

                                      15 
<PAGE>
 
     The following table sets forth the Corporation's investment and mortgage-
backed securities portfolio at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
 
                                                        Year Ended September 30,
                                 ---------------------------------------------------------------------
                                           1998                   1997                  1996
                                 -----------------------  ---------------------  ---------------------
                                  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......     $ 7,682       28.60%   $10,341       65.22%   $12,221       55.12%
   Municipal securities........         451        1.68        447        2.82      1,444        6.51
                                    -------      ------    -------      ------    -------      ------
  Total investment securities..       8,133       30.28     10,788       68.04     13,665       61.63
                                    -------      ------    -------      ------    -------      ------
 Mortgage-backed securities....      18,723       69.72      5,067       31.96      8,509       38.37
                                    -------      ------    -------      ------    -------      ------
 Total available for sale......     $26,856      100.00%   $15,855      100.00%   $22,174      100.00%
                                    =======      ======    =======      ======    =======      ======
                                    
HELD TO MATURITY:                   
 Investment securities:             
  U.S. Agency obligations......     $ 1,500       55.58    $ 5,995       76.75%   $ 5,473       47.09%
  Mortgage-backed securities...       1,199       44.42      1,816       23.25      6,149       52.91
                                    -------      ------    -------      ------    -------      ------
 Total held to maturity........     $ 2,699      100.00%   $ 7,811      100.00%   $11,622      100.00%
                                    =======      ======    =======      ======    =======      ======
</TABLE>

     The Corporation purchases mortgage-backed securities, both fixed-rate and
adjustable-rate, from FHLMC, FNMA and GNMA 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,
1998 was approximately $7,896,000 with a fair value of $7,958,000. 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 $2.1 million in structured notes as of September 30, 1998 with a
fair value of approximately $2.1 million as of that date.  See Note 2  of  Notes
to Consolidated Financial Statements for more information regarding investment
and mortgage-backed securities.

                                      16
<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, 1998 (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            Weighted            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..      $500       3.03%     $1,546     5.05%    $  220     6.21%   $ 5,416     7.50%   $ 7,682      6.68%
  Municipal Securities(a)..       250       5.30         131     5.93         --       --         70     8.32        451      5.95
                             --------  ---------   ---------  -------     ------     ----    -------     ----    -------      ----
 
 Total Investment
  Securities...............       750       3.79       1,677     5.12        220     6.21      5,486     7.51      8,133      6.64
 
 Mortgage-backed Securities       111       7.02         728     7.40        262     5.51     17,622     7.04     18,723      7.03
                             --------  ---------   ---------  -------     ------     ----    -------     ----    -------      ----
 
 Total Available for Sale..       861       4.20%      2,405     5.81        482     5.83     23,108     7.15     26,856      6.91
 
HELD TO MATURITY:
 
 Investment Securities
  U.S. Agency Obligations..        --         --          --       --      1,500     7.58%        --       --      1,500      7.58
 
  Mortgage-backed
   Securities..............        --         --          --       --         --       --      1,199     7.87      1,199      7.87
                             --------  ---------   ---------  -------     ------     ----    -------     ----    -------      ----
 
  Total Held to Maturity...      $ --         --%     $   --       --%    $1,500     7.58%   $ 1,199     7.87%   $ 2,699      7.71%
</TABLE>
--------------------------
(a) Yields are presented on a fully taxable equivalent basis.

                                      17
<PAGE>
 
     At September 30, 1998, approximately $1.4  million of debt securities and
$751,000 of mortgage-backed securities were adjustable-rate securities.

     At September 30, 1998, the Corporation held obligations of Union County,
South Carolina, in the amount of approximately $99,000 with a fair value of
approximately $102,000 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 1998, the Corporation experienced a net increases in deposits of
approximately $11.9 million.  The Corporation borrowed funds to support the
remaining  growth experienced in fiscal 1998.

     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.

     Savings deposits in the Corporation at September 30, 1998 were represented
by the various types of savings programs described below:
<TABLE>
<CAPTION>
 
                                     Weighted
                                      Average   Minimum             Percentage
                                     Interest   Balance              of Total
Deposits                               Rate     Required  Balances   Balances
-----------------------------------  ---------  --------  --------  -----------
                                                   (in thousands)
<S>                                  <C>        <C>       <C>       <C>
NOW accounts:
  Commercial non-interest-bearing..      0.00%    $   --   $ 7,119        5.48%
  Noncommercial....................      1.33        250    10,925        8.41%
Money market
  checking accounts................      3.40      1,000     6,832        5.26
Regular savings accounts...........      1.97        100    11,849        9.12
                                                           -------       -----
   Total demand and
     savings deposits..............      1.60               36,725       28.28%
                                         ----              -------       -----
 Certificates of deposit:
  91-day...........................      4.42        500       800         .86%
  6 months.........................      4.78        500    18,392       19.72
  9-12 months......................      5.50        500    22,768       24.42
  15-19 months.....................      5.70        500    19,833       21.27
  20-30 months.....................      5.73        500    12,460       13.36
  36-40 months.....................      5.72        500     2,277        2.44
</TABLE>
                      (table continued on following page)

                                      18
<PAGE>
 
<TABLE>
<CAPTION>
 
                         Weighted
                          Average   Minimum             Percentage
                         Interest   Balance              of Total
Deposits                   Rate     Required  Balances   Balances
-----------------------  ---------  --------  --------  -----------
                                       (in thousands)
<S>                      <C>        <C>       <C>       <C>
 
  48 months............      5.86%      $500       539         .55
  60 months............      6.38        500     3,839        4.25
IRAs...................      5.58        100    12,240       10.57
   Total certificates
     of deposits.......      5.51               93,148       71.72%
 
Total deposits.........      4.40             $129,873      100.00%

</TABLE>

     TIME DEPOSITS BY RATES AND MATURITY.  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,
                                                                    ---------------------------------
                                                                       1998        1997        1996
                                                                    ----------  -----------  --------
<S>                                                                 <C>         <C>          <C>
                                                                                   
Up to 4%..........................................................     $    37      $    22   $   125
4.01% to 6.0%.....................................................      89,155       77,401    61,794
6.01% to 8.0%.....................................................       3,956        5,342     7,139
                                                                       -------      -------   -------
                                                                                   
Total savings certificates                                             $93,148      $82,765   $69,058
                                                                       =======      =======   =======
 
The following table sets forth the maturities of time deposits at
 September 30, 1998 (in thousands):
 
                                                                              Amount
                                                                             -------
 
 Within three months..............................................           $27,611
 After three months but within six months.........................            29,953  
 After six months but within one year.............................            17,120
 After one year but within three years............................            14,508
 After three years but within five years..........................             3,956
 After five years but within ten years............................                --  
                                                                             -------
        Total.....................................................           $93,148
                                                                             =======
</TABLE>

     Certificates of deposit with maturities of less than one year increased
from $60.8 million at September 30, 1997 to $74.6 million at September 30, 1998.
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.

                                      19
<PAGE>
 
     The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1998 (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...........  $ 5,581
Over three through six months..    6,055
Over six through 12 months.....    3,461
Over 12 months.................    3,732
                                 -------
     Total jumbo certificates
      of deposit...............  $18,829
                                 =======
</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,
                                              ----------------------------
                                                1998      1997      1996
                                              --------  --------  --------
<S>                                           <C>       <C>       <C>
 
Balance outstanding at end of period:
  FHLB advances and other borrowings........  $41,441   $37,979   $20,488
 
Weighted average rate paid on:
  FHLB advances and other borrowings........     5.69%     6.00%     6.30%
 
<CAPTION>  
 
                                                Year Ended September 30,
                                              ---------------------------
                                                 1998      1997      1996
                                              -------   -------   -------
 
Maximum amount of borrowings
 outstanding at any month end:
  FHLB advances and other borrowings........  $41,441   $37,979   $20,488
 
Approximate average short-term borrowings
 outstanding with respect to:
  FHLB advances and other borrowings........   35,197    35,237     9,499
 
Approximate weighted average rate paid on:
  FHLB advances and other borrowings........     5.70%     5.62%     6.01%
</TABLE>

At  September 30, 1998, the Corporation had unused short-term lines of credit to
purchase federal funds from unrelated banks totaling $4 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, 1998, the Corporation had unused lines of
credit with the FHLB of Atlanta totaling $8 million.

                                      20
<PAGE>
 
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 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.

     As of September 30, 1998, a local commercial bank, one branch office of a
regional commercial bank and an office of a regional savings and loan
association 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.

     The State of South Carolina has a reciprocity law with twelve other states
and the District of Columbia that allows for interstate mergers between
financial institutions.  As of  June  30, 1997, federal law permits bank holding
companies from any state to acquire banks in South Carolina.  These statutes
have created, and are expected to continue to create, additional competition
from large, out of state, financial institutions.

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.

YEAR 2000 ISSUES

     The approach of the year 2000 ("Year 2000") presents significant issues for
many financial, information, and operational systems.  Many systems in use today
may not be able to interpret dates after December 31, 1999, appropriately,
because such systems allow only two digits to indicate the year in a date. The
Year 2000 problems may occur in computer programs, computer hardware, or
electronic devices that utilize computer chips to process any information that
contains dates.  Therefore, the issue is not limited to dates in computer
programs but is a complex combination of problems that may exist in computer
programs, data files, computer hardware, and other devices essential to the
operation of the business.  Further, companies must consider the potential
impact that Year 2000 may have on services provided by third parties.

        Substantially all of the Year 2000 risk is related to the Bank's
activities. The Bank has a formal Year 2000 Plan which includes a Year 2000 Task
Force. The Plan has been reviewed by the senior management and the Board of
Directors. Included in the Plan is a listing of all systems (whether in-house or
provided/supported by third parties) which may be impacted by Year 2000 and a
categorization of the systems by their potential impact on Bank operations. The
Task Force has received Year 2000 plans from third parties identified during
                                      21
<PAGE>
 
the assessment phase of the Year 2000 Plan. For systems that have been
classified as critical to the operations of the Bank, contingency plans have
been developed. Contingency plans may include utilization of alternate third
party vendors, alternate processing methods and software, or manual processing.
The plans have various activation dates (e.g., the date on which a third party
processor fails to meet its Year 2000 compliance deadline). In addition to
addressing its own Year 2000 issues, the Bank is in the process of assessing the
impact of the Year 2000 on significant commercial borrowers. The Bank's Year
2000 readiness is reviewed and monitored by the Office of Thrift Supervision
("OTS").

     The Bank core processing systems are outsourced through a contract with The
BISYS  Group, Inc. ("BISYS"). BISYS has developed a Year 2000 Plan and provides
the Bank with periodic updates.  BISYS also has held Year 2000 workshops, whose
objectives have been to assist the Bank in the development of its Year 2000
Plan, to provide updates on the BISYS Year 2000 plan, and training on the use of
the BISYS Year 2000 test facility, whose function is to allow BISYS clients to
test their systems' compatibility with the BISYS system.  BISYS completed all
program maintenance associated with Year 2000 prior to October 31, 1998, and
expects a full year of testing prior to January 1, 2000.  Like the Bank, BISYS
Year 2000 activities are subject to OTS oversight.

     The incremental cost associated with the Bank's compliance is expected to
be less than $25,000 to $50,000. The majority of all hardware upgrades began in
             -------------------                                               
1995 as a result of the Bank's plan to increase efficiencies and eliminate
obsolescence of some system components.  Should the Bank or any of its third
party service providers fail to complete Year 2000 measures in a timely manner,
it would likely have a material adverse effect, which amount cannot be
reasonably estimated at this time.
 
EMPLOYEES

     The Corporation had 65 full-time employees as of September 30, 1998.  None
of the employees are represented by a collective bargaining unit.  The
Corporation believes that relations with its employees are excellent.

                                   REGULATION

GENERAL

     The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended ("HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes.  These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements.  In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents.  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 financial institutions.  There are periodic
examinations by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements.  The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such policies, whether by
the OTS, the FDIC or Congress, could have a material adverse impact on the
Corporation, the Bank and their operations.  The Corporation, as a savings and
loan holding company, is also required to file certain 

                                      22
<PAGE>
 
reports with, and otherwise comply with the rules and regulations of, the OTS
and the Securities and Exchange Commission ("SEC").

FEDERAL REGULATION OF SAVINGS ASSOCIATIONS

     OFFICE OF THRIFT SUPERVISION.  The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board.  Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.

     FEDERAL HOME LOAN BANK SYSTEM.  The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB").  The
designated duties of the FHFB are to:  supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.  The Bank, as a member
of the FHLB-Atlanta, is required to acquire and hold shares of capital stock in
the FHLB-Atlanta in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or (ii) 1/20 of
its advances (borrowings) from the FHLB-Atlanta.  The Bank is in compliance with
this requirement with an investment in FHLB-Atlanta stock of $2.0 million at
September 30, 1998.  Among other benefits, the FHLB-Atlanta provides a central
credit facility primarily for member institutions.  It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Atlanta.

     FEDERAL DEPOSIT INSURANCE CORPORATION.  The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions.  The FDIC maintains two separate insurance funds: the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF").
As insurer of the Bank's deposits, the FDIC has examination, supervisory and
enforcement authority over the Bank.

     The Bank's deposit accounts are insured by the FDIC under the SAIF to the
maximum extent permitted by law.  The Bank pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions.  Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of an
institution's capital ("well capitalized," "adequately capitalized" or
"undercapitalized"), which are defined in the same manner as the regulations
establishing the prompt corrective action system under the Federal Deposit
Insurance Act as discussed below. The matrix so created results in nine
assessment risk classifications, with rates that until September 30, 1996 ranged
from 0.23% for well capitalized, financially sound institutions with only a few
minor weaknesses to 0.31% for undercapitalized institutions that pose a
substantial risk of loss to the SAIF unless effective corrective action is
taken.

     Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio.  In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995.  In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980's to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.

     The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date.  The DIF Act contemplates 

                                      23
<PAGE>
 
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.

     The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC.  It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital.  If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC.  Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.

     LIQUIDITY REQUIREMENTS.  Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings.   Monetary
penalties may be imposed for failure to meet liquidity requirements.

     PROMPT CORRECTIVE ACTION.  Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates.  The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.  Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized", (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0%
or a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.

     A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity.  The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.

     An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized.  Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.

     At September 30, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.

     STANDARDS FOR SAFETY AND SOUNDNESS.  The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and

                                      24
<PAGE>
 
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings, and (viii) compensation, fees and benefits.  The regulations 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 the Bank fails to meet any
standard prescribed by the regulations, the agency may require the Bank to
submit to the agency an acceptable plan to achieve compliance with the standard.
OTS regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.

     QUALIFIED THRIFT LENDER TEST.  All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations.  A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following restrictions
on its operations:  (i) the association may not make any new investment or
engage in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the statutory and regulatory dividend restrictions applicable to
national banks.  Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB.  In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies.  A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.

     Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code of 1986,
as amended ("Code") or that 65% of an institution's "portfolio assets" (as
defined) consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every 12 months.  Assets that qualify without limit
for inclusion as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities (where the
mortgages are secured by domestic residential housing or manufactured housing);
FHLB stock; direct or indirect obligations of the FDIC; and loans for
educational purposes, loans to small businesses and loans made through credit
cards.  In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings institution's
portfolio assets:  50% of residential mortgage loans originated and sold within
90 days of origination; 100% of consumer loans; and stock issued by Federal Home
Loan Mortgage Corporation or FNMA.  Portfolio assets consist of total assets
minus the sum of (i) goodwill and other intangible assets, (ii) property used by
the savings institution to conduct its business, and (iii) liquid assets up to
20% of the institution's total assets.  At September 30, 1998, the Bank was in
compliance with the QTL test.

     CAPITAL REQUIREMENTS.  Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital.  Savings associations must meet all of the standards in
order to comply with the capital requirements.  The Corporation is not subject
to any minimum capital requirements.

     OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets).  Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities.  In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries.  An institution
that fails to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance.  In addition, the OTS's prompt corrective action regulation provides

                                      25
<PAGE>
 
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.  See " Prompt
Corrective Action."

     Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.

     Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined.  Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.

     The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets.  Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets.  The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due.  Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight.  Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio.  The book value of assets in each category is
multiplied by the weighting factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets.  Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule.  These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule.  Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements.  A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
                               ----                                     
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS.  A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule.  The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets.  That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data.  A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise.  The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis.  Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure.  In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount.  The OTS has postponed the date that the component
will first be deducted from an institution's total capital.

                                      26
<PAGE>
 
     LIMITATIONS ON CAPITAL DISTRIBUTIONS.  OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers.  In addition, OTS regulations require the Bank to give the OTS 30 days
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.

     A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
                           ----                                              
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association.  Capital distributions in excess of such
amount require advance notice to the OTS.  A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution).  Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement.  Capital distributions exceeding this amount
require prior OTS approval.  A Tier 3 savings association has capital below the
minimum capital requirement (either before or after the proposed capital
distribution).  A Tier 3 savings association may not make any capital
distributions without prior approval from the OTS.

     The Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.

     LOANS TO ONE BORROWER.  Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower.  Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion.  The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.  At September 30, 1998, the Bank's limit on loans to one borrower
was $1.9 million.  At September 30, 1998, the Bank's largest aggregate amount of
loans to one borrower was $1.4 million.

     ACTIVITIES OF SAVINGS ASSOCIATIONS AND THEIR SUBSIDIARIES.  When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require.  Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.

     The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary.  The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF.  If so, it may require that no SAIF member engage in
that activity directly.

     TRANSACTIONS WITH AFFILIATES.  Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank.   A savings and loan holding
company, its subsidiaries and any other 

                                      27
<PAGE>
 
company under common control are considered affiliates of the subsidiary savings
association under the HOLA. Generally, Sections 23A and 23B: (I) limit the
extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, the purchase of assets, the issuance of a guarantee and similar types
of transactions. Any loan or extension of credit by the Bank to an affiliate
must be secured by collateral in accordance with Section 23A.

     Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B.  Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks.  The Bank has not been significantly affected by the rules
regarding transactions with affiliates.

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is governed by
Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O
thereunder.  Among other things, these regulations generally require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Generally, Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and requires certain board approval procedures to be followed.
The OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.

     COMMUNITY REINVESTMENT ACT.  Under the federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community.  The CRA does not establish specific lending requirements
or programs nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to meet all the credit
needs of its delineated community.  The CRA requires the federal banking
agencies, in connection with regulatory examinations, to assess an institution's
record of meeting the credit needs of its delineated community and to take such
record into account in evaluating regulatory applications to establish a new
branch office that will accept deposits, relocate an existing office, or merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution, among others.

SAVINGS AND LOAN HOLDING COMPANY REGULATIONS

     HOLDING COMPANY ACQUISITIONS.  The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof.  They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.

     HOLDING COMPANY ACTIVITIES.  As a unitary savings and loan holding company,
the Corporation generally is not subject to activity restrictions under the
HOLA.  If the Corporation acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company.  There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company.  The HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding 

                                      28
<PAGE>
 
company or subsidiary thereof, any business activity other than: (i) furnishing
or performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple bank holding companies or (vii) those activities authorized by
the Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple savings and loan
holding company.

     QUALIFIED THRIFT LENDER TEST.  The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations --Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.

                                    TAXATION

FEDERAL TAXATION

     GENERAL.  Union Financial and the Bank report their income on a fiscal year
basis using 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 the
Bank or Union Financial.

     TAX BAD DEBT RESERVES.  Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income.  The Bank's deduction with respect
to "qualifying loans," which are generally loans secured by certain interests in
real property, may have been computed using an amount based on the Bank's actual
loss experience, or a percentage equal to 8% of the Bank's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve.  The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve.

     The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996."  The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995.  These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988).  The Bank has previously recorded a deferred
tax liability equal to the bad debt recapture and as such the new rules will
have no effect on the net income or federal income tax expense.  For taxable
years beginning after December 31, 1995, the Bank's bad debt deduction has been
determined under the experience method using a formula based on actual bad debt
experience over a period of years.  The new rules allow an institution to
suspend bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996, adjusted for inflation.  For this purpose, only home purchase or
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation.  If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year.  The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking.  In addition, the
balance of the pre-1988 bad debt reserves continue to 

                                      29
<PAGE>
 
be subject to provisions of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.

     DISTRIBUTIONS.  To the extent that the Bank makes "nondividend
distributions" to Union Financial that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income.  Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation.  However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve.  Thus, any dividends to Union Financial that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank.  The amount of additional
taxable income attributable to an Excess Distribution 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 "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state  taxes).  See "REGULATION" for limits on the
payment of dividends by the Bank.  The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.

     CORPORATE ALTERNATIVE MINIMUM TAX.  The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%.  The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI.  In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses).  For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid.

     DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS.  Union Financial may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations.  The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which Union Financial and the Bank will not file a
consolidated tax return, except that if Union Financial or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.

     OTHER FEDERAL TAX MATTERS.  Other recent changes in the federal tax system
could also affect the business of the Bank.  These changes include limitations
on the deduction of personal interest paid or accrued by individual taxpayers,
limitations on the deductibility of losses attributable to investment in certain
passive activities and limitations on the deductibility of contributions to
individual retirement accounts.  The Bank does not believe these changes will
have a material effect on its operations.

     There have not been any IRS audits of Union Financial's or the Bank's
federal income tax returns during the past five years.

                                      30
<PAGE>
 
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 percent.  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.  The Corporation also owns a
banking center which opened in April 1989, located at 508 North Duncan By-Pass,
Union, South Carolina and a branch office, acquired in 1997, in Laurens, South
Carolina.  The Corporation purchased property in Jonesville, South Carolina and
opened a temporary office in July 1994.  The net book value of the Corporation's
investment in premises and equipment totaled approximately $4 million at
September 30, 1998.  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, 1998.


                                    PART II

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

     The information contained under the section captioned "Common Stock 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.

                                      31
<PAGE>
 
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 disagreement 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
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(a)  September 30, 1998
----                ------  ------------------
<S>                 <C>     <C>
 
Dwight V. Neese      48     President, Chief Executive Officer and Director
Richard H. Flake     50     Executive Vice President - Chief Financial Officer
Gerald L. Bolin      36     Vice President - Chief Operating Officer
Wanda J. Wells       42     Vice President - Corporate Secretary
</TABLE>
--------------------
(a)  At September 30, 1998.

     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.

     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.

                                      32
<PAGE>
 
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 "Securities Ownership of Certain Beneficial
         Owners and Management" in the Proxy Statement.

     (b) Security Ownership of Management

         Information required by this item is incorporated herein by reference
         to the sections captioned "Proposal I -- Election of Directors" and
         "Securities Ownership of Certain Beneficial Owners and Management" 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.


                                    PART IV

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

      (a)  Exhibits
           3(a)  Certificate of Incorporation(1)
           3(b)  Bylaws(1)
           3(c)  Certificate of Amendment of Certificate of Incorporation dated
                 January 22, 1997(2)
           10(a) Employment Agreement with Dwight V. Neese(3)
           10(b) Union Federal Savings and Loan Association 1987 Stock
                 Option Plan(3)
           10(c) Union Financial Bancshares, Inc. 1995 Stock Option Plan(4)
           13    1998 Annual Report to Stockholders
           21    Subsidiaries of the Registrant
           23    Consent of Independent Auditor
           27    Financial Data Schedule

      (b)  No reports on Form 8-K have been filed during the last quarter of the
           fiscal year covered by this report.

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

                                      33
<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 28, 1998          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.



By:   /s/ Dwight V. Neese           By:   
      ---------------------------         ----------------------------------- 
      Dwight V. Neese                     James W. Edwards
      Principal Executive Officer         Director

Date: December 28, 1998             Date: December __, 1998



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

Date: December 28, 1998             Date: December __, 1998



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

Date: December 28, 1998             Date: December __, 1998



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

Date: December 28, 1998             Date: December __, 1998