UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           ---------------------------

                                    FORM 10-K

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

                     For the fiscal year ended June 30, 1999

                                       OR

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

                         Commission File Number: 0-22445

                          FIRSTSPARTAN FINANCIAL CORP.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


        Delaware                                               56-2015272
-------------------------------                             ------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)


380 E. Main Street, Spartanburg, South Carolina                     29302
-----------------------------------------------                  ----------
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code:            (864) 582-2391
                                                               --------------

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 $0.01 per share

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]

         Indicate by check mark whether disclosure of delinquent filers pursuant
to  Item  405 of  Regulation  S-K is  not  contained  herein,  and  will  not 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-K or any amendments to this Form 10- K. [ X ]

         As of August 31,  1999,  there were  issued and  outstanding  3,787,970
shares of the registrant's Common Stock, which are listed on the Nasdaq National
Market System under the symbol "FSPT." Based on the average of the bid and asked
prices  for the Common  Stock on August 31,  1999,  the  aggregate  value of the
Common Stock outstanding held by nonaffiliates of the registrant was $64,384,075
(2,968,376  shares at $21.69  per  share).  For  purposes  of this  calculation,
officers and  directors of the  registrant  and the First  Federal Bank Employee
Stock Ownership Plan are excluded.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

            1.  Portions of Annual  Report to  Stockholders  for the Fiscal Year
Ended June 30, 1999 ("Annual Report") (Parts I and II).

            2.  Portions  of  Definitive  Proxy  Statement  for the 1999  Annual
Meeting of Stockholders (Part III).


<PAGE>
                                     PART I

              This  report   contains   certain   "forward-looking   statements"
concerning the future operations of FirstSpartan Financial Corp. Forward-looking
statements  are  used  to  describe  future  plans  and  strategies,   including
expectations  of future  financial  results.  Management's  ability  to  predict
results or the effect of future plans or  strategies  is  inherently  uncertain.
Factors  which could affect actual  results  include  interest rate trends,  the
general  economic  climate in the market  area in which  FirstSpartan  Financial
Corp. operates, as well as nationwide, FirstSpartan Financial Corp.'s ability to
control costs and expenses,  competitive products and pricing,  loan delinquency
rates,  changes in federal and state legislation and regulation,  and the impact
of Year 2000 issues.  These  factors  should be  considered  in  evaluating  the
forward-looking  statements  and  undue  reliance  should  not be placed on such
statements.

Item 1.     Description of Business
-------     -----------------------

General

               FirstSpartan    Financial    Corp.    ("FirstSpartan"    or   the
"Corporation"), a Delaware corporation, was incorporated on February 4, 1997 for
the purpose of becoming the holding  company for First Federal  Savings and Loan
Association of Spartanburg (the "Association")  (collectively referred to as the
"Company") upon the Association's  conversion from a federally  chartered mutual
savings and loan  association  to a federally  chartered  stock savings and loan
association  (the  "Conversion").  The  Conversion was completed on July 8, 1997
through  the sale and  issuance  of  4,430,375  shares  of  common  stock by the
Corporation.  In January 1998, the Association changed its name to First Federal
Bank ("First  Federal" or the "Bank").  At June 30, 1999,  the Company had total
assets  of  $545.7   million,   total  deposits  of  $406.0  million  and  total
stockholders'  equity  of  $66.0  million.  FirstSpartan's  business  activities
generally  are limited to passive  investment  activities  and  oversight of its
investment  in First  Federal.  Therefore,  substantially  all of the  Company's
operations are conducted through the Bank.

               All of the Bank's  operations are located in South Carolina.  The
Bank  conducts its business  from its main office and ten branch  offices.  Nine
offices are  located in  Spartanburg  County and two are  located in  Greenville
County.  The  deposits  of the Bank are insured up to  applicable  limits by the
Savings  Association  Insurance Fund ("SAIF") of the Federal  Deposit  Insurance
Corporation ("FDIC").

               The Bank is a  community  oriented  financial  institution  whose
business  historically  has been  focused on the  origination  and  servicing of
residential   mortgage  loans  and  attracting   retail  deposits   (principally
certificates of deposit and savings accounts) from the general public. In recent
years,  the Bank has  diversified  its  products  and now offers a full range of
consumer and commercial products and services.

Market Area

               The Bank considers  Spartanburg  County and adjacent  counties in
northwest South Carolina to be its primary market area. The City of Spartanburg,
the county seat of Spartanburg County, is located on Interstate 85 approximately
75 miles  southwest of  Charlotte,  North  Carolina,  and 35 miles  northeast of
Greenville, South Carolina.
<PAGE>

               Spartanburg  County  and  the  City  of  Spartanburg  had a  1995
population of approximately 240,000 and 42,000,  respectively,  according to the
Spartanburg Area Chamber of Commerce.  The Spartanburg County economy is diverse
and generally stable. According to the Spartanburg Area Chamber of Commerce, the
Spartanburg  County  unemployment rate was 4.3% for June 1999.  According to the
Spartanburg  Area  Chamber  of  Commerce,  major  employers  include  Milliken &
Company, Michelin Tire Corp., Spartan Mills, Hoechst Celanese Corp., Spartanburg
Regional Medical Center and BMW Manufacturing Co.

                                        1
<PAGE>
Competition

            The Bank faces intense  competition  in its primary  market area for
the attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans.  Its most direct  competition for savings deposits has
historically come from commercial banks, credit unions,  other thrifts operating
in its market area, and other financial institutions such as brokerage firms and
insurance  companies.  As of June 30, 1999,  there were numerous  large regional
state-wide and community banks as well as other thrifts operating in its primary
market area.  Particularly in times of high interest  rates,  the Bank has faced
additional  significant  competition for investors'  funds from short-term money
market  securities  and other  corporate and government  securities.  The Bank's
competition for loans comes from commercial banks, thrift  institutions,  credit
unions and mortgage  bankers.  Such competition for deposits and the origination
of loans may limit the Bank's growth in the future.

Lending Activities

               General.  At June 30,  1999,  the Bank's  total loans  receivable
portfolio  amounted to $473.4 million,  or 87% of total assets at that date. The
Bank traditionally has concentrated its lending activities on conventional first
mortgage  loans  secured  by one- to  four-family  properties,  with such  loans
amounting to $290.2 million, or 61.3% of the total loans receivable portfolio at
June 30, 1999. In addition, the Bank originates  construction loans,  commercial
real  estate  loans,  land  development  loans,  consumer  loans and  commercial
business loans. A substantial portion of the Bank's loan portfolio is secured by
real estate, either as primary or secondary  collateral,  located in its primary
market area.


                                        2

<PAGE>
               Loan  Portfolio  Analysis.  The  following  table  sets forth the
composition of the Bank's loan portfolio  (excluding loans held-for-sale) at the
dates  indicated.  The Bank had no concentration of loans exceeding 10% of total
gross loans other than as disclosed below (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                June 30,
                                             -------------------------------------------------------------------------------------
                                                    1999                          1998                               1997
                                             -------------------          ---------------------             ----------------------
                                             Amount      Percent          Amount        Percent             Amount         Percent
                                             ------      -------          ------        -------             ------         -------
<S>                                         <C>            <C>          <C>               <C>             <C>                <C>
Mortgage loans:
               One- to four-family          $290,219       61.3%        $312,981          70.9%           $285,969           75.1%
               Construction                   72,373       15.3           41,089           9.3              35,061            9.2
               Land development               18,864        4.0           16,729           3.8              12,376            3.2
               Commercial and other           23,587        5.0           13,817           3.1               3,773            1.0
                                            --------      -----         --------         -----            --------          -----
                    Total mortgage loans     405,043       85.6          384,616          87.1             337,179           88.5
                                            --------      -----         --------         -----            --------          -----

Consumer and other loans
               Home equity                    43,623        9.2           40,746           9.2              35,366            9.3
               Commercial                     13,885        2.9            6,987           1.6               1,984            0.5
               Other                          10,894        2.3            9,058           2.1               6,301            1.7
                                            --------      -----         --------         -----            --------          -----
                       Total consumer and
                           other loans        68,402       14.4           56,791          12.9              43,651           11.5
                                            --------      -----         --------         -----            --------          -----

Total loans receivable                       473,445      100.0%       441,407           100.0%            380,830          100.0%
                                                          =====                          =====                              =====
Less:
               Undisbursed portion of
                      loans in process        34,807                      21,923                            15,311
               Net deferred loan fees            561                         843                               995
               Allowance for loan losses       2,896                       2,179                             1,796
                                            --------                    --------                          --------
Loans receivable, net                       $435,181                    $416,462                          $362,728
                                            ========                    ========                          ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                    1996                       1995
                                           ----------------------     ----------------------
                                           Amount         Percent     Amount         Percent
                                           ------         -------     ------         -------
<S>                                         <C>             <C>         <C>               <C>
Mortgage loans:
               One- to four-family          $257,398        77.3%       $219,522          77.9%
               Construction                   32,393         9.8          32,145          11.4
               Land development                5,683         1.8           1,670           0.6
               Commercial and other            3,262         1.0           3,372           1.2
                                            --------       -----        --------         -----
                    Total mortgage loans     299,276        89.9         256,739          91.1
                                            --------       -----        --------         -----
Consumer and other loans
               Home equity                    26,584         8.0          19,282           6.8
               Commercial                        433         0.1             513           0.2
               Other                           6,510         2.0           5,302           1.9
                                            --------       -----        --------         -----
                       Total consumer and
                           other loans        33,527        10.1          25,097           8.9
                                            --------       -----        --------         -----

Total loans receivable                       332,803       100.0%        281,836         100.0%
                                                           =====                         =====
Less:
               Undisbursed portion of
                      loans in process        15,839                      12,761
               Net deferred loan fees          1,028                       1,082
               Allowance for loan losses       1,000                         600
                                            --------                    --------
Loans receivable, net                       $314,936                    $267,393
                                            ========                    ========
</TABLE>

                                        3

<PAGE>
               One- to Four-Family Real Estate Lending. At June 30, 1999, $290.2
million,  or 61.3% of the Bank's  total  loan  portfolio,  consisted  of one- to
four-family mortgage loans. The Bank originated $88.5 million, $95.8 million and
$50.9 million of one- to four-family  mortgage loans during the years ended June
30, 1999, 1998 and 1997, respectively.

               The  Bank  participates  in the  Federal  Housing  Administration
("FHA")  Direct   Endorsement   Program,   which  allows  the  Bank's  in-house,
FHA-approved,  direct endorsement  underwriters to approve or reject FHA insured
one- to four-family mortgage loans up to maximum amounts established by the FHA.
The Bank is also a Veterans'  Administration ("VA") "automatic approved lender,"
which enables designated Bank personnel to approve or reject VA-insured, one- to
four-family  mortgage loans on behalf of the Bank. The Bank generally  sells all
FHA and VA loan originations, servicing released.

               Generally,  the Bank's  fixed-rate  one- to four-family  mortgage
loans have maturities  ranging from 10 to 30 years and are fully amortizing with
monthly payments  sufficient to repay the total amount of the loan with interest
by the end of the  loan  term.  Generally,  they  are  originated  under  terms,
conditions  and  documentation  which permit them to be sold to U.S.  Government
sponsored  agencies such as Fannie Mae. The Bank's  fixed-rate loans customarily
include "due on sale"  clauses,  which give the Bank the right to declare a loan
immediately  due and  payable  in the  event  the  borrower  sells or  otherwise
disposes of the real property subject to the mortgage and the loan is not paid.

               The Bank offers  adjustable-rate  mortgage ("ARM") loans at rates
and terms competitive with market conditions.  At June 30, 1999, $108.8 million,
or 37% of total one- to  four-family  mortgage  loans,  were subject to periodic
interest rate adjustments. Substantially all of the Bank's ARM loan originations
meet the  underwriting  standards of Fannie Mae even though the Bank  originates
ARM loans primarily for its own portfolio. The Bank originates for its portfolio
ARM loans which  provide for an interest rate that adjusts every year or that is
fixed  for five or ten years  and then  adjusts  every  year  after the  initial
period.  Most of the Bank's  one-year and ten-year  ARMs adjust every year after
the initial period based on the one-year  Treasury constant maturity index while
the interest  rate  adjustment  for its  five-year  ARMs after the initial fixed
period is based on the ten-year U.S.  Treasury  securities rate. The Bank's ARMs
typically are based on a 30-year amortization  schedule.  The Bank qualifies the
borrowers  on its ARM loans based on the initial  rate.  The  one-year  ARM loan
generally  may  be  converted  to  a  fixed-rate   loan  within  five  years  of
origination.  The ten-year  ARM  provides a conversion  option after seven years
have  elapsed.  The  Bank's  current  ARM  loans  do not  provide  for  negative
amortization.  At June 30, 1999, however, 16 loans aggregating  $604,000 provide
for negative  amortization at the borrowers' option. These loans were originated
more than ten years ago. The Bank's ARM loans  generally  provide for annual and
lifetime interest rate adjustment limits of 1% to 2% and 4% to 6%, respectively.

               Borrower demand for ARM loans versus fixed-rate mortgage loans is
a function of the level of interest  rates,  the  expectations of changes in the
level of interest  rates and the difference  between the initial  interest rates
and fees  charged  for each type of loan.  The  relative  amount  of  fixed-rate
mortgage  loans  and ARM loans  that can be  originated  at any time is  largely
determined by the demand for each in a competitive environment.
<PAGE>
               The  retention  of ARM loans in the Bank's loan  portfolio  helps
reduce the Bank's  exposure to changes in interest  rates.  There are,  however,
unquantifiable  credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer.  It is possible  during  periods of
rising  interest  rates that the risk of default on ARM loans may  increase as a
result of repricing and the  increased  payments  required by the  borrower.  In
addition,  although ARM loans allow the Bank to increase the  sensitivity of its
asset  base to  changes  in the  interest  rates,  the  extent of this  interest
sensitivity  is  limited by the annual and  lifetime  interest  rate  adjustment
limits.  Because of these considerations,  the Bank has no assurance that yields
on ARM loans will be sufficient to offset increases in the Bank's cost of funds.
The Bank believes these risks,  which have not had a material  adverse effect on
the Bank to date,  generally  are less than the risks  associated  with  holding
fixed-rate loans in portfolio during a rising interest rate environment.

                                        4
<PAGE>
               The Bank generally  requires title insurance  insuring the status
of its lien or an acceptable  attorney's  opinion on all loans where real estate
is the primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate,  flood  insurance) be maintained in an amount at
least equal to the outstanding loan balance.

               The Bank's one- to four-family  mortgage  loans  typically do not
exceed  80%  of the  appraised  value  of the  security  property.  Pursuant  to
underwriting  guidelines adopted by the Bank's Board of Directors,  the Bank can
lend  up to 95% of the  appraised  value  of the  property  securing  a one-  to
four-family  mortgage loan provided that the borrower purchases private mortgage
insurance for the benefit of the Bank. The private mortgage insurance  purchased
generally  provides  coverage of the principal amount that exceeds 65% to 70% of
the appraised value of the security property.  At June 30, 1999, the Bank had 12
one- to four-family  mortgage loans totaling $404,000 with principal balances in
excess of 80% of the appraised  value of the real estate  collateral and with no
private mortgage insurance.  These loans are part of the Spartanburg Residential
Development Program, an affordable housing program.

               Construction    Lending.   The   Bank   originates    residential
construction  loans  to  local  home  builders,   generally  with  whom  it  has
established  lending  relationships.  The Bank  also  originates  such  loans to
individuals  who have a contract  with a builder for the  construction  of their
residence.  In addition, the Bank purchases construction loans from the mortgage
banking company in which the Bank's service  corporation owns a one-third equity
interest,  and from unaffiliated  correspondent  mortgage banking relationships.
Construction  loans  purchased  from  third  parties  are  underwritten  by Bank
personnel in accordance with lending policies and are approved by Bank personnel
prior to purchase.  At June 30, 1999, total approved construction loans amounted
to $72.4 million ($42.6 million not directly  originated by the Bank), or 15% of
the Bank's  total  loan  portfolio.  Outstanding  balances  under such  approved
construction loans were $43.5 million ($24.2 million not directly  originated by
the Bank) at June 30, 1999.

               The Bank's construction loans generally are for a term of nine to
12 months. Construction loans to builders typically are made with a maximum loan
to value ratio of 80%.  Construction loans to individuals  typically are made in
connection  with the granting of the permanent  financing on the property.  Such
loans convert to a fully amortizing adjustable- or fixed-rate loan at the end of
the construction term. The Bank typically requires that permanent financing with
the Bank or some other lender be in place prior to closing any construction loan
to an individual.

               The Bank's  construction  loans to builders  are made on either a
pre-sold or speculative  (unsold) basis.  However, the Bank generally limits the
number of  outstanding  loans on unsold homes under  construction  to individual
builders,  with the amount  dependent on the financial  strength of the builder,
the present  exposure of the  builder,  the  location of the  property and prior
sales of homes in the development.  At June 30, 1999,  speculative  construction
loans  amounted  to $53.4  million.  At June 30,  1999,  the  largest  amount of
construction loans outstanding to one builder was $2.6 million, all of which was
for speculative construction.
<PAGE>
               Prior to making a commitment  to fund a  construction  loan,  the
Bank requires an appraisal of the property by an independent  state-licensed and
qualified  appraiser  approved by the Board of Directors.  The Bank's staff also
reviews and inspects each project prior to disbursement of funds during the term
of the  construction  loan. Loan proceeds are disbursed after  inspection of the
project based on a percentage of completion.  With respect to construction loans
originated   since  September  1996,  the  Bank  has  enforced  the  contractual
requirement that monthly interest payments be made during the construction term.
With respect to loans originated prior to that time,  monthly payment of accrued
interest was not required and all accrued interest was collected at maturity. In
periods prior to discontinuance of this practice, this contributed,  in part, to
the high level of accruing  construction loans contractually past due 90 days or
more. See "-- Nonperforming Assets and Delinquencies."


                                        5
<PAGE>
               Construction loans purchased from mortgage bankers are subject to
approval by the Bank.  Appraisal policies of the mortgage bankers are similar to
the Bank's policies.  The mortgage bankers  generally use outside  appraisers to
conduct inspections prior to disbursement of funds.

                Construction  lending affords the Bank the opportunity to charge
higher interest rates with shorter terms to maturity  relative to  single-family
mortgage  lending.  Construction  lending,  however,  generally is considered to
involve a higher degree of risk than  single-family  mortgage lending because of
the inherent  difficulty in estimating both a property's  value at completion of
the project and the estimated cost of the project.  The nature of these loans is
such that they  generally  are more  difficult to evaluate  and monitor.  If the
estimate of construction cost proves to be inaccurate,  the Bank may be required
to advance funds beyond the amount originally  committed to permit completion of
the project.  If the estimate of value upon completion  proves to be inaccurate,
the Bank may be confronted  with a project the value of which is insufficient to
assure full repayment. Projects also may be jeopardized by disagreements between
borrowers  and  builders  and by the failure of builders to pay  subcontractors.
Loans to builders to construct  homes for which no purchaser has been identified
carry more risk because the payoff for the loan is  dependent  on the  builder's
ability to sell the  property  prior to the time that the  construction  loan is
due. Construction loans purchased from mortgage bankers involve additional risks
due to third parties' involvement in inspection and monitoring the loans and due
to some of the loans being outside the Bank's primary market area.

               The Bank has attempted to minimize the foregoing  risks by, among
other  things,  limiting  its  construction  lending  primarily  to  residential
properties.  It is also the Bank's general policy to obtain personal  guarantees
from the  principals  of its  corporate  borrowers.  In the case of  speculative
construction  loans,  the Bank has begun  limiting the number of unsold homes to
larger  borrowers  and, on loans  originated  since  September  1996,  enforcing
contractual  clauses  requiring the payment of interest  monthly (rather than at
the earlier of loan maturity or sale of home) and assessing  monetary  penalties
on delinquent  balances.  The monthly interest payment  requirement  provides an
earlier indication of potential delinquency.  The Bank also attempts to minimize
the risk of construction  loans purchased from mortgage bankers by approving all
loans and selectively inspecting properties.  The Bank directly originated $21.0
million and  purchased  $43.1  million of  speculative  construction  loans from
mortgage bankers during the year ended June 30, 1999,  compared to $17.8 million
and $5.7 million, respectively, during the year ended June 30, 1998.

               Commercial  Real Estate  Lending.  The Bank  originates  mortgage
loans for the acquisition and refinancing of commercial real estate  properties.
At June 30, 1999,  $23.6  million,  or 5.0% of the Bank's total loan  portfolio,
consisted of loans secured by commercial real estate properties. The majority of
the Bank's commercial real estate loans are secured by office buildings,  retail
shops and manufacturing facilities located in the Bank's primary market area.

               The  Bank  requires   appraisals  of  all   properties   securing
commercial real estate loans. Appraisals are performed by independent appraisers
designated by the Bank, all of which are reviewed by management. In underwriting
commercial  loans, the Bank categorizes loans as either real estate dependent or
owner-occupied  properties.  Real estate  dependent  loans are dependent on cash
flow generated from the operation of the security  property for loan  repayment.
<PAGE>
Therefore,  a property's cash flow is given the highest weight in  underwriting.
Also considered are the property's appraised value and the financial strength of
the  borrower.  On  owner-occupied  properties,  the  underwriter  considers the
business as a going  concern  and places the most  emphasis on the cash flows of
the business as a whole. As with real estate  dependent  loans, the value of the
collateral  and  the  overall   credit-worthiness   of  the  borrower  are  also
considered.

               Loan to value ratios on the Bank's  commercial  real estate loans
generally  are  limited  to  75%.  As  part  of the  criteria  for  underwriting
commercial real estate loans,  the Bank generally  imposes a debt coverage ratio
(the ratio of net cash from  operations  before  payment of debt service to debt
service) of not less than 1.2. It is also the Bank's  policy to obtain  personal
guarantees from the principals of its corporate borrowers on its commercial real
estate loans.

                                        6
<PAGE>
               Commercial real estate lending affords the Bank an opportunity to
receive  interest at rates higher than those  generally  available  from one- to
four-family mortgage lending.  However, loans secured by such properties usually
are greater in amount,  more  difficult to evaluate and monitor and,  therefore,
involve a  greater  degree of risk  than  one- to  four-family  mortgage  loans.
Because payments on loans secured by multi-family and commercial  properties are
often  dependent on the successful  operation and management of the  properties,
repayment of such loans may be affected by adverse conditions in the real estate
market or the  economy.  The Bank seeks to minimize  these risks by limiting the
maximum  loan-to-value  ratio to 75% and  strictly  scrutinizing  the  financial
condition of the borrower,  the quality of the  collateral and the management of
the property  securing the loan.  The Bank also  obtains  loan  guarantees  from
financially capable parties based on a review of personal financial statements.

               Land  Development  Lending.  The Bank originates land development
loans to  local  developers  for the  purpose  of  developing  the  land  (i.e.,
installing roads, sewers, water and other utilities) for sale. At June 30, 1999,
land  development  loans amounted to $18.9 million,  or 4.0% of the Bank's total
loan portfolio.  Land  development  loans are secured by a lien on the property,
generally are limited to 75% of the developed value of the secured  property and
are made for a period of three years with an interest rate that adjusts with the
prime  lending rate as published in The Wall Street  Journal.  The Bank requires
monthly  interest  payments  during  the  term  of the  loan.  The  Bank's  land
development  loans  are  structured  so that the Bank is repaid in full upon the
sale by the borrower of  approximately  75% of the  available  lots.  All of the
Bank's land  development  loans are  secured by property  located in its primary
market  area.  In  addition,  the  Bank  obtains  personal  guarantees  from the
principals  of its  corporate  borrowers.  At June  30,  1999,  the  Bank had no
nonaccruing land development loans.

               Loans  secured  by  undeveloped  land or  improved  lots  involve
greater  risks than one- to  four-family  mortgage  loans because such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate, in
the event of default and  foreclosure the Bank may be confronted with a property
the value of which is insufficient  to assure full repayment.  The Bank attempts
to minimize this risk by generally limiting the maximum  loan-to-value  ratio on
land development loans to 75%.

               Consumer and Commercial  Loans.  The Bank originates a variety of
consumer  loans,  the majority of which are on a secured  basis.  Consumer loans
include second  mortgage  loans,  home equity lines of credit,  savings  account
loans,  automobile  loans,  boat  loans,  loans  secured  by  marketable  equity
securities,  VISA credit card loans and unsecured loans. Consumer loans are made
with both fixed and variable  interest rates and with varying terms. At June 30,
1999,  consumer  loans  amounted  to $68.4  million,  or 14.4% of the total loan
portfolio.

               At June 30, 1999,  the largest  component  of the  consumer  loan
portfolio  consisted of second  mortgage  loans and home equity lines of credit,
which totaled $43.6 million,  or 9.2% of the total loan  portfolio.  At June 30,
1999,  unused  commitments  to extend  credit  under home equity lines of credit
totaled $40.9 million. Home equity lines of credit and second mortgage loans are
made for  purposes  such as the  improvement  of  residential  properties,  debt
consolidation and education expenses,  among others. The majority of these loans
are made to existing  customers and are secured by a first or second mortgage on
<PAGE>

residential  property.  The Bank actively solicits these loans by contacting its
customers  directly.  The  loan-to-value  ratio is typically  90% or less,  when
taking into account both the first and second  mortgage  loans.  Second mortgage
loans  typically  carry fixed  interest  rates with a fixed  payment over a term
between five and 15 years. Home equity lines of credit generally are for 15-year
terms and the  interest  rate is tied to the prime  lending rate as published in
The Wall Street Journal.

               At June 30, 1999,  automobile loans amounted to $4.8 million. The
Bank  originates  automobile  loans for both new and used  automobiles for terms
generally  not  exceeding  60  months.  The Bank  does not  engage  in  indirect
automobile lending.


                                        7

<PAGE>
               Since  June  1995,  the  Bank has  issued  VISA  credit  cards to
customers  within its primary  market area.  At June 30, 1999,  there were 1,496
credit card accounts with  aggregate  outstanding  balances of $1.4 million.  At
June 30, 1999,  total approved lines of credit were $5.8 million.  The Bank does
not engage in direct mailings of pre-approved credit cards.

               The Bank  views  consumer  lending  as an  important  part of its
business  because consumer loans generally have shorter terms and higher yields,
thus  reducing  exposure to changes in interest  rates.  In  addition,  the Bank
believes that offering  consumer loans helps to expand and create  stronger ties
to its customer base. Subject to market conditions, the Bank intends to continue
emphasizing  consumer  lending,  particularly  home  equity  lines of credit and
automobile loans.

               The Bank  employs  strict  underwriting  procedures  for consumer
loans.  These procedures include an assessment of the applicant's credit history
and the ability to meet  existing and proposed  debt  obligations.  Although the
applicant's  creditworthiness  is the primary  consideration,  the  underwriting
process also includes a comparison of the value of the security,  if any, to the
proposed loan amount. The Bank generally underwrites and originates its consumer
loans  internally,  which the Bank believes  limits its exposure to credit risks
associated with loans  underwritten or purchased from brokers and other external
sources.

               Consumer loans entail  greater risk than do residential  mortgage
loans,  particularly in the case of consumer loans that are unsecured or secured
by  rapidly  depreciating  assets  such  as  automobiles.  In  such  cases,  any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the  outstanding  loan balance as a result of the greater
likelihood of damage, loss or depreciation.  The remaining deficiency often does
not warrant further  substantial  collection efforts against the borrower beyond
obtaining a deficiency  judgment.  In addition,  consumer loan  collections  are
dependent on the borrower's continuing financial stability,  and are more likely
to be affected adversely by job loss, divorce,  illness or personal  bankruptcy.
Furthermore,  the  application  of various  federal  and state  laws,  including
federal and state  bankruptcy and insolvency laws, may limit the amount that can
be  recovered  on such  loans.  The Bank  believes  that these  risks are not as
prevalent  in the case of the Bank's  consumer  loan  portfolio  because a large
percentage of the portfolio  consists of second  mortgage  loans and home equity
lines of credit  that are  underwritten  in a manner  such  that they  result in
credit risk that is similar to residential  first mortgage loans.  Nevertheless,
second  mortgage  loans and home equity lines of credit have greater credit risk
than  residential  first  mortgage  loans  because they are secured by mortgages
subordinated  to the existing first  mortgage on the property,  which may or may
not be held by the Bank.  At June 30,  1999,  $378,000  of  consumer  loans were
delinquent in excess of 90 days.

               The Bank also engages in commercial business lending. At June 30,
1999, the Bank had $13.9 million of commercial  business loans which represented
2.9% of the total  loan  portfolio.  Commercial  business  loans  generally  are
secured by business  equipment.  Of the total commercial  business loans at June
30, 1999,  loans  amounting to $2.7 million were  unsecured.  The Bank generally
requires annual financial  statements from its corporate  borrowers and personal
guarantees from the corporate principals.
<PAGE>
               Commercial  business lending generally involves greater risk than
residential  mortgage  lending and involves  risks that are different from those
associated  with  residential  and  commercial  real  estate  lending.  Although
commercial  business  loans are often  collateralized  by equipment,  inventory,
accounts  receivable or other business assets,  the liquidation of collateral in
the event of a borrower  default is often an  insufficient  source of  repayment
because accounts  receivable may be uncollectible  and inventories and equipment
may be  obsolete  or of  limited  use,  among  other  things.  Accordingly,  the
repayment   of  a   commercial   business   loan   depends   primarily   on  the
creditworthiness  of the borrower (and any  guarantors),  while  liquidation  of
collateral is a secondary and often insufficient source of repayment.


                                        8
<PAGE>
               Maturity  of Loan  Portfolio.  The  following  table  sets  forth
certain  information  at June 30,  1999  regarding  the  dollar  amount of loans
maturing in the Bank's portfolio based on their  contractual  terms to maturity,
but does not include scheduled payments or potential prepayments.  Demand loans,
loans  having no stated  schedule  of  repayments  and no stated  maturity,  and
overdrafts  are reported as becoming due within one year.  Loan  balances do not
include  undisbursed  loan proceeds,  unearned  discounts,  unearned  income and
allowance for loan losses (in thousands):
<TABLE>
<CAPTION>

                                           After         After       After
                                          One Year      3 Years     5 Years
                             Within       Through       Through     Through       Beyond
                             One Year     3 Years       5 Years     10 Years     10 Years      Total
                             --------     --------     --------     --------     --------     --------
<S>                          <C>          <C>          <C>          <C>          <C>          <C>
Mortgage loans:
  One- to four-family        $    533     $  5,317     $  6,702     $ 99,377     $178,290     $290,219
  Construction                 48,845        3,538         --           --         19,990       72,373
  Land development              6,227       10,481          700          944          512       18,864
  Commercial and other          2,717        2,413       12,837        3,412        2,208       23,587
Consumer and other loans        9,753        7,231       12,814        8,815       29,789       68,402
                             --------     --------     --------     --------     --------     --------
    Total                    $ 68,075     $ 28,980     $ 33,053     $112,548     $230,789     $473,445
                             ========     ========     ========     ========     ========     ========
</TABLE>

               The following table sets forth the dollar amount of all loans due
after June 30,  2000,  which  have fixed  interest  rates and have  floating  or
adjustable interest rates (in thousands):
<TABLE>
<CAPTION>
                                          Fixed-     Floating-or
                                         Rates    Adjustable-Rates       Total
                                         -----    ----------------       -----
<S>                                     <C>             <C>             <C>
Mortgage loans:
  One- to four-family                   $182,395        $107,291        $289,686
  Construction                            23,528            --            23,528
  Land development                         3,179           9,458          12,637
  Commercial and other                     3,585          17,285          20,870
Consumer and other loans                  28,197          30,452          58,649
                                        --------        --------        --------
    Total                               $240,884        $164,486        $405,370
                                        ========        ========        ========
</TABLE>
                                        9

<PAGE>
               Scheduled  contractual  principal  repayments  of  loans  do  not
reflect  the  actual  life  of  such  assets.  The  average  life  of a loan  is
substantially  less  than its  contractual  terms  because  of  prepayments.  In
addition,  due-on-sale  clauses  on loans  generally  give the Bank the right to
declare loans 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  market  rates are  substantially  higher  than rates on
existing  mortgage  loans  and,  conversely,  decrease  when  rates on  existing
mortgage loans are substantially higher than current mortgage loan market rates.
Furthermore,  management  believes  that a  significant  number  of  the  Bank's
residential  mortgage  loans  are  outstanding  for a  period  less  than  their
contractual  terms because of the transitory nature of many of the borrowers who
reside in its primary market area.

              Loan  Solicitation and Processing.  The Bank's lending  activities
are subject to the written, non-discriminatory,  underwriting standards and loan
origination  procedures  established  by  the  Bank's  Board  of  Directors  and
management.  Loan  originations  come from a number of  sources.  The  customary
sources of loan  originations  are realtors,  walk-in  customers,  referrals and
existing  customers.  A business  development program has been implemented where
loan  officers  and sales  personnel  make sales calls on  businesses,  building
contractors,  realtors and other  prospects.  The Bank also  advertises its loan
products by radio and newspaper.

               The Bank uses  professional  fee appraisers for most  residential
real estate loans and  construction  loans and on all commercial real estate and
land  development  loans.  The Bank  requires  hazard,  title and, to the extent
applicable, flood insurance on all security property.

              Residential  mortgage  loan  applications  are  initiated  by loan
officers and are required to be approved by the Bank's Loan Committee consisting
of the Bank's  President,  Executive Vice President,  two Senior Vice Presidents
and two Vice Presidents.  All residential  loans in excess of $300,000 but below
$400,000 must be approved by the Executive  Board Loan  Committee  consisting of
the  President  and  two  other   directors   rotating   among  all   directors.
Additionally,  residential  loans in excess of $400,000  must be approved by the
Bank's Board of Directors.

              All  commercial  real estate  loans less than $1.0 million must be
approved by the Bank's  President,  Executive Vice President of Lending and Vice
President of Commercial Lending. Commercial loans in excess of $1.0 million must
be approved by the Bank's  Commercial  Loan  Committee  consisting of the Bank's
President,  Executive  Vice  President of Lending,  Vice President of Commercial
Lending,  Chief Financial Officer,  the Senior Vice President of Lending and one
director  rotating  among  all  directors.  Commercial  loans in  excess of $1.5
million must be approved by the Bank's Board of Directors.

              Loan Originations,  Sales and Purchases. While the Bank originates
both adjustable- and fixed-rate loans, its ability to generate each type of loan
depends upon relative  customer  demand for loans in its primary market area and
the  rates  and  terms  offered  by  the  Bank  relative  to  those  offered  by
competitors.
<PAGE>
              The  Bank  periodically  sells  conventional  one- to  four-family
mortgage  loans (i.e.,  non-FHA/VA  loans) with  servicing  retained and without
recourse.  However,  several  pools of loans were sold with recourse in 1983 and
had an aggregate  outstanding balance of $1.7 million at June 30, 1999. The Bank
does not expect any material losses on these loans due to their seasoned nature.
Recent loan sales have been to Fannie Mae and  primarily  consisted  of 30-year,
fixed-rate residential real estate loans. These sales reduce the Bank's interest
rate risk and the proceeds of sale are used to fund continuing  operations.  The
Bank sold $61.4 million of  conventional  loans during  fiscal 1999.  Management
intends to sell loans in the future as  necessary to manage  interest  rate risk
and fund continuing operations.

              When   conventional   loans  are  sold,   the  Bank   retains  the
responsibility  for servicing the loans,  including  collecting and remitting of
mortgage loans  payments,  accounting for principal and interest and holding and
disbursing  escrow or  impounded  funds  for real  estate  taxes  and  insurance
premiums. The Bank receives a servicing

                                       10
<PAGE>
fee for performing  these services for others.  The Bank's  servicing  portfolio
amounted to $102.9  million at June 30, 1999.  The Bank  generally is paid a fee
equal to 0.25% of the  outstanding  principal  balance for servicing sold loans.
Loan  servicing  income  totaled  $227,000,  $178,000 and $196,000 for the years
ended June 30, 1999,  1998 and 1997,  respectively.  The Bank earns late charges
collected from delinquent customers whose loans are serviced by the Bank.

              The Bank invests escrow  impounds  (funds  collected from mortgage
customers for the payment of property taxes and insurance  premiums on mortgaged
real estate)  until they are disbursed on behalf of mortgage  customers,  but is
not required to pay interest on these funds. At June 30, 1999, borrowers' escrow
funds amounted to $1.0 million.

              The Bank  sells all loans  originated  under FHA and VA  programs,
servicing  released,  to private  investors and the South Carolina State Housing
Authority.

              Historically,  the Bank has not been an active  purchaser of loans
or participation  interests in loans.  However, in September 1996 the Bank began
purchasing one- to four-family  mortgage loans from a start-up  mortgage banking
company located in Greenville,  South Carolina, in which the Bank made an equity
investment through its service  corporation  subsidiary.  During the fiscal year
ended June 30, 1999,  the Bank  purchased  $16.4 million of one- to  four-family
mortgage loans. Currently, substantially all of the loans purchased through this
mortgage banking company are secured by properties located in the Bank's primary
market area.  The Bank also  purchased  construction  loans from the  affiliated
mortgage  banking  company.  See "-- Subsidiary  Activities" and  "-Construction
Lending."

              The Bank has  established  relationships  with other  unaffiliated
mortgage banking companies.  In the year ended June 30, 1999, the Bank purchased
one- to  four-family  mortgage  loans from these  unaffiliated  entities  in the
amount  of $1.4  million.  The  one- to  four-family  mortgage  loans  purchased
generally are nonconforming to secondary  marketing  standards.  However, in the
Bank's opinion,  the higher yields justify the slightly  increased risk in these
loans.
<PAGE>
              The following table sets forth total loans originated,  purchased,
sold and repaid during the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                            ---------------------------------------
                                               1999          1998            1997
                                            ---------      ---------      ---------
<S>                                         <C>            <C>            <C>
Loans originated:
 Mortgage loans:
  One- to four-family                       $  88,500      $  95,754      $  50,886
  Construction                                 41,696         38,860         36,770
  Land development                              8,238         12,676          6,924
  Commercial and other                         11,929          9,133          1,770
 Consumer and other                            49,950         56,888         29,734
                                            ---------      ---------      ---------
   Total loans originated                     200,313        213,311        126,084

Loans purchased:
 One- to four-family                           16,365         14,309          9,091
 Construction                                  49,447          9,537          5,820
                                            ---------      ---------      ---------
    Total loans purchased                      65,812         23,846         14,911

Whole loans sold:
 Conventional                                 (61,407)       (13,211)        (2,824)
 Government                                    (2,818)        (6,329)        (7,223)
                                            ---------      ---------      ---------
    Total whole loans sold                    (64,225)       (19,540)       (10,047)

Loan principal repayments                    (173,781)      (148,697)       (84,423)

Net  (decrease) increase in other items        (9,400)       (15,186)         1,267
                                            ---------      ---------      ---------

Net increase in loans receivable, net       $  18,719      $  53,734      $  47,792
                                            =========      =========      =========
</TABLE>

                                       11
<PAGE>
               Loan Commitments.  The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events.  Such commitments are made in
writing on specified terms and conditions and are honored for up to 20 days from
approval,  depending on the type of transaction.  At June 30, 1999, the Bank had
loan commitments  (excluding  undisbursed portions of interim construction loans
of $34.8  million) of $6.5 million and unused lines of credit of $50.9  million.
See Note 11 of Notes to Consolidated Financial Statements.

               Loan Fees.  In  addition to  interest  earned on loans,  the Bank
receives   income  from  fees  in  connection  with  loan   originations,   loan
modifications,  late  payments  and for  miscellaneous  services  related to its
loans.  Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.

               The Bank charges loan  origination fees which are calculated as a
percentage of the amount  borrowed.  In accordance  with  applicable  accounting
procedures,  loan  origination  fees  and  discount  points  in  excess  of loan
origination  costs are deferred and recognized  over the  contractual  remaining
lives of the related  loans on a level yield  basis.  Discounts  and premiums on
loans  purchased  are  accreted  and  amortized  in the  same  manner.  The Bank
recognized  $632,000,  $219,000  and  $157,000 of deferred  loan fees during the
years ended June 30, 1999, 1998 and 1997, respectively,  in connection with loan
refinancings, payoffs, sales and ongoing amortization of outstanding loans.

               Nonperforming Assets and Delinquencies.  When a borrower fails to
make a required  payment on a loan,  the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment.  Contacts generally are made 15
days after a payment is due. In most cases,  deficiencies are cured promptly. If
a delinquency  continues,  additional contact is made either through a notice or
other means and the Bank will attempt to work out a payment schedule.  While the
Bank generally prefers to work with borrowers to resolve such problems, the Bank
will institute foreclosure or other proceedings,  as necessary,  to minimize any
potential loss.

               Loans  are  placed  on  nonaccrual  status  generally  if, in the
opinion of management, principal or interest payments are not likely to continue
in  accordance  with the  terms  of the loan  agreement,  or when  principal  or
interest is past due 90 days or more (except in the case of  construction  loans
originated before September 1996 as discussed under "-- Construction  Lending").
Interest  accrued but not collected at the date the loan is placed on nonaccrual
status is charged  against  income at the time the loan is placed on  nonaccrual
status.  Loans may be  reinstated  to accrual  status when payments are under 90
days past due and, in the opinion of  management,  collection  of the  remaining
past due balances reasonably can be expected.

               In certain  cases,  the Bank grants  extensions  on  construction
loans that may have become delinquent in excess of 90 days. These extensions are
granted based upon management's judgment of the creditworthiness of the borrower
and other  factors  such as a sales  contract  pending on the  property  held as
collateral.  In the case of extended loans, interest continues to accrue and the
loans are reported as accruing but contractually past due 90 days or more.

               The Bank's Board of  Directors is informed  monthly of the status
of all loans  delinquent  more than 60 days,  all loans in  foreclosure  and all
foreclosed and repossessed property owned by the Bank.


                                       12

<PAGE>
               The following  table sets forth  information  with respect to the
Bank's  nonperforming  assets  and  restructured  loans  within  the  meaning of
Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  15 at the  dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                 At June 30,
                                                           ------------------------------------------------------
                                                            1999        1998        1997        1996        1995
                                                           ------      ------      ------      ------      ------
<S>                                                        <C>         <C>         <C>         <C>         <C>
Loans accounted for on
 a nonaccrual basis:
 Mortgage loans:
  One- to four-family                                      $  533      $  266      $  271      $  719      $  348
  Construction                                                310         787         273       1,130         471
  Commercial and other                                       --             4        --          --            48
 Consumer and other loans                                     378         153          74          60          20
                                                           ------      ------      ------      ------      ------
      Total nonaccrual loans                                1,221       1,210         618       1,909         887
                                                           ------      ------      ------      ------      ------

Accruing loans contractually past due 90 days or more:
 Mortgage loans:
  Construction                                                298         145       1,401       3,965       3,906
 Consumer and other loans                                       2           8          12        --          --
                                                           ------      ------      ------      ------      ------
    Total accruing loans 90
     days or more past due                                    300         153       1,413       3,965       3,906
                                                           ------      ------      ------      ------      ------

Total of nonaccrual loans and
 accruing loans 90 days or more
 past due                                                   1,521       1,363       2,031       5,874       4,793

Real estate acquired in settlement
 of loans                                                     348          36          36          58          34
                                                           ------      ------      ------      ------      ------

    Total nonperforming assets                             $1,869      $1,399      $2,067      $5,932      $4,827
                                                           ======      ======      ======      ======      ======

Restructured loans                                         $  672      $  594      $  863      $1,247      $1,049
                                                           ======      ======      ======      ======      ======

Nonaccrual loans and accruing
 loans 90 days or more past due
 as a percentage of loans
 receivable, net                                             0.35%       0.33%       0.56%       1.87%       1.79%

Nonaccrual loans and accruing
 loans 90 days or more past due
 as a percentage of total
 assets                                                      0.28%       0.26%       0.31%       1.65%       1.49%

Nonperforming assets as a
 percentage of total assets                                  0.34%       0.27%       0.31%       1.66%       1.50%

</TABLE>
<PAGE>

               Interest  income that would have been recorded for the year ended
June 30,  1999 had  nonaccruing  loans  been  current in  accordance  with their
original terms amounted to $52,000.  The amount of interest included in interest
income on such loans for such periods amounted to $51,000.  Interest income that
would have been

                                       13

<PAGE>
recorded for the year ended June 30, 1999 if restructured loans had been current
in accordance with their original terms, and the amount of interest  included in
interest income on such loans for such periods, were, in both cases, immaterial.

               Real Estate Acquired in Settlement of Loans. Real estate acquired
by the Bank as a result of  foreclosure  or by  deed-in-lieu  of  foreclosure is
classified as real estate  acquired in settlement of loans until sold.  Pursuant
to  Statement of Position  ("SOP")  92-3,  issued by the  American  Institute of
Certified Public Accountants, which provides guidance on determining the balance
sheet treatment of foreclosed assets in annual financial  statements for periods
ended on or after  December 15, 1992,  there is a  rebuttable  presumption  that
foreclosed  assets  are held for sale and  such  assets  are  recommended  to be
carried at fair value minus estimated costs to sell the property. After the date
of acquisition,  all costs incurred in maintaining the property are expensed and
costs  incurred  for  the  improvement  or  development  of  such  property  are
capitalized  up to  the  extent  of  their  net  realizable  value.  The  Bank's
accounting for its real estate acquired in settlement of loans complies with SOP
92-3.  At June 30,  1999,  the Bank had  $348,000  of real  estate  acquired  in
settlement  of loans,  which  consisted  of eight one- to  four-family  mortgage
loans.

               Restructured   Loans.   Under   generally   accepted   accounting
principles  ("GAAP"),   the  Bank  is  required  to  account  for  certain  loan
modifications or restructurings as "troubled debt  restructurings."  In general,
the  modification  or  restructuring  of a  debt  constitutes  a  troubled  debt
restructuring  if  the  Bank  for  economic  or  legal  reasons  related  to the
borrower's financial  difficulties grants a concession to the borrowers that the
Bank would not otherwise consider. Debt restructurings or loan modifications for
a borrower do not necessarily  always constitute  troubled debt  restructurings,
however,   and  troubled  debt  restructurings  do  not  necessarily  result  in
nonaccrual  loans.  The Bank had $672,000 of  restructured  loans as of June 30,
1999, which consisted of 13 one- to four-family mortgage loans.

               Asset  Classification.  The Office of Thrift Supervision  ("OTS")
has  adopted   various   regulations   regarding   problem   assets  of  savings
institutions.  The regulations  require that each insured institution review and
classify  its  assets  on a regular  basis.  In  addition,  in  connection  with
examinations of insured  institutions,  OTS examiners have authority to identify
problem assets and, if  appropriate,  require them to be  classified.  There are
three  classifications  for  problem  assets:  substandard,  doubtful  and loss.
Substandard  assets have one or more defined weaknesses and are characterized by
the distinct  possibility that the insured institution will sustain some loss if
the  deficiencies  are not  corrected.  Doubtful  assets have the  weaknesses of
substandard assets with the additional  characteristic  that the weaknesses make
collection  or  liquidation  in full on the basis of currently  existing  facts,
conditions and values questionable,  and there is a high possibility of loss. An
asset  classified as loss is considered  uncollectible  and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion  thereof is  classified  as loss,  the insured  institution  establishes
specific  allowances  for loan  losses for the full amount of the portion of the
asset  classified  as loss.  All or a portion  of general  loan loss  allowances
established to cover possible losses related to assets classified substandard or
doubtful can be included in determining  an  institution's  regulatory  capital,
while specific valuation  allowances for loan losses generally do not qualify as
regulatory  capital.  Assets  that do not  expose  the  insured  institution  to
sufficient  risk  to  warrant   classification  in  one  of  the  aforementioned
categories currently but possess weaknesses are designated "special mention" and
monitored by the Bank.
<PAGE>
               The  aggregate  amounts  of the  Bank's  classified  and  special
mention  assets,  and of the Bank's general and specific loss  allowances at the
dates indicated, were as follows (in thousands):


                                       14

<PAGE>
<TABLE>
<CAPTION>
                                                               At June 30,
                                                       -------------------------
                                                        1999               1998
                                                        ----               ----
<S>                                                    <C>                <C>
Classified assets:
 Loss                                                  $ --               $ --
 Doubtful                                                  32                 42
 Substandard assets                                     3,144              2,016
 Special mention                                        1,119              1,495

Loan loss allowances                                    2,896              2,179
</TABLE>

               At June 30,  1999,  substandard  assets  consisted  of 28 one- to
four-family   mortgage  loans  totaling   approximately   $1.4  million,   seven
construction loans totaling $918,000, 47 other loans totaling $480,000, and real
estate acquired through foreclosure totaling $348,000.

               At June 30, 1999,  special mention assets consisted of 13 one- to
four-family  mortgage  loans  totaling  $435,000  and  five  construction  loans
totaling $684,000.

               Allowance for Loan Losses.  The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal  policy  and takes into  consideration  the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.

               In originating  loans,  the Bank  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.  The Bank increases its allowance for loan
losses by charging provisions for loan losses against the Bank's income.

               The general  valuation  allowance is  maintained  to cover losses
inherent in the loan portfolio. Management's periodic evaluation of the adequacy
of the  allowance  is based on the Bank's past loan loss  experience,  known and
inherent  risks  in the  portfolio,  adverse  situations  that  may  affect  the
borrower's  ability to repay, the estimated value of any underlying  collateral,
and current economic  conditions.  Specific valuation allowances are established
to absorb  losses on loans for which full  collectibility  cannot be  reasonably
assured.  The amount of the allowance  generally is based on the estimated value
of the  collateral  securing  the  loan and  other  analyses  pertinent  to each
situation.  Generally,  a provision  for loan losses is charged  against  income
monthly to maintain the allowances, for loan losses at the amounts determined by
management.
<PAGE>

               At June 30, 1999,  the Bank had an  allowance  for loan losses of
$2.9 million.  Management  believes that the amount maintained in the allowances
at June 30, 1999 will be 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  affected  significantly  and
adversely if  circumstances  differ  substantially  from the assumptions used in
making  the  determinations.   Furthermore,  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  affect  adversely  the Bank's  financial  condition  and  results of
operations.

                                       15

<PAGE>
               The  following  table  sets  forth  an  analysis  of  the  Bank's
allowance for loan losses (dollars in thousands):
<TABLE>
<CAPTION>
                                                                       Year Ended June 30,
                                                 ----------------------------------------------------------------
                                                   1999          1998          1997          1996           1995
                                                 --------      --------      --------      --------      --------
<S>                                              <C>           <C>           <C>           <C>           <C>
Total loans outstanding at end of period         $473,445      $441,407      $380,830      $332,803      $281,836
                                                 ========      ========      ========      ========      ========

Average loans outstanding during period          $441,514      $395,465      $336,476      $298,865       273,778
                                                 ========      ========      ========      ========      ========

Allowance balance at beginning of period         $  2,179      $  1,796      $  1,000      $    600      $    600
 Provision for loan losses                            800           460           825           419             9
 Charge-offs:
  Mortgage loans:
   One- to four-family                                 16             1            15          --            --
  Consumer and other                                   69            79            24            23             9
                                                 --------      --------      --------      --------      --------
    Total charge-offs                                  85            80            39            23             9
                                                 --------      --------      --------      --------      --------

 Recoveries:
  Mortgage loans:
   One- to four-family                               --               2             9          --            --
  Consumer and other                                    2             1             1             4          --
                                                 --------      --------      --------      --------      --------
    Total recoveries                                    2             3            10             4          --
                                                 --------      --------      --------      --------      --------
Allowance balance at end of period               $  2,896      $  2,179      $  1,796      $  1,000      $    600
                                                 ========      ========      ========      ========      ========

Allowance for loan losses as a percentage of
 total loans receivable at end of period             0.61%         0.49%         0.47%         0.30%         0.21%
                                                 ========      ========      ========      ========      ========

Net charge-offs as a percentage of average
 loans outstanding during the period                 0.02%         0.02%         0.01%         0.01%         --
                                                 ========      ========      ========      ========      --------

Ratio of allowance for loan losses to total
 nonperforming loans at end of period                1.90          1.60          0.88          0.17          0.13
                                                 ========      ========      ========      ========      ========
</TABLE>
               The  fluctuation  in the ratio of  allowance  for loan  losses to
nonperforming  loans at the end of the  periods  set  forth in the  above  table
results primarily from the Bank giving greater weight to the level of classified
assets than to the level of nonperforming  assets  (nonaccrual  loans,  accruing
loans  contractually  past due 90 days or  more,  and real  estate  acquired  in
settlement of loans) and  consideration  of the growth in the loan portfolio and
increases in consumer and commercial  loans when determining the adequacy of the
allowance for loan losses.  Greater weight is given to classified assets because
they  include  not only  nonperforming  assets but also  performing  assets that
otherwise exhibit, in management's  judgment,  potential credit weaknesses.  See
"-- Nonperforming Assets and Delinquencies" and "-- Asset Classification."

                                       16
<PAGE>
               The following table sets forth the breakdown of the allowance for
loan losses by loan category at the dates  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
future losses and does not restrict the use of the allowance to absorb losses in
any other category (dollars in thousands):
<TABLE>
<CAPTION>

                                                                         At June 30,
                           ---------------------------------------------------------------------------------------------------------
                                 1999                  1998                  1997                1996                 1995
                           -------------------- ---------------------- --------------------- -------------------- ------------------
                                    Percent               Percent              Percent              Percent              Percent
                                    of Loans              of Loans             of Loans             of Loans             of Loans
                                    in Category           in Category          in Category          in Category          in Category
                                    to Total              to Total             to Total             to Total             to Total
                           Amount   Loans       Amount    Loans       Amount   Loans       Amount   Loans       Amount   Loans
                           ------   -----       ------    -----       ------   -----       ------   -----       ------   -----
<S>                        <C>       <C>        <C>        <C>        <C>       <C>        <C>       <C>        <C>       <C>
Mortgage loans:
 Residential               $1,411    76.9%      $1,194     81.2%      $1,222    83.4%      $  675    86.0%      $  400    87.2%
 Nonresidential             1,112    11.3          830      6.7          423     4.0           28     3.6           17     3.5
Consumer and other loans      373    11.8          155     12.1          142    12.6          297    10.4          183     9.3
                           ------   -----       ------    -----       ------   -----       ------   -----       ------   -----
   Total allowance for
     loan losses           $2,896   100.0%      $2,179    100.0%      $1,796   100.0%      $1,000   100.0%      $  600   100.0%
                           ======   =====       ======    =====       ======   =====       ======   =====       ======   =====
</TABLE>

                                       17

<PAGE>
Investment Activities

               The Bank is  permitted  under  federal  law to invest in  various
types of liquid  assets,  including  U.S.  Treasury  obligations,  securities of
various federal agencies and of state and municipal governments, deposits at the
Federal Home Loan Bank of Atlanta ("FHLB"), certificates of deposit of federally
insured institutions, certain bankers' acceptances and federal funds. Subject to
various  restrictions,  the Bank  also may  invest a  portion  of its  assets in
commercial paper and corporate debt securities.  Savings  institutions  like the
Bank are also  required  to maintain an  investment  in FHLB stock.  The Bank is
required  under  federal  regulations  to  maintain  a minimum  amount of liquid
assets. See "REGULATION."

               The Corporation is not subject to any investment restrictions.

               The Bank purchases  investment  securities with excess  liquidity
arising  when  investable  funds  exceed  loan  demand.  The  Bank's  investment
securities  purchases have been limited to U.S. Government Agency securities and
state and local  obligations with  contractual  maturities of between one and 20
years and a mutual fund which invests in  adjustable-rate  mortgage  loans.  The
Corporation's   investment   activities   have   been   limited   to   overnight
interest-bearing  deposits  and an  investment  in a mutual fund that invests in
adjustable-rate mortgages.

               The Bank's  investment  policies  generally limit  investments to
U.S.  Government  and  agency  securities,   municipal  bonds,  certificates  of
deposits, marketable corporate debt obligations,  mortgage-backed securities and
certain  types of mutual  funds.  The Bank's  investment  policy does not permit
engaging  directly  in  hedging  activities  or  purchasing  high risk  mortgage
derivative  products or non-investment  grade corporate bonds;  however,  mutual
funds held by the Bank periodically may engage in hedging  activities and invest
in derivative securities.  Investments are made based on certain considerations,
which  include the interest  rate,  yield,  settlement  date and maturity of the
investment,  the  Bank's  liquidity  position,  and  anticipated  cash needs and
sources (which in turn include  outstanding  commitments,  upcoming  maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed  investment  would have on the Bank's credit and interest rate
risk and risk-based capital also is considered.

               At June 30, 1999, the Bank's  investment in the Asset  Management
Fund, Inc. Adjustable Rate Mortgage Portfolio (which had an aggregate fair value
of $16.4  million  and  amortized  cost of $16.5  million)  exceeded  24% of the
Company's stockholders' equity at that date.

                                       18

<PAGE>
               The following  table sets forth the amortized cost and fair value
of the Bank's securities,  by accounting classification and by type of security,
at the dates indicated (in thousands):
<TABLE>
<CAPTION>

                                                                 At June 30,
                                  --------------------------------------------------------------------
                                            1999                    1998                    1997
                                  ----------------------    --------------------   -------------------
                                  Amortized     Fair       Amortized     Fair      Amortized      Fair
                                    Cost        Value        Cost        Value       Cost        Value
<S>                                 <C>         <C>         <C>         <C>         <C>         <C>
Held-to-Maturity:
 Mortgage-backed securities         $    54     $    55     $    88     $    90     $   121     $   125
                                    -------     -------     -------     -------     -------     -------
   Total held-to-maturity                54          55          88          90         121         125
                                    -------     -------     -------     -------     -------     -------

Available-for-Sale:
 Debt securities:
  U.S. Treasury obligations            --          --           497         498       1,492       1,488
  State and local
   obligations                        1,480       1,468        --          --          --          --
  U.S. Government
   Agency obligations                 5,497       5,436       6,010       6,019       6,499       6,483
                                    -------     -------     -------     -------     -------     -------
    Total                             6,977       6,904       6,507       6,517       7,991       7,971

Marketable equity securities(1)      16,511      16,440      22,225      22,192       2,181       2,230
                                    -------     -------     -------     -------     -------     -------

   Total available-for-sale          23,488      23,344      28,732      28,709      10,172      10,201
                                    -------     -------     -------     -------     -------     -------

Total                               $23,542     $23,399     $28,820     $28,799     $10,293     $10,326
                                    =======     =======     =======     =======     =======     =======

</TABLE>
-----------------

(1)  Consists  principally  of a mutual  fund that  invests  in  adjustable-rate
     mortgage-backed  securities.  At June 30,  1999,  the mutual  fund  yielded
     5.25%.

               The following table sets forth certain information  regarding the
carrying value,  weighted  average yields and maturities or periods to repricing
of the Bank's debt securities and  mortgage-backed  securities at June 30, 1999.
U.S. Treasury  obligations and certain U.S.  Government  agency  obligations are
exempt from state taxation.  Their yields,  however, have not been computed on a
tax equivalent  basis for purposes of the table due to the  immateriality of the
amounts (dollars in thousands):
<PAGE>
<TABLE>
<CAPTION>

                                         Less Than                                One to                          After
                                         One Year                                Five Years                     Ten Years
                                  --------------------------------    ------------------------------  -----------------------------
                                  Amortized      Fair                 Amortized    Fair               Amortized    Fair
                                    Cost         Value       Yield      Cost       Value       Yield    Cost       Value     Yield
                                  --------     -----------     ---     ------     ------        ----   ------     ------     ----
<S>                               <C>          <C>                     <C>        <C>           <C>    <C>        <C>        <C>
  State and local obligations     $   --       $      --       --%     $  963     $  951        4.65%  $  517     $  517     4.50%
  U. S. Government Agency
       obligations                    --              --       --       5,497      5,436        5.86     --         --         --%
  Mortgage-backed securities          --              --       --          54         55        8.00     --         --         --
                                  --------     -----------     ---     ------     ------        ----   ------     ------     ----

Total                             $   --       $      --       --%     $6,514     $6,442        5.70%  $  517     $  517     4.50%
                                  ========     ===========     ===     ======     ======        ====   ======     ======     ====

</TABLE>

Deposit Activities and Other Sources of Funds

               General.  Deposits are the major external source of funds for the
Bank's  lending and other  investment  activities.  In  addition,  the Bank also
generates funds  internally  from loan principal  repayments and prepayments and
maturing investment

                                       19

<PAGE>
securities.  Scheduled loan repayments are a relatively  stable source of funds,
while  deposit  inflows  and  outflows  and  loan   prepayments  are  influenced
significantly by general interest rates and money market conditions.  Borrowings
from the FHLB are used to compensate for reductions in the availability of funds
from other sources. Presently, the Bank has no other borrowing arrangements.

               Deposit Accounts. The majority of the Bank's depositors reside in
South Carolina. The Bank's deposit products include a broad selection of deposit
instruments,  including negotiable order of withdrawal ("NOW") accounts,  demand
deposit  accounts,  money market accounts,  regular  passbook savings  accounts,
statement savings accounts and term certificate accounts.  Deposit account terms
vary with the principal  difference  being the minimum  balance  deposit,  early
withdrawal penalties and the interest rate. The Bank reviews its deposit mix and
pricing  weekly.  The  Bank  does  not  utilize  brokered  deposits,  nor has it
aggressively sought jumbo certificates of deposit.

               The Bank believes it is  competitive  in the type of accounts and
interest rates it offers on its deposit products.  The Bank does not seek to pay
the highest deposit rates but a competitive  rate. The Bank determines the rates
paid based on a number of conditions, including rates paid by competitors, rates
on U.S. Treasury securities,  rates offered on various FHLB lending programs and
the deposit growth rate the Bank is seeking to achieve.

               The Bank uses a variety  of  promotions  to attract  new  deposit
accounts  including direct mail, print and broadcast media,  rate promotions and
premiums. These promotions are reflected in the growth in the Bank's advertising
and promotion expense in recent periods.

               The  following  table  indicates  the amount of the Bank's  jumbo
certificate accounts by time remaining until maturity as of June 30, 1999. Jumbo
certificate accounts have principal balances of $100,000 or more (in thousands):
<TABLE>
<CAPTION>

        Maturity Period                                          Amount
        ---------------                                          ------
<S>                                                              <C>
Three months or less                                             $20,270
Over three through six months                                      9,865
Over six through twelve months                                    25,597
Over twelve months                                                 5,748
                                                                 -------
     Total                                                       $61,480
                                                                 =======
</TABLE>
<PAGE>
               Deposit  Flow.  The  following  table  sets  forth  the  balances
(inclusive of interest  credited)  and changes in dollar  amounts of deposits in
the various  types of accounts  offered by the Bank between the dates  indicated
(dollars in thousands):
<TABLE>
<CAPTION>

                                                                                 At June 30,
                                          ------------------------------------------------------------------------------------------
                                                 1999                                1998                               1997
                                          ------------------------------     --------------------------------   --------------------
                                                     Percent                              Percent                            Percent
                                                        of      Increase                     of     Increase                   of
                                           Amount     Total    (Decrease)      Amount      Total   (Decrease)     Amount      Total
                                          --------    -----    --------      --------     -----    --------      --------     -----
<S>                                       <C>           <C>    <C>           <C>            <C>    <C>           <C>            <C>
NOW accounts
  Noninterest-bearing                     $ 19,163      4.7%   $  6,406      $ 12,757       3.4%   $  6,188      $  6,569       1.8%
  Interest-bearing                          46,533     11.5       4,312        42,221      11.5       8,796        33,425       9.5
Savings accounts                            56,225     13.8        (515)       56,740      15.3      (7,612)       64,352      18.2
Money market accounts                       30,099      7.4      11,966        18,133       4.9       3,825        14,308       4.1
Fixed term certificate accounts which
 mature:
  Within 1 year                            225,328     55.5      25,305       200,023      54.1      17,730       182,293      51.6
  After 1 year, but within 2 years          17,481      4.3      (8,898)       26,379       7.1      (1,930)       28,309       8.0
  After 2 years, but within 3 years          4,852      1.2      (2,046)        6,898       1.9      (8,268)       15,166       4.3
  Thereafter                                 6,330      1.6        (331)        6,661       1.8      (2,110)        8,771       2.5
                                          --------    -----    --------      --------     -----    --------      --------     -----

     Total                                $406,011    100.0%   $ 36,199      $369,812     100.0%   $ 16,619      $353,193     100.0%
                                          ========    =====    ========      ========     =====    ========      ========     =====
</TABLE>

                                       20

<PAGE>
               Time Deposits by Rates. The following table sets forth the amount
of time  deposits  in the  Bank  categorized  by rates  at the  dates  indicated
(dollars in thousands):
<TABLE>
<CAPTION>
                                                     At June 30,
                                    --------------------------------------------
                                      1999              1998              1997
                                    --------          --------          --------
<S>                                 <C>               <C>               <C>
3.00% or less                       $  1,008          $    412          $    325
3.01% - 5.00%                         97,638             2,623             2,613
5.01% - 7.00%                        155,261           236,792           231,333
7.01% - 9.00%                             84               134               268
                                    --------          --------          --------
Total                               $253,991          $239,961          $234,539
                                    ========          ========          ========
</TABLE>
               Time Deposits by Maturities.  The following  table sets forth the
amount of time deposits in the Bank  categorized  by maturities at June 30, 1999
(dollars in thousands):
<TABLE>
<CAPTION>
                                                 Amount Due
                  ------------------------------------------------------------------------
                  Less Than      1-2           2-3         3-4          After
                  One Year      Years         Years       Years        4 Years       Total
                  --------     --------     --------     --------     --------     --------
<S>               <C>          <C>          <C>          <C>          <C>          <C>
3.00% or less     $  1,008     $   --       $   --       $   --       $   --       $  1,008
3.01% - 5.00%       87,775        7,885          731          105        1,142       97,638
5.01% - 7.00%      136,501        9,590        4,121        3,223        1,826      155,261
7.01% - 9.00%           44            6         --             34         --             84
                  --------     --------     --------     --------     --------     --------
Total             $225,328     $ 17,481     $  4,852     $  3,362     $  2,968     $253,991
                  ========     ========     ========     ========     ========     ========
</TABLE>
               Deposit  Activity.  The  following  table set  forth the  deposit
activity of the Bank for the periods indicated (in thousands):
<TABLE>
<CAPTION>
                                                   Year Ended June 30,
                                              ----------------------------------
                                                1999         1998          1997
                                              --------     --------     --------
<S>                                           <C>          <C>          <C>
Beginning balance                             $369,812     $353,193     $305,831
                                              --------     --------     --------

Net deposits  before interest credited          20,919        1,452       33,743
Interest credited                               15,280       15,167       13,619
                                              --------     --------     --------

Net increase in deposits                        36,199       16,619       47,362
                                              --------     --------     --------

Ending balance                                $406,011     $369,812     $353,193
                                              ========     ========     ========
</TABLE>
<PAGE>

               Advances from Federal Home Loan Bank of Atlanta. Deposits are the
primary source of funds for the Bank's lending and investment activities and for
its general business purposes. The Bank has the ability to use advances from the
FHLB to supplement its supply of lendable  funds and to meet deposit  withdrawal
requirements.  The FHLB functions as a central reserve bank providing credit for
savings banks and certain other member  financial  institutions.  As a member of
the  FHLB,  the  Bank is  required  to own  capital  stock  in the  FHLB  and is
authorized  to apply for  advances on the  security of such stock and certain of
its mortgage loans and other assets (principally securities that are obligations
of, or guaranteed by, the U.S.  Government)  provided  certain  creditworthiness
standards have been met.  Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial  condition of the member  institution  and the adequacy of  collateral
pledged to secure the credit.


                                       21

<PAGE>
               The Company  had  advances  from the FHLB,  all of which are at a
fixed rate with  interest  payable  quarterly  and  principal  due at  maturity.
Additionally,  all of the  advances  are  convertible  prior to maturity (at the
option of the FHLB) to a variable  three-month  LIBOR-based rate. These advances
are either (i)  convertible  one-time only at a future  conversion  date or (ii)
convertible at any quarterly  payment date on or after a future conversion date.
Should the FHLB exercise its conversion  option on any advance,  the Company has
the right to prepay the advance on any quarterly  payment date through maturity.
Outstanding  advances  at June 30,  1999 and 1998  are as  follows  (dollars  in
thousands):
<TABLE>
<CAPTION>
                                                                                                       At June 30,
                                                                                    -----------------------------------------------
                                                               Earliest                       1999                       1998
                                        Maturity             Conversion             ----------------------      -------------------
                                        Date                   Date                   Amount         Rate        Amount        Rate
<S>                                 <C>                   <C>                       <C>              <C>        <C>            <C>
One-time convertible                March 26, 2008        March 26, 2003            $ 2,000          5.44%      $ 2,000        5.44%
One-time convertible                June 23, 2008         June  23, 2003              5,000          5.51         5,000        5.51
One-time convertible                August 25, 2008       August 25, 2003            10,000          5.52           ---         ---
One-time convertible                April 22, 2004        April 22, 2001              4,000          5.01           ---         ---
One-time convertible                April 22, 2004        April 22, 2001              3,000          4.96           ---         ---

Continuously convertible
    after conversion date           April 7, 2008         April 7, 1999             10,000           4.91        10,000        4.91
                                                                                    -------                     -------

Total advances                                                                       34,000          5.23       $17,000        5.15
                                                                                    =======                     =======
</TABLE>
              The maximum  month-end  balance of FHLB advances  outstanding  was
$34.0 million and $17.0 million  during the years ending June 30, 1999 and 1998,
respectively. The Company had an approved credit limit of $75.0 million with the
FHLB as of June 30,  1999.  The advances are secured by FHLB stock and a blanket
lien on all qualifying one- to four-family first mortgage loans.

               Short-term  Borrowings.   At  June  30,  1999,  the  Company  had
outstanding a $35.0 million note payable to a commercial  bank. The note,  dated
June 23, 1999, bearing interest at three-month LIBOR plus 1.0% was due on August
15, 1999.  All of the Bank's common stock was pledged as collateral on the loan.
The note was paid in full on July 22, 1999.

Subsidiary Activities

               Under OTS regulations,  the Bank generally may invest up to 3% of
its assets in service corporations, provided that any investment in excess of 2%
of assets  shall be used  primarily  for  community,  inner-city  and  community
development  projects.   The  Bank's  investment  in  its  wholly-owned  service
corporation, FirstService Corporation ("FirstService"),  which was approximately
$632,000 at June 30, 1999, did not exceed these limits.
<PAGE>

               FirstService sells alternative investment products such as mutual
funds,  deferred  annuities  and  insurance.  In  addition,  in  August  1996 it
purchased  for  $400,000 a one-third  equity  interest  in First Trust  Mortgage
Corporation,  Greenville,  South Carolina ("First Trust"),  a start-up  mortgage
banking  company.  The Bank has  purchased  loans  from  First  Trust in  recent
periods. See "-- Lending Activities -- Loan Originations,  Sales and Purchases."
All loans are  purchased  from First  Trust  subject to the Bank's  underwriting
standards.  At June 30, 1999, the Bank's financial commitment to First Trust and
its maximum exposure to share in any losses incurred by First Trust were limited
solely to its equity investment through FirstService.  The Bank, either directly
or through  FirstService,  may undertake additional financial commitments in the
future  that would  increase  its loss  exposure  to First  Trust's  operations;
however,  there are no such agreements,  plans or understandings at present. The
Bank recorded  income of $149,000 and $181,000 for the years ended June 30, 1999
and 1998, respectively,  related to First Trust's operations.  Billy L. Painter,
the Bank's President and Chief Executive Officer,  and J. Stephen Sinclair,  the
Bank's Executive Vice President of Lending, are directors of First Trust.

                                       22

<PAGE>
                           REGULATION AND SUPERVISION

General

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

Holding Company Regulation

               The  Corporation  is a  nondiversified  unitary  savings and loan
holding company within the meaning of federal law. As a unitary savings and loan
holding company, the Corporation generally is not restricted under existing laws
as to the types of business activities in which it may engage, provided that the
Bank continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation--QTL  Test." Upon any non-supervisory  acquisition by the Corporation
of another savings  institution or savings bank that meets the qualified  thrift
lender  test  and  is  deemed  to be a  savings  institution  by  the  OTS,  the
Corporation  would become a multiple  savings and loan  holding  company (if the
acquired  institution is held as a separate  subsidiary)  and generally would be
limited to  activities  permissible  for bank holding  companies  under  Section
4(c)(8) of the Bank Holding  Company Act,  subject to the prior  approval of the
OTS, and certain activities authorized by OTS regulation.

               A savings and loan holding company is prohibited  from,  directly
or  indirectly,  acquiring  more than 5% of the voting stock of another  savings
institution or savings and loan holding company,  without prior written approval
of the OTS and from acquiring or retaining  control of a depository  institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions,  the OTS considers the financial and managerial
resources  and future  prospects of the company and  institution  involved,  the
effect  of the  acquisition  on the risk to the  deposit  insurance  funds,  the
convenience and needs of the community and competitive factors.
<PAGE>
               The OTS may not approve any  acquisition  that would  result in a
multiple savings and loan holding company  controlling  savings  institutions in
more than one state,  subject to two exceptions:  (i) the approval of interstate
supervisory  acquisitions  by savings and loan  holding  companies  and (ii) the
acquisition  of a savings  institution in another state if the laws of the state
of the target savings  institution  specifically  permit such acquisitions.  The
states  vary in the  extent to which they  permit  interstate  savings  and loan
holding company acquisitions.



                                       23
<PAGE>
               Although  savings and loan holding  companies  are not subject to
specific  capital  requirements  or  specific  restrictions  on the  payment  of
dividends or other capital distributions,  federal regulations do prescribe such
restrictions on subsidiary  savings  institutions as described  below.  The Bank
must notify the OTS 30 days before declaring any dividend to the Corporation. In
addition,   the  financial  impact  of  a  holding  company  on  its  subsidiary
institution  is a  matter  that is  evaluated  by the OTS  and  the  agency  has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.

Federal Savings Institution Regulation

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

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

               The risk-based capital standard for savings institutions requires
the  maintenance  of Tier I (core) and total  capital  (which is defined as core
capital and  supplementary  capital) to risk-weighted  assets of at least 4% and
8%, respectively. In determining the amount of risk-weighted assets, all assets,
including  certain  off-balance  sheet assets,  are  multiplied by a risk-weight
factor of 0% to 100%,  assigned by the OTS capital regulation based on the risks
believed  inherent  in the type of asset.  Core  (Tier I)  capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus,  and minority interests in equity
accounts  of  consolidated  subsidiaries  less  intangibles  other than  certain
mortgage  servicing  rights and credit card  relationships.  The  components  of
supplementary  capital currently include cumulative  preferred stock,  long-term
perpetual preferred stock, mandatory convertible  securities,  subordinated debt
and  intermediate  preferred  stock,  the  allowance  for loan and lease  losses
limited  to a  maximum  of  1.25%  of  risk-weighted  assets  and  up to  45% of
unrealized   gains  on   available-for-sale   equity   securities  with  readily
determinable fair values.  Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
<PAGE>
               The capital  regulations  also  incorporate an interest rate risk
component.  Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating  their
risk- based capital  requirements.  For the present  time,  the OTS has deferred
implementation  of the interest rate risk component.  At June 30, 1999, the Bank
met each of its capital requirements.



                                       24
<PAGE>
               The following table presents the Bank's capital  position at June
30, 1999:
<TABLE>
<CAPTION>
                                                                        Capital
                                                         Excess    -----------------
                              Actual      Required   (Deficiency)  Actual   Required
                              Capital     Capital        Amount    Percent   Percent
                              -------     -------    -----------   -------   -------
                                            (Dollars in thousands)
<S>                           <C>         <C>         <C>           <C>       <C>
Tangible                      $91,006     $ 8,131     $82,875       16.8%     1.5%
Core (Leverage)                91,006      16,264      74,742       16.8      3.0
Risk-based                     93,902      27,573      66,329       27.2      8.0
</TABLE>


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

               Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. The FDIC maintains a risk-based  assessment system by which
institutions   are  assigned  to  one  of  three   categories   based  on  their
capitalization and one of three  subcategories  based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories  to  which  it  is  assigned.   Assessment   rates  for  SAIF  member
institutions  are determined  semiannually  by the FDIC and currently range from
zero basis  points for the  healthiest  institutions  to 27 basis points for the
riskiest.
<PAGE>
               In addition to the assessment for deposit insurance, institutions
are required to make payments on bonds issued in the late 1980s by the Financing
Corporation  ("FICO") to recapitalize the predecessor to the SAIF.  During 1998,
FICO payments for SAIF  members,  including  the Bank,  approximated  6.10 basis
points,  while Bank  Insurance Fund ("BIF")  members paid 1.22 basis points.  By
law,  there will be equal sharing of FICO payments  between SAIF and BIF members
on the earlier of January 1, 2000 or the date the SAIF and BIF are  merged.  The
FDIC has authority to increase insurance assessments.  A significant increase in
SAIF  insurance  premiums  would likely have an adverse  effect on the operating
expenses and results of operations of the Bank.  Management  cannot predict what
insurance assessment rates will be in the future.



                                       25
<PAGE>
               Insurance  of  deposits  may be  terminated  by the  FDIC  upon a
finding that the institution has engaged in unsafe or unsound  practices,  is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
OTS.  The  management  of the Bank does not know of any  practice,  condition or
violation that might lead to termination of deposit insurance.

               Thrift  Rechartering  Legislation.  Legislation  enacted  in 1996
provided  that the BIF and SAIF were to have  merged on January 1, 1999 if there
were  no more  savings  associations  as of  that  date.  Various  proposals  to
eliminate the federal savings  association  charter,  create a uniform financial
institutions  charter,  abolish the OTS and  restrict  savings and loan  holding
company   activities  have  been  introduced  in  Congress.   Currently  pending
legislation  would place  activities  restrictions  on unitary  savings and loan
holding  companies,  subject to a grandfather  for existing  unitary savings and
loan holding  companies such as the  Corporation.  The Bank is unable to predict
whether such  legislation will be enacted or the extent to which the legislation
would restrict or disrupt its operations.

               Loans  to  One  Borrower.   Federal  law  provides  that  savings
institutions  generally  are  subject  to the  limits  on loans to one  borrower
applicable  to  national  banks.  A savings  institution  may not make a loan or
extend  credit to a single or related group of borrowers in excess of 15% of its
unimpaired  capital and surplus.  An additional amount may be lent, equal to 10%
of unimpaired  capital and surplus,  if secured by specified  readily-marketable
collateral.  At June 30,  1999,  the Bank's  limit on loans to one  borrower was
$13.6 million, and the Bank's largest aggregate  outstanding balance of loans to
one borrower was $6.4 million.  These loans were  performing  according to their
original terms at June 30, 1999.

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

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

               Limitation  on  Capital  Distributions.  OTS  regulations  impose
limitations upon all capital  distributions by a savings institution,  including
cash  dividends,  payments to repurchase its shares and payments to shareholders
of  another  institution  in a  cash-out  merger.  The  rule  effective  in 1998
established  three tiers of  institutions  based  primarily on an  institution's
capital level. An institution that exceeded all capital  requirements before and
after a proposed capital  distribution  ("Tier I Bank") and had not been advised
by the OTS that it was in need of more than  normal  supervision,  could,  after
<PAGE>

prior  notice  but  without   obtaining   approval  of  the  OTS,  make  capital
distributions  during the calendar  year equal to the greater of (i) 100% of its
net earnings to date during the calendar  year plus the amount that would reduce
by one-half the excess capital over its capital requirements at the beginning of
the calendar year or (ii) 75% of its net income for the previous four  quarters.
Any additional  capital  distributions  required prior regulatory  approval.  At
March 31, 1999, the Bank was a Tier I Bank.  Effective  April 1, 1999, the OTS's
capital  distribution   regulation  changed.   Under  the  new  regulation,   an
application  to and the prior  approval of the OTS will be required prior to any
capital  distribution  if  the  institution  does  not  meet  the  criteria  for
"expedited  treatment" of applications under OTS regulations  (i.e.,  generally,
safety and soundness,  compliance  and Community  Reinvestment  Act  examination
ratings in the two top  categories),  the total  capital  distributions  for the
calendar  year exceed net income for that year plus the amount of  retained  net
income for the preceding two years,  the institution  would be  undercapitalized
following the distribution or the distribution  would otherwise be contrary to a
statute,  regulation or agreement  with OTS. If an  application is not required,
the  institution  must  still  provide  prior  notice  to  OTS  of  the  capital
distribution.  In the  event  the  Bank's  capital  fell  below  its  regulatory
requirements  or the OTS  notified  it that it was in need of more  than  normal
supervision, the Bank's ability to make capital distributions could

                                       26

<PAGE>
be  restricted.   In  addition,  the  OTS  could  prohibit  a  proposed  capital
distribution  by any  institution,  which would  otherwise  be  permitted by the
regulation,  if the OTS determines that such  distribution  would  constitute an
unsafe or unsound practice.

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

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

               Transactions with Related Parties. The Bank's authority to engage
in transactions with  "affiliates"  (e.g., any company that controls or is under
common control with an  institution,  including the  Corporation)  is limited by
federal law. The aggregate  amount of covered  transactions  with any individual
affiliate  is  limited  to  10% of  the  capital  and  surplus  of  the  savings
institution. The aggregate amount of covered transactions with all affiliates is
limited  to  20% of the  savings  institution's  capital  and  surplus.  Certain
transactions  with  affiliates  are required to be secured by  collateral  in an
amount and of a type  described  in federal  law.  The  purchase  of low quality
assets from affiliates is generally prohibited. The transactions with affiliates
must be on terms and under circumstances,  that are at least as favorable to the
institution  as those  prevailing at the time for comparable  transactions  with
non-affiliated companies. In addition,  savings institutions are prohibited from
lending to any affiliate that is engaged in activities  that are not permissible
for  bank  holding  companies  and  no  savings  institution  may  purchase  the
securities of any affiliate other than a subsidiary.

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

               Enforcement.  The OTS has primary enforcement responsibility over
savings  institutions  and  has the  authority  to  bring  actions  against  the
institution and all institution-affiliated  parties, including stockholders, and
any  attorneys,   appraisers  and   accountants   who  knowingly  or  recklessly
participate  in wrongful  action likely to have an adverse  effect on an insured
institution.  Formal enforcement action may range from the issuance of a capital
<PAGE>

directive or cease and desist order to removal of officers  and/or  directors to
institution  of   receivership,   conservatorship   or  termination  of  deposit
insurance.  Civil  penalties  cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially  egregious  cases. The
FDIC has the authority to recommend to the Director of the OTS that  enforcement
action to be taken with respect to a particular savings  institution.  If action
is not taken by the  Director,  the FDIC has authority to take such action under
certain  circumstances.  Federal law also  establishes  criminal  penalties  for
certain violations.

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

                                       27
<PAGE>
Federal Home Loan Bank System

               The Bank is a member of the FHLB  System,  which  consists  of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital  stock in that FHLB in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential  mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances  (borrowings)
from the  FHLB,  whichever  is  greater.  The Bank was in  compliance  with this
requirement  with an investment in FHLB stock at June 30, 1999, of $3.6 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may be obtained only for the purpose of providing funds for residential
housing finance.

               The FHLBs are  required to provide  funds for the  resolution  of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements  could reduce the amount of  dividends  that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their  members.  For the years ended June 30,  1999,  1998 and 1997,
dividends from the FHLB to the Bank amounted to $262,000, $229,000 and $207,000,
respectively.  If dividends  were  reduced,  or interest on future FHLB advances
increased, the Bank's net interest income would likely be reduced also.

Federal Reserve System

               The   Federal   Reserve   Board   regulations   require   savings
institutions to maintain non-interest earning reserves against their transaction
accounts  (primarily  NOW  and  regular  checking  accounts).   The  regulations
generally  provide that reserves be  maintained  against  aggregate  transaction
accounts as follows:  for accounts aggregating $46.5 million or less (subject to
adjustment by the Federal Reserve Board) the reserve  requirement is 3%; and for
accounts  aggregating  greater than $46.5  million,  the reserve  requirement is
$1.395  million plus 10% (subject to  adjustment  by the Federal  Reserve  Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $46.5  million.  The first $4.9  million  of  otherwise  receivable  balances
(subject to  adjustments  by the Federal  Reserve  Board) are exempted  from the
reserve requirements. The Bank complies with the foregoing requirements.

                                    TAXATION

Federal Taxation

               General. The Company 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 the Corporation.

               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

<PAGE>

may  have  been  deducted  in  arriving  at their  taxable  income.  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. Due to the
Bank's loss experience, the Bank generally recognized a bad debt deduction equal
to 8% of taxable income.

               The thrift bad debt rules were  revised by Congress in 1996.  The
new rules  eliminated  the  percentage  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). For taxable years

                                       28

<PAGE>
beginning  after  December  31,  1995,  the  Bank's bad debt  deduction  must be
determined under the experience  method using a formula based on actual bad debt
experience  over a period of years or, if the thrift is a "large" thrift (assets
in excess of $500  million) on the basis of net  charge-offs  during the taxable
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 continues to be subject
to  provisions  of present law referred to below that  require  recapture of the
pre-1988  bad  debt  reserve  in the case of  certain  excess  distributions  to
shareholders.

               Distributions.  To the extent  that the Bank  makes  "nondividend
distributions"  to the  Corporation,  such  distributions  will be considered to
result in distributions  from the balance of its bad debt reserve as of December
31,  1987 (or a lesser  amount if the  Bank's  loan  portfolio  decreased  since
December  31, 1987) and then from the  supplemental  reserve for losses on loans
("Excess  Distributions"),  and an amount based on the Excess Distributions 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.  The  amount  of  additional  taxable  income  created  from 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 Excess
Distribution  would be  includable  in  gross  income  for  federal  income  tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and local
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  carry-overs.  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
0.12% 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.  The Corporation
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  the  Corporation  and  the  Bank  will  not  file  a
consolidated  tax return,  except that if the  Corporation 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.
<PAGE>
               Audits.  The Bank's  Federal income tax returns have been audited
through June 30, 1998. The Consolidated Financial Statements include the effects
of all adjustments related to the audit.

State Taxation

               South  Carolina.  The provisions of South Carolina tax law mirror
the Code, with certain  modifications,  as it relates to savings banks. The Bank
is subject to South  Carolina  income tax at the rate of 6%. This rate of tax is
imposed on  savings  banks in lieu of the  general  state  business  corporation
income tax. The Bank's state income tax returns have not been audited within the
last five years.

               Delaware.  As a Delaware  holding  company not earning  income in
Delaware,  the Corporation is exempt 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.

                                       29

<PAGE>
               For  additional  information  regarding  taxation,  see Note 8 of
Notes to Consolidated Financial Statements contained in the Annual Report.

Personnel

               As of June 30, 1999, the Company had 141 full-time  employees and
35 part-time employees. The Company believes that employees play a vital role in
the success of a service  company and that the Company's  relationship  with its
employees is good. The employees are not represented by a collective  bargaining
unit.

Item 2.     Properties
-------     ----------

               The following table sets forth certain information  regarding the
Company's offices as of June 30, 1999.


                                       30

<PAGE>
<TABLE>
<CAPTION>
                                                                                                        Net
                                                                   Leased/        Approximate           Book
              Location                Year Opened                  Owned          Square Footage        Value
              --------                -----------                  -----          --------------        -----
<S>                                        <C>                                        <C>              <C>
Main Office:

380 E. Main Street                         1974                    Owned              32,820           $1,016
Spartanburg, South Carolina

Branch Offices:

280 N. Church Street                       1986                    Owned               1,080              187
Spartanburg, South Carolina

1488 W.O. Ezell Boulevard                  1980                    Ground              2,453              603
Spartanburg, South Carolina                                        Lease(1)

1585 E. Main Street                        1991                    Owned               2,166              390
Spartanburg, South Carolina

2701 Boiling Springs Road                  1994                    Owned               3,300              683
Boiling Springs, South Carolina

1157 Asheville Highway                     1997                    Owned               3,330              524
Inman, South Carolina

2075 E. Main Street                        1997                    Owned               3,332              714
Duncan, South Carolina

1451 Woodruff Road                         1998                    Leased(2)             540              203
Greenville, South Carolina

1319 W. Poinsett Street
Greer, South Carolina                      1998                    Owned               3,332              801

14055 E. Wade Hampton Boulevard
Greer, South Carolina                      1998                    Leased(3)             688              210

450 S. Alabama Avenue
Chesnee, South Carolina                    1999                    Owned               1,760              465
</TABLE>
     (1) A  fifteen-year  ground  lease  expiring  in 2012 with  annual  rent of
     $24,500.
     (2) A five-year lease expiring in 2003 with annual rent of $25,000.
     (3) A five-year lease expiring in 2003 with annual rent of $30,000.

              The Bank uses the  services of an outside  service  bureau for its
significant  data  processing  applications.  At June 30, 1999,  the Bank had 11
proprietary  automated teller machines.  At June 30, 1999, the net book value of
the Bank's office  properties and the Bank's  fixtures,  furniture and equipment
was $8.1 million.

                                       31
<PAGE>
Item 3.    Legal Proceedings
-------    -----------------

              In the  opinion of  management,  the Company is not a party to any
pending  claims or lawsuits  that are expected to have a material  effect on the
Company's  financial  condition  or  operations.  Periodically,  there have been
various claims and lawsuits involving the Company mainly as a defendant, such as
claims to enforce  liens,  condemnation  proceedings  on properties in which the
Company holds security  interests,  claims involving the making and servicing of
real  property  loans and  other  issues  incident  to the  Company's  business.
Management,  based on advice from legal  counsel  does not expect the outcome of
any  pending  legal  proceedings  to have a  material  effect  on the  financial
condition or results of operations of the Company.

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

              No matters were submitted to a vote of security holders during the
quarter ended June 30, 1999.



                                     PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder
           Matters
-------    -------

              The common stock of  FirstSpartan is traded on the Nasdaq National
Market under the symbol "FSPT." As of August 3, 1999,  there were  approximately
1,188 stockholders of record (excluding holders in nominee or street name).

              Declarations or payments of dividends are subject to determination
by the Company's Board of Directors,  which takes into account the Corporation's
financial  condition,   results  of  operations,  tax  considerations,   capital
requirements,   industry  standards,  economic  conditions  and  other  factors,
including the regulatory  restrictions  which affect the payment of dividends by
the Bank to the  Corporation.  See "REGULATION -- Federal  Regulation of Savings
Banks -- Limitations on Capital  Distributions" and "-- Savings and Loan Holding
Company Regulations -- Dividends."

              The  Corporation's  common  stock was sold in its  initial  public
offering at $20.00 per share and commenced trading on July 8, 1997. High and low
prices and dividend  information are included in the Company's  Annual Report to
Shareholders which is incorporated herein by reference.

Item 6.    Selected Financial Data
-------    -----------------------

              The  information  under Item 6 of this  Report is  included in the
Company's Annual Report to Shareholders and is incorporated herein by reference.

Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations
-------    ---------------------

              The  information  under Item 7 of this  Report is  included in the
Company's Annual Report to Shareholders and is incorporated herein by reference.
<PAGE>
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
--------   ----------------------------------------------------------

              The  information  under Item 7A of this  Report is included in the
Company's Annual Report to Shareholders and is incorporated herein by reference.




                                       32

<PAGE>
Item 8.    Financial Statements and Supplementary Data
-------    -------------------------------------------

              The  information  under Item 8 of this  Report is  included in the
Company's Annual Report to Shareholders and is incorporated herein by reference.

Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure
-------    --------------------

              Not applicable.

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant
--------   --------------------------------------------------

              The  information  under Item 10 of this  Report is included in the
Company's Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
and is incorporated herein by reference.

              Reference is made to the cover page of this report,  as well as to
the  Company's  Definitive  Proxy  Statement  for the  1999  Annual  Meeting  of
Shareholders,  for  information  regarding  compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act").

Item 11.   Executive Compensation
--------   ----------------------

              The  information  under Item 11 of this  Report is included in the
Company's Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
and is incorporated herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management
--------   --------------------------------------------------------------

              The  information  under  Items  12(a) and 12(b) of  this Report is
included in the Company's Definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders and is incorporated herein by reference.

Item 13.   Certain Relationships and Related Transactions
--------   ----------------------------------------------

               The information  under Item  13 of this Report is included in the
Company's Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
and is incorporated herein by reference.
<PAGE>
                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

             (a)    Exhibits

                    (3)(a) Certificate of Incorporation of the Registrant*
                    (3)(b) Bylaws of the Registrant*
                    (10)(a) Employment Agreement with Billy L. Painter**
                    (10)(b) Employment Agreement with Hugh H. Brantley**
                    (10)(c) Employment Agreement with J. Stephen Sinclair**
                    (10)(d) Employment Agreement with R. Lamar Simpson***
                    (10)(e) Severance Agreement with Rand Peterson**
                    (10)(f) Severance Agreement with Thomas Bridgeman**
                    (10)(g) Severance Agreement with Katherine A. Dunleavy***
                    (10)(h) Employee Severance Compensation Plan**

                             33

<PAGE>
                    (10)(i) Employee Stock Ownership Plan**
                    (10)(j) Registrant's 1997 Stock Option Plan****
                    (10)(k) Registrant's  Management Recognition and Development
                    Plan****
                    (10)(l) Loan Agreement with Central  Carolina Bank and Trust
                    Company*****
                    (13) 1999 Annual Report to Stockholders
                    (21) Subsidiaries of the Registrant**
                    (23) Consent of Deloitte & Touche LLP
                    (27) Financial Data Schedule

             (b)    Reports on Form 8-K:

         On June 9, 1999, a Form 8-K was filed reporting that the Registrant had
declared a special cash distribution in the amount of $12.00 per share,  payable
on June  25,  1999 to  shareholders  of  record  on June  14,  1999.  Also,  the
Registrant  reported in the Form 8-K that it had entered  into a loan  agreement
with Central  Carolina Bank and Trust Company in the amount of $35.0 million for
the purpose of funding  payment of a portion of the special  cash  distribution.
The  press  release  announcing  the  special  cash  distribution  and the  loan
agreement were filed by exhibit.

*    Filed as an exhibit to the Registrant's  Registration Statement on Form S-1
     (333-23015) and incorporated herein by reference. ** Filed as an exhibit to
     the registrant's  Annual Report on Form 10-K for the fiscal year ended June
     30, 1997 and incorporated herein by reference.
***  Filed as an exhibit to the  Registrant's  Quarterly Report on Form 10-Q for
     the  quarter ended September 30, 1997 and incorporated herein by reference.
**** Filed as an exhibit to the  Registrant's  Annual Meeting  Definitive  Proxy
     Statement dated December 12, 1997 and incorporated herein by reference.
*****Filed as an  exhibit  to the  Registrant's  Form 8-K dated June 9, 1999 and
     incorporated herein by reference.



                                       34

<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, there unto duly authorized.

                                       FIRSTSPARTAN FINANCIAL CORP.



Date: September 23, 1999               By: /s/ Billy L. Painter
                                           --------------------
                                           Billy L. Painter
                                           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/ Billy L. Painter                                  September 23, 1999
   ---------------------
    Billy L. Painter
    President and Chief Executive Officer
    (Principal Executive Officer)



By: /s/ R. Lamar Simpson                                  September 23, 1999
   ---------------------
    R. Lamar Simpson
    Treasurer, Secretary and Chief Financial Officer
    (Principal Financial and Accounting Officer)


By: /s/ Robert R. Odom                                    September 23, 1999
   -------------------
    Robert R. Odom
    Chairman of the Board


By: /s/ E. Lea Salter                                     September 23, 1999
   ------------------
    E. Lea Salter
    Director


By: /s/ David E. Tate                                     September 23, 1999
   ------------------
    David E. Tate
    Director


By: /s/ Robert L. Handell                                 September 23, 1999
   ----------------------
    Robert L. Handell
    Director

<PAGE>

By: /s/ E.L. Sanders                                      September 23, 1999
   -----------------
    E.L. Sanders
    Director



By: /s/ R. Wesley Hammond                                 September 23, 1999
   ----------------------
    R. Wesley Hammond
    Director




<PAGE>







                                   EXHIBIT 13

                       1999 ANNUAL REPORT TO STOCKHOLDERS