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


                                    FORM 10-K

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

                     For the fiscal year ended June 30, 2000

                                       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 Identification No.)
incorporation or organization)


             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
                     ---------------------------------------
                                (Title of Class)


            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  September  19,  2000,  there  were  issued  and  outstanding
3,720,270  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  September  19,  2000,  the
aggregate value of the Common Stock  outstanding held by  non-affiliates  of the
registrant was $82,767,648  (2,913,328 shares at $28.41 per share). For purposes
of this  calculation,  officers and  directors of the  registrant  and the First
Federal Bank Employee Stock Ownership Plan are excluded.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


<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,  and  changes in federal  and state  legislation  and  regulation.  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. (the  "Corporation")  is a unitary
thrift holding company incorporated in the state of Delaware.  The Corporation's
principal business activities are conducted through its wholly-owned subsidiary,
First Federal Bank (the  "Bank"),  which is a federally  chartered  savings bank
engaged in the business of accepting  savings and demand  deposits and providing
mortgage,  consumer,  and  commercial  loans to the general  public  through its
retail banking offices.  The Bank's business activities are primarily limited to
within the Spartanburg and adjacent county areas of South Carolina. The Bank was
originally founded in 1935 as a federal mutual savings and loan association.  In
1997, the Bank converted to a federal stock savings bank (the  "Conversion") and
as part of the Conversion, the Corporation was formed as the holding company for
the Bank.  At June 30,  2000,  the Company had total  assets of $585.7  million,
total  deposits  of  $419.6  million,  and total  stockholders'  equity of $69.4
million.

               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.

               Spartanburg  County  and  the  City  of  Spartanburg  had a  2000
population of approximately 248,000 and 46,000,  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 3.3% for May 2000.  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
historically  has come from  commercial  banks,  credit  unions,  other  thrifts
operating in its market area, and other financial institutions such as brokerage
firms and insurance companies.  There are 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.  Additionally,  the Bank
expects  competition  to increase as a result of recent  regulatory  actions and
legislative changes, most notably the recent enactment of the Gramm-Leach-Bliley
Act of  1999.  These  changes  have  eased  and  likely  will  continue  to ease
restrictions on interstate  banking and entry into the financial services market
by non-depository and non-traditional  financial services  providers,  including
insurance companies,  securities brokerage and underwriting firms, and specialty
financial services companies such as internet-based providers.

Lending Activities

               General.  At June 30,  2000,  the Bank's  total loans  receivable
portfolio  amounted to $540.5 million,  or 92% 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 $309.1 million,  or 57% of the total loans receivable  portfolio at
June 30, 2000. 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,
                                           ----------------------------------------------------------------------------------------
                                                         2000                          1999                           1998
                                           -------------------------------  ------------------------------ ------------------------
                                              Amount           Percent        Amount           Percent        Amount       Percent
                                           --------------  ---------------  -------------   -------------- -------------  ---------
<S>                                          <C>                <C>         <C>                <C>         <C>               <C>
Mortgage loans:
   One- to four-family                       $309,096           57.2%       $290,219           61.3%       $312,981          70.9%
   Construction                                75,963           14.0          72,373           15.3          41,089           9.3
   Land development                            24,150            4.5          18,864            4.0          16,729           3.8
   Commercial and other                        40,979            7.6          23,587            5.0          13,817           3.1
                                           ----------      ---------      ----------      ---------       ---------      --------
      Total mortgage loans                    450,188           83.3         405,043           85.6         384,616          87.1
                                           ----------      ---------      ----------      ---------       ---------      --------

Consumer and other loans:
   Home equity                                 52,928            9.8          43,623            9.2          40,746           9.2
   Commercial                                  25,259            4.7          13,885            2.9           6,987           1.6
   Other                                       12,115            2.2          10,894            2.3           9,058           2.1
                                           ----------      ---------      ----------      ---------       ---------      --------
      Total consumer and other loans           90,302           16.7          68,402           14.4          56,791          12.9
                                           ----------      ---------      ----------      ---------       ---------      --------
Total loans receivable                        540,490          100.0%        473,445          100.0%        441,407         100.0%
                                                           =========                      =========                      ========
Less:
   Undisbursed portion of loans in process     33,367                         34,807                         21,923
   Net deferred loan fees                         554                            561                            843
   Allowance for loan losses                    3,474                          2,896                          2,179
                                           ----------                     ----------                      ---------
      Loans receivable, net                  $503,095                       $435,181                       $416,462
                                           ==========                     ==========                      =========
</TABLE>

<TABLE>
<CAPTION>


                                           -----------------------------------------------------------------------
                                                            1997                                1996
                                            ---------------------------------    ---------------------------------
                                                 Amount           Percent              Amount             Percent
                                            --------------    --------------     -----------------   -------------
Mortgage loans:
<S>                                             <C>                 <C>                <C>                 <C>
   One- to four-family                          $285,969            75.1%              $257,398            77.3%
   Construction                                   35,061             9.2                 32,393             9.8
   Land development                               12,376             3.2                  5,683             1.8
   Commercial and other                            3,773             1.0                  3,262             1.0
                                           -------------       ---------         --------------       ---------
      Total mortgage loans                       337,179            88.5                299,276            89.9
                                           -------------       ---------         --------------       ---------

Consumer and other loans:
   Home equity                                    35,366             9.3                 26,584             8.0
   Commercial                                      1,984             0.5                    433             0.1
   Other                                           6,301             2.0                  6,510             2.0
                                           -------------       ---------         --------------       ---------
      Total consumer and other loans              43,651            11.5                 33,527            10.1
                                           -------------       ---------         --------------       ---------
Total loans receivable                           380,830           100.0%               332,803          100.0%
                                                               =========                              =========
Less:
   Undisbursed portion of loans in process        15,311                                 15,839
   Net deferred loan fees                            995                                  1,028
   Allowance for loan losses                       1,796                                  1,000
                                           -------------                         --------------
      Loans receivable, net                     $362,728                               $314,936
                                           =============                         ==============
</TABLE>

                                        3

<PAGE>

               One- to Four-Family Real Estate Lending. At June 30, 2000, $309.1
million,  or 57% of the  Bank's  total  loan  portfolio,  consisted  of  one- to
four-family  mortgage loans. The Bank originated  $38.4 million,  $88.5 million,
and $95.8 million of one- to  four-family  mortgage loans during the years ended
June 30, 2000, 1999, and 1998, 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, 2000, $139.1 million,
or 45% 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, 2000, however, 14 loans aggregating  $502,000 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.

               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.  During periods of rising  interest
rates  the risk of  default  on ARM  loans  generally  increases  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, 2000, the Bank had 11
one- to  four-family  first  mortgage  loans  totaling  $496,000 with  principal
balances in excess of 80% of the appraised  value of the real estate  collateral
and with no private mortgage insurance.  The majority of 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, 2000, total approved construction loans amounted
to $76.0 million ($47.3 million not directly  originated by the Bank), or 14% of
the Bank's  total  loan  portfolio.  Outstanding  balances  under such  approved
construction loans were $51.6 million ($31.5 million not directly  originated by
the Bank) at June 30, 2000.

               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,  2000,  approved  speculative
construction  loans amounted to $52.1 million  (outstanding  balances were $40.9
million). At June 30, 2000, the largest amount of construction loans outstanding
to one builder was $2.1 million, all of which was for speculative construction.

               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 "-- Non-performing 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 involves 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 $23.5
million and  purchased  $40.0  million of  speculative  construction  loans from
mortgage bankers during the year ended June 30, 2000,  compared to $21.0 million
and $43.1 million, respectively, during the year ended June 30, 1999.

               Commercial  Real Estate  Lending.  The Bank  originates  mortgage
loans for the acquisition and refinancing of commercial real estate  properties.
At June 30,  2000,  $41.0  million,  or 8% 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 real estate 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. 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  loans to local
developers for the purpose of developing land (i.e.,  installing roads,  sewers,
water, and other  utilities) for sale. At June 30, 2000, land development  loans
amounted  to $24.2  million,  or 5% 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.

               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,
2000,  consumer  loans  amounted  to $90.3  million,  or 17% of the  total  loan
portfolio.

               At June 30, 2000,  the largest  component  of the  consumer  loan
portfolio  consisted of second  mortgage  loans and home equity lines of credit,
which totaled $52.9  million,  or 10% of the total loan  portfolio.  At June 30,
2000,  unused  commitments  to extend  credit  under home equity lines of credit
totaled $40.2 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
residential  property.  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, 2000,  automobile loans amounted to $5.6 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.

               The Bank issues VISA credit cards to customers within its primary
market  area.  At June 30,  2000,  there were 1,812  credit card  accounts  with
aggregate outstanding balances of $1.7 million. At June 30, 2000, total approved
lines of credit were $6.6 million.  The Bank does not engage in direct  mailings
of pre-approved credit cards.

                                        7

<PAGE>


               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.

               The Bank also engages in commercial business lending. At June 30,
2000, the Bank had $25.3 million of commercial  business loans which represented
5% of the total loan portfolio.  Commercial business loans generally are secured
by business equipment.  Of the total commercial business loans at June 30, 2000,
loans  amounting to $3.6 million were  unsecured.  The Bank  generally  requires
annual financial statements from its corporate borrowers and personal guarantees
from the corporate principals.

               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,  2000  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          $  1,407        $  3,523        $  6,244        $ 87,475        $210,447        $309,096
   Construction                   52,101           3,169             287              80          20,326          75,963
   Land development                6,519          13,201           2,354           1,213             863          24,150
   Commercial and other            9,795           3,861          18,141           6,600           2,582          40,979
Consumer and other loans          19,174          12,382          13,598          11,901          33,247          90,302
                                --------        --------        --------        --------        --------        --------
      Total                     $ 88,996        $ 36,136        $ 40,624        $107,269        $267,465        $540,490
                                ========        ========        ========        ========        ========        ========
</TABLE>

               The following table sets forth the dollar amount of all loans due
after June 30,  2001,  which  have fixed  interest  rates and have  floating  or
adjustable interest rates (in thousands):



                                  Fixed-        Floating- or
                                  Rates       Adjustable-Rates    Total
                                 -------     ----------------    -------
Mortgage loans:
   One- to four-family          $180,598        $127,091        $307,689
   Construction                   14,374           9,488          23,862
   Land development                2,770          14,861          17,631
   Commercial and other           28,318           2,866          31,184
Consumer and other loans          38,920          32,208          71,128
                                --------        --------        --------
       Total                    $264,980        $186,514        $451,494
                                ========        ========        ========

                                        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 television, 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
Senior 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.

              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 $1.3 million at June 30, 2000. The Bank
does not expect any material losses on these loans due to their seasoned nature.
Recent loan sales have been predominantly 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 $25.3  million of  conventional  loans during  fiscal
2000.  Management  intends to sell loans in the  future as  necessary  to manage
interest rate risk and fund continuing operations.


                                       10

<PAGE>

              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 fee for  performing  these services for
others.  The Bank's servicing  portfolio  amounted to $119.4 million at June 30,
2000.  The Bank  generally  is paid a fee  equal  to  0.25%  of the  outstanding
principal  balance for  servicing  sold loans.  Loan  servicing  income  totaled
$308,000,  $227,000,  and $178,000 for the years ended June 30, 2000,  1999, and
1998,  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, 2000, borrowers' escrow
funds amounted to $1.1 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, 2000,  the Bank  purchased  $20.6 million of one- to  four-family
mortgage  loans.  Currently,  the majority of the loans  purchased  through this
mortgage banking company are secured by properties located in the Bank's primary
market area and all are located  within South  Carolina or North  Carolina.  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, 2000, the Bank purchased
one- to  four-family  mortgage  loans from these  unaffiliated  entities  in the
amount of $927,000. The one- to four-family mortgage loans purchased are located
in South  Carolina and  generally  are  non-conforming  to  secondary  marketing
standards.  However,  in the Bank's  opinion,  the  higher  yields  justify  the
slightly increased risk in these loans.

                                       11

<PAGE>


              The following table sets forth total loans originated,  purchased,
sold, and repaid during the periods indicated (in thousands):

<TABLE>
<CAPTION>


                                                                  Year Ended June 30,
                                                --------------------------------------------------------
                                                    2000                   1999                1998
                                                --------------------------------------------------------
<S>                                             <C>                    <C>                  <C>
Loans originated:
   Mortgage loans:
      One- to four-family                       $   38,358             $   88,500           $   95,754
      Construction                                  43,228                 41,696               38,860
      Land development                              11,173                  8,238               12,676
      Commercial and other                          25,682                 11,929                9,133
   Consumer and other                               58,117                 49,950               56,888
                                                ----------             ----------            ---------
         Total loans originated                    176,558                200,313              213,311

Loans purchased:
   Mortgage loans:
      One- to four-family                           21,486                 16,365               14,309
      Construction                                  48,043                 49,447                9,537
                                                ----------             ----------            ---------
         Total loans purchased                      69,529                 65,812               23,846

Whole loans sold:
   Mortgage loans:
      One- to four-family                         (30,352)               (64,225)             (19,540)

Loan principal repayments                        (152,849)              (173,781)            (148,697)

Net  increase (decrease) in other items              5,028                (9,400)             (15,186)
                                                ----------             ----------            ---------
Net increase in loans receivable, net           $   67,914             $   18,719            $  53,734
                                                ==========             ==========            =========
</TABLE>


               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, 2000, the Bank had
loan commitments  (excluding  undisbursed  portions of interim  construction and
land  development  loans of $33.4  million) of $6.5  million and unused lines of
credit  of  $55.6  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  some  of  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 $98,000, $632,000, and $219,000 of deferred loan fees during the
years ended June 30, 2000, 1999, and 1998, respectively, in connection with loan
refinancings, payoffs, sales, and ongoing amortization of outstanding loans.

                                       12

<PAGE>

               Non-performing 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  non-accrual  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 non-accrual
status is charged  against  income at the time the loan is placed on non-accrual
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.


                                       13

<PAGE>

               The following  table sets forth  information  with respect to the
Bank's non-performing assets and restructured loans (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                         At June 30,
                                                              -----------------------------------------------------------------
                                                               2000           1999           1998           1997          1996
                                                               ----           ----           ----           ----          ----
<S>                                                           <C>           <C>            <C>             <C>            <C>
Loans accounted for on a non-accrual basis:
 Mortgage loans:
    One- to four-family                                       $  524         $  533         $  266         $  271         $  719
    Construction                                               2,580            310            787            273          1,130
    Commercial and other                                          --             --              4             --             --
 Consumer and other loans                                        316            378            153             74             60
                                                              ------         ------         ------         ------         ------
       Total non-accrual loans                                 3,420          1,221          1,210            618          1,909
                                                              ------         ------         ------         ------         ------
Accruing loans contractually past due 90 days or more:
 Mortgage loans:
    Construction                                                  --            298            145          1,401          3,965
 Consumer and other loans                                         23              2              8             12             --
                                                              ------         ------         ------         ------         ------
       Total accruing loans 90 days or more
          past due                                                23            300            153          1,413          3,965
                                                              ------         ------         ------         ------         ------
       Total of non-accrual loans and accruing
          loans 90 days or more past due                       3,443          1,521          1,363          2,031          5,874

Real estate acquired in settlement of loans                      478            348             36             36             58
                                                              ------         ------         ------         ------         ------

       Total non-performing assets                            $3,921         $1,869         $1,399         $2,067         $5,932
                                                              ======         ======         ======         ======         ======

Restructured loans                                            $1,419         $  672         $  594         $  863         $1,247
                                                              ======         ======         ======         ======         ======

Non-accrual loans and accruing loans 90
   days or more past due as a percentage
   of loans receivable, net                                     0.68%          0.35%          0.33%          0.56%          1.87%
                                                                ====           ====           ====           ====           ====
Non-accrual loans and accruing and loans
   90 days or more past due as a percentage
   of total assets                                              0.59%          0.28%          0.26%          0.31%          1.65%
                                                                ====           ====           ====           ====           ====

Non-performing assets as a percentage of
   total assets                                                 0.67%          0.34%          0.27%          0.31%          1.66%
                                                                ====           ====           ====           ====           ====
</TABLE>

                                       14

<PAGE>


               Interest  income that would have been recorded for the year ended
June 30,  2000 had  non-accruing  loans been  current in  accordance  with their
original terms amounted to $196,000. The amount of interest included in interest
income on such loans for such periods amounted to $75,000.  Interest income that
would have been recorded for the year ended June 30, 2000 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,  2000,  the Bank had  $478,000  of real  estate  acquired  in
settlement of loans,  which  consisted of eight one- to four-family  properties,
six of which are under construction in a condominium development.

               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
non-accrual  loans.  The Bank had $1.4 million of restructured  loans as of June
30, 2000, which consisted of 18 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.


                                       15

<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):

                                                         At June 30,
                                                  ------------------------
                                                   2000              1999
                                                  ------            ------
                       Classified assets:
                          Loss                  $      --        $      --
                          Doubtful                    132               32
                          Substandard               5,866            3,144
                          Special mention           1,046            1,119

                       Loan loss allowances         3,474            2,896


               At June 30,  2000,  substandard  assets  consisted  of 23 one- to
four-family mortgage loans totaling  approximately $2.3 million, 25 construction
loans totaling $2.6 million,  46 other loans totaling $480,000,  and real estate
acquired through foreclosure totaling $478,000.

               At June 30, 2000,  special mention assets consisted of eight one-
to  four-family  mortgage  loans totaling  $309,000 and six  construction  loans
totaling $737,000.

               See Item 7,  "Management's  Discussion  and Analysis of Financial
Condition and Results of  Operations -- Financial  Condition - Asset Quality and
Allowance  for Loan Losses and -- Results of  Operations  -  Provision  for Loan
Losses" for further discussion.

               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.

               See Item 7,  "Management's  Discussion  and Analysis of Financial
Condition and Results of  Operations -- Financial  Condition - Asset Quality and
Allowance  for Loan Losses and -- Results of  Operations  -  Provision  for Loan
Losses" for further discussion.

                                       16

<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,
                                                  --------------------------------------------------------------------
                                                    2000           1999           1998           1997           1996
                                                   ------         ------         ------         ------         ------
<S>                                               <C>            <C>            <C>            <C>            <C>
Total loans outstanding at end of period          $540,491       $473,445       $441,407       $380,830       $332,803
                                                  ========       ========       ========       ========       ========
Average loans outstanding during period           $474,156       $441,514       $395,465       $336,476       $298,865
                                                  ========       ========       ========       ========       ========
Allowance balance at beginning of period          $  2,896       $  2,179       $  1,796       $  1,000       $    600
Provision for loan losses                              683            800            460            825            419
Charge-offs:
   Mortgage loans:
   One- to four-family                                  64             16              1             15             --
   Consumer and other                                   46             69             79             24             23
                                                  --------       --------       --------       --------       --------
      Total charge-offs                                110             85             80             39             23
                                                  --------       --------       --------       --------       --------

Recoveries:
   Mortgage loans:
   One- to four-family                                  --             --              2              9             --
   Consumer and other                                    5              2              1              1              4
                                                  --------       --------       --------       --------       --------
      Total recoveries                                   5              2              3             10              4
                                                  --------       --------       --------       --------       --------
Allowance balance at end of period                $  3,474       $  2,896       $  2,179       $  1,796       $  1,000
                                                  ========       ========       ========       ========       ========

Allowance for loan losses as a percentage of
  total loans receivable at end of period             0.64%          0.61%          0.49%          0.47%          0.30%
                                                  ========       ========       ========       ========       ========
Net charge-offs as a percentage of average
  loans outstanding during the period                 0.02%          0.02%          0.02%          0.01%          0.01%
                                                  ========       ========       ========       ========       ========
Ratio of allowance for loan losses to total
  non-performing loans at end of period               1.01           1.90           1.60           0.88           0.17
                                                  ========       ========       ========       ========       ========
</TABLE>


               The ratio of allowance  for loan losses to  non-performing  loans
may fluctuate at the end of the periods because of changes in the composition in
non-performing loans from period to period. The level of non-performing loans is
but one factor of many considered in establishing the allowance for loan losses.
See "-- Non-performing  Assets and Delinquencies" and "-- Asset  Classification"
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations -- Financial  Condition - Asset Quality and Allowance for Loan Losses
and  --  Results  of  Operations  -  Provision  for  Loan  Losses"  for  further
discussion.
                                       17

<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>
                                                   2000                     1999                    1998
                                          -----------------------   ---------------------   -----------------------
                                                       Percent                 Percent                   Percent
                                                      of Loans                of Loans                   of Loans
                                                         in                      in                         in
                                                      Category                Category                   Category
                                                      to Total                to Total                   to Total
                                            Amount     Loans        Amount     Loans          Amount      Loans
                                            ------     -----        ------     -----          ------      -----
<S>                                        <C>         <C>          <C>         <C>           <C>          <C>
Mortgage loans:
   Residential                             $2,050      71.5%        $1,411      76.9%         $1,194       81.2%
   Non-residential                            920      16.1          1,112      11.3             830        6.7
Consumer and other loans                      504      12.4            373      11.8             155       12.1
                                           ------     -----         ------     -----          ------      -----
      Total allowance for loan losses      $3,474     100.0%        $2,896     100.0%         $2,179      100.0%
                                           ======     =====         ======     =====          ======      =====

</TABLE>


<TABLE>
<CAPTION>
                                                   1997                     1996
                                           -------------------     ---------------------
                                                    Percent                     Percent
                                                    of Loans                   of Loans
                                                       in                          in
                                                    Category                    Category
                                                    to Total                    to Total
                                           Amount    Loans         Amount        Loans
                                           ------    -----         ------        -----
<S>                                        <C>         <C>          <C>           <C>
Mortgage loans:
   Residential                             $1,222      83.4%        $  675        86.0%
   Non-residential                            423       4.0             28         3.6
Consumer and other loans                      142      12.6            297        10.4
                                           ------     -----         ------       -----
      Total allowance for loan losses      $1,796     100.0%        $1,000       100.0%
                                           ======     =====         ======       =====

</TABLE>

                                       18

<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 AND SUPERVISION."

               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-backed
securities.  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 mortgage- backed securities.

               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, 2000, the Bank's  investment in the Asset  Management
Fund, Inc. Adjustable-Rate Mortgage Portfolio (which had an aggregate fair value
of $17.2  million  and  amortized  cost of $17.5  million)  exceeded  24% of the
Company's stockholders' equity at that date.


                                       19

<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,
                                           ---------------------------------------------------------------------------
                                                    2000                       1999                      1998
                                           -----------------------     ---------------------      --------------------
                                             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                 $    25      $    26      $    54      $    55      $    88      $    90
                                              -------      -------      -------      -------      -------      -------
         Total held-to-maturity                    25           26           54           55           88           90
                                              -------      -------      -------      -------      -------      -------
Available-for-Sale:
   Debt securities:
      U.S. Treasury obligations                    --           --           --           --          497          498
      State and local obligations               2,241        2,172        1,480        1,468           --           --
      U.S. Government Agency obligations       14,500       14,236        5,497        5,436        6,010        6,019
                                              -------      -------      -------      -------      -------      -------
         Total                                 16,741       16,408        6,977        6,904        6,507        6,517
Marketable equity securities(1)                17,498       17,285       16,511       16,440       22,225       22,192
                                              -------      -------      -------      -------      -------      -------
         Total available-for-sale              34,239       33,693       23,488       23,344       28,732       28,709
                                              -------      -------      -------      -------      -------      -------
Total                                         $34,264      $33,719      $23,542      $23,399      $28,820      $28,799
                                              =======      =======      =======      =======      =======      =======
</TABLE>

--------------------
(1)  Consists  principally  of a mutual  fund that  invests  in  adjustable-rate
     mortgage-backed  securities.  At June 30,  2000,  the mutual  fund  yielded
     6.39%.

               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, 2000.
U.S. Treasury  obligations and certain U.S.  Government  agency  obligations are
exempt from state taxation.  Their weighted  average 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):

<TABLE>
<CAPTION>
                                       Less Than                             One to
                                       One Year                            Five Years
                            ------------------------------      ---------------------------------
                            Amortized       Fair                Amortized        Fair
                              Cost         Value     Yield         Cost          Value      Yield
                             ------        -----     -----        ------        -------     -----
<S>                       <C>            <C>          <C>         <C>           <C>         <C>
State and local
   obligations              $   --       $   --         --%       $  958       $  933       4.65%
U. S. Government
   Agency obligations        1,000          990       5.14         4,500        4,412       5.97
Mortgage-backed
   securities                   --           --         --            25           26       8.00
                            ------       ------       ----        ------       ------       ----

Total                       $1,000       $  990       5.14%       $5,483       $5,371       5.75%
                            ======       ======       ====        ======       ======       ====
</TABLE>

<TABLE>
<CAPTION>
                                          Five to                               After
                                         Ten Years                            Ten Years
                            --------------------------------      -------------------------------
                            Amortized       Fair                  Amortized       Fair
                               Cost         Value      Yield        Cost          Value     Yield
                              ------       -------     -----       ------        ------     -----
<S>                           <C>           <C>         <C>          <C>          <C>       <C>
State and local
   obligations              $  294       $  289       4.80%       $  989       $  950       4.80%
U. S. Government
   Agency obligations        9,000        8,834       7.88            --           --         --
Mortgage-backed
   securities                   --           --         --            --           --         --
                            ------       ------       ----        ------       ------       ----

Total                       $9,294       $9,123       7.78%       $  989       $  950       4.80%
                            ======       ======       ====        ======       ======       ====
</TABLE>

                                       20

<PAGE>

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  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,  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.

               The  following  table  indicates  the amount of the Bank's  jumbo
certificate accounts by time remaining until maturity as of June 30, 2000. Jumbo
certificate accounts have principal balances of $100,000 or more (in thousands):


                     Maturity Period                       Amount
              -----------------------------               --------
              Three months or less                         $13,244
              Over three through six months                 16,551
              Over six through twelve months                33,327
              Over twelve months                            11,623
                                                          --------
                   Total                                   $74,745
                                                          ========

                                       21

<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,
                                         -----------------------------------------------------------------------------------------
                                                       2000                             1999                           1998
                                         -------------------------------   --------------------------------     ------------------
                                                     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:
   Non-interest-bearing                 $ 27,896        6.6%  $  8,733     $ 19,163        4.7%  $  6,406     $ 12,757        3.4%
   Interest-bearing                       48,551       11.6      2,018       46,533       11.5      4,312       42,221       11.5
Savings accounts                          50,488       12.0     (5,737)      56,225       13.8       (515)      56,740       15.3
Money market accounts                     27,711        6.6     (2,388)      30,099        7.4     11,966       18,133        4.9
Fixed-term certificate accounts
  which mature:
   Within 1 year                         223,035       53.2     (2,293)     225,328       55.5     25,305      200,023       54.1
   After 1 year, but within 2 years       28,872        6.9     11,391       17,481        4.3     (8,898)      26,379        7.1
   After 2 years, but within 3 years       5,946        1.4      1,094        4,852        1.2     (2,046)       6,898        1.9
   Thereafter                              7,120        1.7        790        6,330        1.6       (331)       6,661        1.8
                                        --------      -----   --------     --------      -----   --------     --------      -----

      Total                             $419,619      100.0%  $ 13,608     $406,011      100.0%  $ 36,199     $369,812      100.0%
                                        ========      =====   ========     ========      =====   ========     ========      =====
</TABLE>

               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):

                                          At June 30,
                              -----------------------------------
                                2000         1999         1998
                              --------     --------     ---------
            3.00% or less     $    951     $  1,008     $    412
            3.01% - 5.00%       72,349       97,638        2,623
            5.01% - 7.00%      183,778      155,261      236,792
            7.01% - 9.00%        7,895           84          134
                              --------     --------     --------
            Total             $264,973     $253,991     $239,961
                              ========     ========     ========


                                       22

<PAGE>

               Time Deposits by Maturities.  The following  table sets forth the
amount of time deposits in the Bank  categorized  by maturities at June 30, 2000
(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             $    951      $     --         $     --       $     --       $     --       $    951
3.01% - 5.00%               59,517         9,143              722            802          2,165         72,349
5.01% - 7.00%              157,574        16,893            5,158          1,716          2,437        183,778
7.01% - 9.00%                4,993         2,836               66             --             --          7,895
                          --------      --------         --------       --------       --------       --------
Total                     $223,035      $ 28,872         $  5,946       $  2,518       $  4,602       $264,973
                          ========      ========         ========       ========       ========       ========
</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,
                                                          ------------------------------------------
                                                            2000             1999           1998
                                                           ------           ------          ------
<S>                                                       <C>              <C>             <C>
Beginning balance                                         $ 406,011        $ 369,812       $ 353,193
                                                          ---------        ---------       ---------
Net (withdrawals) deposits before interest credited          (1,655)          22,126           1,452
Interest credited                                            15,263           14,073          15,167
                                                          ---------        ---------       ---------
Net increase in deposits                                     13,608           36,199          16,619
                                                          ---------        ---------       ---------
Ending balance                                            $ 419,619        $ 406,011       $ 369,812
                                                          =========        =========       =========
</TABLE>

               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.

                                       23

<PAGE>


               FHLB advances are summarized as follows (dollars in thousands):



                                             June 30,
                      ------------------------------------------------------
                                2000                          1999
                      ------------------------      ------------------------
                                      Weighted                      Weighted
                                      Average                        Average
  Type of Advance      Amount           Rate        Amount            Rate
  ---------------     --------         ------       ------           ------
  Fixed-rate          $45,000           6.38%       $34,000            5.23%
  Adjustable-rate      10,000           6.58             --              --
  Variable-rate        27,000           7.40             --              --
                      -------           ----        -------            ----
  Total advances      $82,000           6.32%       $34,000            5.23%
                      =======           ====        =======            ====


               The fixed-rate  advances are convertible whereby the FHLB has the
option  at a  predetermined  date  to  convert  the  fixed  interest  rate to an
adjustable rate tied to LIBOR.  The Company has the option to prepay any advance
on the conversion date or any subsequent  quarterly interest payment date should
the FHLB exercise its conversion  option.  The  adjustable-rate  advances adjust
quarterly based upon 3-month LIBOR and the  variable-rate  advances adjust daily
based on the overnight funds market.

               Scheduled  maturities  and repricing or conversion  dates of FHLB
advances as of June 30, 2000 are as follows (in thousands):


                                 Amounts          Amounts at
                                    at          Next Repricing
                Year Ending       Stated        or Conversion
                 June 30,        Maturity            Date
                 --------        --------         ----------
                   2001           $27,000          $65,000
                   2002                --               --
                   2003            16,000            7,000
                   2004             7,000           10,000
                 2005-2007             --               --
                   2008             7,000               --
                   2009            10,000               --
                   2010            15,000               --
                                  -------          -------
            Total advances        $82,000          $82,000
                                  =======          =======


               The maximum  month-end  balance of FHLB advances  outstanding was
$82.0 million and $34.0 million  during the years ending June 30, 2000 and 1999,
respectively.  Average  balances of FHLB advances  outstanding  during the years
ended June 30, 2000 and 1999 were $64.1 million and $26.8 million, respectively.
The Company had an approved  credit limit of $146.2  million with the FHLB as of
June 30, 2000.  The advances are secured by FHLB stock and a blanket lien on all
qualifying one- to four-family residential first mortgage loans.

                                       24

<PAGE>



               Short-term  Borrowings.  At June 30, 2000,  the Company had sold,
under  agreements  to  repurchase,   U.S.  Government  agency  securities.   The
securities  underlying the agreements  were delivered to the  broker-dealer  who
arranged the transaction.

               Information   concerning  securities  sold  under  agreements  to
repurchase is summarized as follows:


                                                            2000       1999
                                                           ------     -----

         Balance outstanding at end of year                $8,763        --
                                                           ======    ======
         Average balance for months outstanding            $8,908        --
                                                           ======    ======
         Average interest rate for months outstanding        6.01%       --
                                                           ======    ======
         Maximum month-end balance during year             $9,079        --
                                                           ======    ======
         Mortgage-related securities underlying the
           agreements at year end:
                Carrying value                             $9,000        --
                                                           ======    ======
                Estimated fair value                       $8,834        --
                                                           ======    ======


               At June 30, 1999,  the Company had  outstanding  a $35.0  million
note payable to a commercial  bank. The note, dated June 23, 1999, bore interest
at the  three-month  LIBOR plus 1.0%,  was due on August  15,  1999.  All of the
outstanding  stock of the Bank 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
$628,000 at June 30, 2000, did not exceed these limits.

               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, 2000, 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 $63,000 and $149,000 for the years ended June 30, 2000
and 1999, 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.

                                       25

<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 Company is a non-diversified unitary savings and loan holding
company  within the meaning of federal law.  Under prior law, a unitary  savings
and loan holding company,  such as the Company,  generally was not restricted as
to the types of business  activities  in which it may engage,  provided that the
Bank continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation  - QTL Test." The  Gramm-Leach-Bliley  Act of 1999  provides  that no
company may acquire control of a savings association after May 4, 1999 unless it
engages  only  in the  financial  activities  permitted  for  financial  holding
companies  under the law or for multiple  savings and loan holding  companies as
described below.  Further,  the  Gramm-Leach-Bliley  Act specifies that existing
savings  and loan  holding  companies  may only engage in such  activities.  The
Gramm-Leach-Bliley  Act, however,  grandfathered the unrestricted  authority for
activities with respect to unitary savings and loan holding  companies  existing
prior to May 4, 1999,  such as the  Company,  so long as the Bank  continues  to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company 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 Company
would  become a multiple  savings  and loan  holding  company  (if the  acquired
institution is held as a separate  subsidiary) and would generally be limited to
activities  permissible for bank holding  companies under Section 4(c)(8) of the
Bank Holding Company Act,  subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.

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


                                       26

<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.

               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 associations (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 4% (3% for  institutions  receiving  the highest  rating on the CAMELS
financial institution rating system) leverage ratio and an 8% risk-based capital
ratio. 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
non-cumulative  perpetual  preferred  stock and related  surplus,  and  minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than  certain  mortgage  servicing  rights and credit  card  relationships.  The
components of  supplementary  capital  currently  include  cumulative  preferred
stock,  long-term perpetual preferred stock,  mandatory convertible  securities,
subordinated  debt and intermediate  preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of  unrealized  gains  on  available-for-sale  equity  securities  with  readily
determinable fair values.  Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.

               The capital  regulations  also  incorporate an interest rate risk
component.  Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating  their
risk- based capital  requirements.  For the present  time,  the OTS has deferred
implementation  of the interest rate risk component.  At June 30, 2000, the Bank
met each of its capital requirements.

                                       27

<PAGE>

               The following table presents the Bank's capital  position at June
30, 2000 (dollars in thousands):



                                                                 Capital
                                                          ----------------------
                    Actual      Required      Excess        Actual      Required
                    Capital     Capital       Amount       Percent      Percent
                   --------    ---------     --------      -------     ---------
Tangible            $57,310    $ 8,770       $48,540         9.8%         1.5%
Core (Leverage)      57,310     23,400        33,910         9.8          4.0
Risk-based           60,684     32,069        28,615        15.1          8.0


               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  semi-annually by the FDIC and currently range from
zero basis  points for the  healthiest  institutions  to 27 basis points for the
riskiest.

               In addition to the assessment for deposit insurance, institutions
are required to make payments on bonds issued in the late 1980s by the Financing
Corporation  ("FICO") to recapitalize the predecessor to the SAIF.  Beginning in
2000,  there is equal sharing of FICO assessments by all SAIF and Bank Insurance
Fund  institutions.  FICO  payments  for the third and fourth  quarters  of 1999
approximated  5.9 basis  points and 2.06 basis points for the first two quarters
of 2000. The FDIC has authority to increase insurance assessments. A significant
increase in SAIF  insurance  premiums would likely have an adverse effect on the
operating  expenses and results of  operations  of the Bank.  Management  cannot
predict what insurance assessment rates will be in the future.

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

                                       28

<PAGE>

               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, 2000, the Bank's limit on loans to one borrower was $8.6
million,  and the Bank's largest aggregate  outstanding  balance of loans to one
borrower  was $4.9  million.  These  loans were  performing  according  to their
original terms at June 30, 2000.

               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, 2000,  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.  An application to and the prior
approval  of the  OTS is  required  prior  to any  capital  distribution  if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations  (i.e.,  generally,  safety and soundness,  compliance and
Community  Reinvestment Act examination ratings in the two top categories),  the
total  capital  distributions  for the calendar  year exceed net income for that
year plus the amount of retained  net income for the  preceding  two years,  the
institution  would  be  undercapitalized   following  the  distribution  or  the
distribution  would otherwise be contrary to a statute,  regulation or agreement
with OTS. If an application is not required,  the institution must still provide
prior notice to OTS of the capital distribution. In the event the Bank's capital
fell below its  regulatory  requirements  or the OTS  notified it that it was in
need of more  than  normal  supervision,  the  Bank's  ability  to make  capital
distributions  could be  restricted.  In  addition,  the OTS  could  prohibit  a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.


               Liquidity.  The Bank is required  to  maintain  an average  daily
balance of specified liquid assets equal to a monthly average of not less than a
specified  percentage of its net  withdrawable  deposit accounts plus short-term
borrowings.  This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount  within  the range of 4% to 10%.  Monetary
penalties may be imposed for failure to meet these liquidity  requirements.  The
Bank 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


                                       29

<PAGE>

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

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

Federal Home Loan Bank System

               The Bank is a member of the 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, 2000, of $4.1 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, 2000,  1999, and 1998,
dividends from the FHLB to the Bank amounted to $284,000, $262,000 and $229,000,
respectively.  If dividends  were  reduced,  or interest on future FHLB advances
increased, the Bank's net interest income would likely be reduced also.


                                       30

<PAGE>


Federal Reserve System

               The   Federal   Reserve   Board   regulations   require   savings
institutions to maintain non-interest earning reserves against their transaction
accounts  (primarily  NOW  and  regular  checking  accounts).   The  regulations
generally  provide that reserves be  maintained  against  aggregate  transaction
accounts as follows:  for accounts aggregating $44.3 million or less (subject to
adjustment by the Federal Reserve Board) the reserve  requirement is 3%; and for
accounts  aggregating  greater than $44.3  million,  the reserve  requirement is
$1.329  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 $44.3  million.  The first $5.0  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
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
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  "non-dividend
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.  Non-dividend  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,


                                       31

<PAGE>

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
"non-dividend  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 AND SUPERVISION" 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.

               Audits.  The Bank's  Federal income tax returns have been audited
through June 30, 1997. 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.

               For  additional  information  regarding  taxation,  see Note 8 of
Notes  to  Consolidated  Financial  Statements  included  in Item 8,  "Financial
Statements and Supplementary Data."



Personnel

               As of June 30, 2000, the Company had 137 full-time  employees and
20 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, 2000.


                                       32

<PAGE>

<TABLE>
<CAPTION>

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

380 E. Main Street                   1974         Owned             38,909         $1,278
Spartanburg, South Carolina

Branch Offices:

280 N. Church Street                 1986         Owned              1,080            176
Spartanburg, South Carolina

1488 W.O. Ezell Boulevard            1980         Ground             2,453            571
Spartanburg, South Carolina                       Lease(1)

1585 E. Main Street                  1991         Owned              2,166            372
Spartanburg, South Carolina

2701 Boiling Springs Road            1994         Owned              3,300            644
Boiling Springs, South Carolina

1157 Asheville Highway               1997         Owned              3,330            509
Inman, South Carolina

2075 E. Main Street                  1997         Owned              3,332            687
Duncan, South Carolina

1451 Woodruff Road                   1998         Leased(2)            540            188
Greenville, South Carolina

1319 W. Poinsett Street              1998         Owned              3,332            773
Greer, South Carolina

14055 E. Wade Hampton Boulevard      1998         Leased(3)            688            196
Greer, South Carolina

450 S. Alabama Avenue                1999         Owned              1,760            461
Chesnee, South Carolina
</TABLE>


(1)   An owned  building on 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, 2000,  the Bank had 11
proprietary  automated teller machines.  At June 30, 2000, the net book value of
the Bank's office properties and the Bank's fixtures,  furniture,  and equipment
was $7.9 million.

                                       33

<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, 2000.


                                     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, 2000,  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  AND  SUPERVISION  --  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.  The table
below  contains the range of high and low per share bid prices of the  Company's
common stock as reported by the Nasdaq  Stock  Market,  and per share  dividends
declared during each quarter (as restated to give retroactive recognition to the
$12.00 per share capital distribution paid on June 25, 1999).


                          2000              High        Low      Dividend
                   -------------------     ------      -----     --------
                    September 30, 1999     $23.625     $19.375     $0.20
                    December 31, 1999       19.500      17.250      0.25
                    March 31, 2000          18.500      14.500      0.25
                    June 30, 2000           18.125      15.063      0.25

                          1999
                   ------------------
                    September 30, 1998     $30.125     $16.125     $0.15
                    December 31, 1998       24.000      10.375      0.20
                    March 31, 1999          18.750      17.000      0.20
                    June 30, 1999           23.563      16.000      0.20



                                       34

<PAGE>



Item 6.            Selected Financial Data

               The following tables set forth certain information concerning the
consolidated  financial position and results of operations of the Company at the
dates and for the  periods  indicated.  This  information  is  qualified  in its
entirety by reference to the detailed information  contained in the Consolidated
Financial Statements and Notes thereto presented elsewhere in this Report.

<TABLE>
<CAPTION>

                                                                  At or For the Year Ended June 30,
                                                  ----------------------------------------------------------------
                                                   2000           1999          1998           1997          1996
                                                  ------         ------        ------         ------        ------
                                                           (Dollars in thousands, except per share data)
<S>                                              <C>            <C>            <C>            <C>            <C>
SUMMARY OF OPERATIONS:
Investment income                                $ 40,906       $ 38,625       $ 37,414       $ 29,462       $ 26,445
Interest expense                                   21,223         18,366         17,153         15,811         14,669
                                                 --------       --------       --------       --------       --------
Net interest income                                19,683         20,259         20,261         13,651         11,776
Provision for loan losses                             683            800            460            825            419
                                                 --------       --------       --------       --------       --------
Net interest income after provision for
    loan losses                                    19,000         19,459         19,801         12,826         11,357
                                                 --------       --------       --------       --------       --------
Non-interest income                                 4,256          4,098          2,366          1,386          1,238
Non-interest expense(1)                            13,448         14,980          9,820          9,903          6,947
                                                 --------       --------       --------       --------       --------
Income before income taxes                          9,808          8,577         12,347          4,309          5,648
Provision for income taxes                          3,866          3,602          4,807          1,587          2,111
                                                 --------       --------       --------       --------       --------
Net income                                       $  5,942       $  4,975       $  7,540       $  2,722       $  3,537
                                                 ========       ========       ========       ========       ========

PER SHARE DATA:
Basic and diluted earnings                       $   1.77       $   1.36       $   1.85             --             --
Cash dividends declared                              0.95           0.75           0.45             --             --
Cash distribution                                      --          12.00             --             --             --
Book value                                       $  18.65       $  17.43       $  29.57             --             --

BALANCE SHEET SUMMARY:
Total assets                                     $585,657       $545,725       $517,433       $665,446       $356,966
Average assets                                    559,080        535,283        499,035        385,347        344,390
Loans receivable, net                             503,095        435,181        416,462        362,728        314,936
Investment securities                              33,718         23,398         28,797         10,322         18,350
Cash and cash equivalents                          20,606         58,420         48,968        227,072         10,784
Deposits                                          419,619        406,011        369,812        353,193        305,831
Other borrowings                                    8,763         35,000             --             --             --
Federal Home Loan Bank of Atlanta advances         82,000         34,000         17,000             --             --
Stock subscription escrow accounts(2)                  --             --             --        259,329             --
Total equity                                       69,384         66,041        125,761         46,978         44,154
Average equity                                     68,198        113,528        127,266         45,795         42,953

</TABLE>

                          (footnotes on following page)

                                       35

<PAGE>

<TABLE>
<CAPTION>
                                                                At or For the Year Ended June 30,
                                                       -----------------------------------------------------
                                                        2000         1999        1998       1997       1996
                                                       ------       ------      ------     ------     ------
<S>                                                      <C>         <C>          <C>       <C>         <C>
SELECTED FINANCIAL RATIOS AND
OTHER STATISTICAL DATA:

Return on average assets                                 1.06%       0.93%        1.51%     0.71%       1.03%
Return on average equity                                 8.71%       4.38%        5.92%     5.94%       8.23%
Interest rate spread(3)                                  3.37%       3.16%        3.07%     3.22%       3.01%
Net interest margin(4)                                   3.73%       3.97%        4.21%     3.69%       3.55%
Efficiency ratio(5)                                      0.56        0.53         0.43      0.54        0.54
Non-performing loans to loans receivable, net(6)         0.68%       0.35%        0.33%     0.56%       1.87%
Allowance for losses to gross loans receivable           0.64%       0.61%        0.49%     0.47%       0.30%
Allowance for losses to non-performing loans           100.90%     190.40%      159.87%    88.43%      17.02%
Total equity to total assets                            11.85%      12.10%       24.30%     7.06%      12.37%
Average equity to average assets                        12.20%      21.21%       25.50%    11.88%      12.47%
Dividend payout ratio(7)                                53.67%      55.15%       24.32%       --          --
Number of offices                                          11          11            8         7           5
</TABLE>


---------------------------
(1)   Includes  a  $2.1  million   compensation   charge  related  to  the  cash
      distribution  of $12.00 per share with  respect to the year ended June 30,
      1999 and a charge of $1.8 million for the one-time  SAIF  assessment  with
      respect to the year ended June 30, 1997.

(2)   Represents  subscription  funds for the common stock of the Company issued
      in connection with the Bank's mutual to stock conversion.

(3)   Difference between weighted average yield on  interest-earning  assets and
      weighted average cost of interest-bearing liabilities.

(4)   Net interest income as a percentage of average interest-earning assets.

(5)   Non-interest  expense  (excluding the  compensation  charge related to the
      cash  distribution of $12.00 per share with respect to the year ended June
      30, 1999 and the one-time SAIF  assessment  with respect to the year ended
      June 30, 1997) divided by the sum of net interest income and  non-interest
      income.

(6)   Non-performing loans consist of loans accounted for on a non-accrual basis
      and accruing loans contractually past due 90 days or more.

(7)   Dividends declared per share divided by net income per share.


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

General

               Management's  discussion and analysis of financial  condition and
results of  operations  is intended  to assist in  understanding  the  financial
condition and results of operations of the Company. The information contained in
this  section  should be read in  conjunction  with the  Consolidated  Financial
Statements and accompanying Notes contained in this Annual Report.

               Forward-looking   statements   are  not   guarantees   of  future
performance.  Numerous risks and uncertainties  could cause the Company's actual
results,  performance,  and  achievements to be materially  different from those
expressed or implied by the forward-looking  statements.  Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions,  including  changes in market interest rates and changes in monetary
and fiscal  policies  of the  federal  government;  legislative  and  regulatory
changes; and other factors disclosed  periodically in the Company's filings with
the Securities and Exchange Commission.


                                       36
<PAGE>

               Because   of   the   risks   and   uncertainties    inherent   in
forward-looking statements, readers are cautioned not to place undue reliance on
them, whether included in this report or made elsewhere from time to time by the
Company  or on its  behalf.  The  Company  assumes no  obligation  to update any
forward-looking statements.

Financial Condition

Overview

              Total  assets  were  $585.7  million  at June 30,  2000 and $545.7
million at June 30,  1999,  an  increase  of $40.0  million.  The  increase  was
principally  the  result  of  increases  in loans  receivable,  net,  investment
securities,  and other assets,  offset by decreases in cash and cash equivalents
and loans  held-for-sale.  Total  liabilities  increased by $36.6 million as the
result  of  increased  deposits  and  borrowings.   Total  stockholders'  equity
increased  by $3.4  million  principally  as the result of net income  offset by
dividends paid and stock repurchases.

Cash and Cash Equivalents

               Cash and cash equivalents totaled $20.6 million at June 30, 2000,
a decrease of $37.8 million.  The majority of the decrease was  attributable  to
cash used in investing activities of $80.5 million offset by cash from financing
activities of $31.0  million and from cash  provided by operating  activities of
$11.6  million.  A more  detailed  reconciliation  may be found in the Company's
Consolidated Statements of Cash Flows for the year ended June 30, 2000.

Investment Securities

               Investment securities increased by $10.3 million to $33.7 million
at June 30, 2000 from $23.4 million at June 30, 1999.

Loans Receivable, Net

               Loans receivable,  net, increased  primarily as a result of a net
growth of $46.6 million in mortgage  loans since June 30, 1999.  Included in the
$46.6 million  increase were  increases of $18.9 million in one- to  four-family
mortgage  loans,  $17.4 million in commercial  mortgage  loans,  $8.1 million in
construction  loans,  and $2.2 million in land  development  loans.  The primary
factor  contributing to the increase in mortgage loans was the purchase of $40.0
million in one- to four-family  mortgage loans and  construction  loans from the
mortgage banking company in which the Bank's service corporation subsidiary owns
a one-third  equity  interest,  and $29.4  million in mortgage  loans from other
correspondent banking  relationships.  Offsetting loan purchases was the sale of
$25.3 million of loans  (principally  30-year fixed-rate  conventional  mortgage
loans) in the secondary market. Loans receivable,  net, also increased due to an
$11.4 million increase in non-mortgage commercial loans, a $9.3 million increase
in home equity loans, and a $1.2 million increase in other  non-mortgage  loans.
The increase in loans receivable, net, was funded primarily through increases in
deposits and in FHLB advances.

               One  of  the  Bank's  operating  strategies  is to  increase  the
proportion  of  higher-yielding,   shorter-term  consumer,   construction,  land
development,  and  commercial  loans in its portfolio.  Management's  goal is to
increase the  originations  of these types of loans and to  supplement  internal
production with purchases of these loans through its mortgage banking affiliate,
and through other closely monitored  correspondent  banking  relationships.  The
objective of this strategy is to increase  yields and reduce interest rate risk,
but because it carries with it increased  credit risk and the intended effect on
net income may not  materialize and net income could be lower than if it had not
been implemented.

                                       37

<PAGE>


Asset Quality and Allowance for Loan Losses

               The  allowance   for  loan  losses   represents  an  amount  that
management  believes  will be adequate to absorb  estimated  losses  inherent in
existing  loans that may become  uncollectible.  Based upon the  Company's  loan
classification  policy  (which  is  in  accordance  with  applicable  regulatory
requirements),  management  estimates  potential  loan losses in the  classified
loans. In addition,  management  assesses the risk of additional losses that are
probable but unidentified in the remaining  unclassified loans. The level of the
allowance  established  is based  upon,  but not  limited  to the  nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans,  and economic  conditions.  Management  deemed the allowance for
loan losses to be adequate at June 30,  2000.  Based on the  uncertainty  in the
estimation  process  however,  management's  estimate of the  allowance for loan
losses may change in the near term.  Further,  the  allowance for loan losses is
subject to periodic  evaluation  by various  regulatory  authorities  and may be
subject to adjustment upon their examination.

               The  accrual  of  interest  is ceased  when,  in the  opinion  of
management,  principal or interest payments are not likely to continue according
to the terms of the loan agreement,  or when principal or interest is 90 days or
more past due. In certain cases,  extensions are granted on  construction  loans
that may have  become  delinquent.  These  extensions  are  granted  based  upon
management's  judgment of the creditworthiness of the borrower and other factors
such as sales contracts 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.  Management  considers the
total of  non-accrual  loans  and  accruing  loans  90 days or more  past due as
non-performing loans.

               Non-performing  loans  increased by $1.9 million to $3.4 million,
or 0.59% of total assets, at June 30, 2000 from $1.5 million,  or 0.28% of total
assets,  at June 30, 1999. Loans  classified under OTS regulations  totaled $7.0
million and $4.3 million at June 30, 2000 and 1999,  respectively.  The increase
in non-performing loans and classified assets was due primarily to the placement
of $2.1  million  in  speculative  construction  loans  outstanding  to  several
partnerships with a common general  partner/builder  on non-accrual status as of
December 31, 1999.  All of the  partnerships  declared  Chapter 11 bankruptcy in
December 1999.

               At June 30, 2000, $2.4 million of loans were considered  impaired
under generally accepted accounting principles ($2.1 million of which is related
to the speculative  construction loans described above). The impaired loans have
an  impairment  allowance  of  $215,000  ($200,000  of which is  related  to the
speculative  construction loans described above), which is included in the total
allowance for loan losses of $3.5 million at June 30, 2000.

               See also "-- Results of Operations - Provision for Loan Losses"
for discussion of the provision for loan losses.

Deposits

               Deposit  accounts  increased  $13.6 million to $419.6  million at
June 30, 2000 from $406.0  million at June 30,  1999.  The  increase in deposits
resulted from increases in deposits due to increasing market penetration of some
of the newer branches,  increased commercial accounts as the result of increased
commercial  lending  activity,  and interest credited to deposit accounts during
the period.

Stockholders' Equity

               Stockholders'  equity  increased by $3.4 million to $69.4 million
at June 30,  2000 from $66.0  million  at June 30,  1999.  Items that  increased
stockholders' equity were retained net income of $5.9 million for the year ended
June 30,  2000 and the  allocation  of shares  under the Bank's  Employee  Stock
Option  Plan  ("ESOP")  and the  Management  Recognition  and  Development  Plan
("MRDP")  which together  totaled $2.0 million.  Offsetting  these  increases to
stockholders'  equity  were the  payment of  dividends  of $3.2  million and the
purchase of $1.2 million of the  Company's  stock in the open market  during the
year ended June 30, 2000.

                                       38

<PAGE>

Results of Operations

               The earnings of the Company depend  primarily on its level of net
interest   income,   which  is  the  difference   between   interest  earned  on
interest-earning  assets and the interest paid on interest-bearing  liabilities.
Net  interest  income is a function of the interest  rate  spread,  which is the
difference between the yield earned on interest-earning assets and the rate paid
on interest-bearing liabilities, as well as a function of the average balance of
interest-earning  assets as compared to the average balance of  interest-bearing
liabilities.

Performance Overview

               Net income increased  $900,000 to $5.9 million for the year ended
June 30, 2000 from $5.0 million for the year ended June 30, 1999  primarily  due
to a decrease in  non-interest  expense.  The  decrease was  primarily  due to a
charge to compensation  expense associated with the special cash distribution on
the MRDP  shares  during the year ended June 30,  1999.  Also as  expected,  net
income for the  current  year was  reduced by the loss of  earnings on the funds
used to pay the special cash  distribution of $12.00 per share and to repurchase
shares during the year ended June 30, 1999. Earnings per share also was affected
by the  special  cash  distribution  and  share  repurchases  in the  form  of a
reduction of average shares outstanding. Share repurchases in the prior year and
in the quarter  ended June 30, 2000  decreased  average  shares  outstanding  by
approximately  200,000  shares.  The  remainder of the share  reduction  was due
principally  to the effect of share  purchases by the  Company's  ESOP with $4.3
million it received from the $12.00 per share special cash distribution.  Shares
held in the ESOP but not yet awarded to  participants  are not  considered to be
outstanding  shares for  computation  of  earnings  per share  until  awarded to
participants.

               Net income  decreased  $2.5  million to $5.0 million for the year
ended June 30,  1999 from $7.5  million  for the year  ended June 30,  1998 as a
result of  increased  non-interest  expense and the absence of earnings on funds
used to repurchase stock,  partially offset by increased non-interest income and
a decreased  provision for income taxes due to lower income before income taxes.
The increase in  non-interest  expense was  principally  the result of increased
compensation  expense associated with the MRDP (particularly with a compensation
charge related to the cash  distribution on the MRDP shares),  and the hiring of
additional personnel for the newly opened branches.

Net Interest Income

               Net interest income  decreased  $600,000 to $19.7 million for the
year ended June 30, 2000 from $20.3 million for the year ended June 30, 1999. As
discussed  above,  net  interest  income was  reduced by the loss of earnings on
approximately  $65.6  million  used for the payment of the $12.00 per share cash
distribution  in June 1999 and share  repurchases  during  the first and  second
quarters of fiscal  year 1999.  The effect of the $65.6  million  cash outlay is
estimated to have decreased net income by  approximately  $1.8 million,  or 36%,
when comparing the years ended June 30, 2000 and 1999. The cash distribution and
share  repurchases  were funded partially with cash equivalents and also through
borrowings.

               As  described  below,  the  average  balance of  interest-earning
assets increased even though a large amount of interest-earning assets were used
in the cash distribution and share repurchases.  Also described below, interest-
bearing  liabilities  increased  in  greater  proportion  than the  increase  in
interest-earning assets due to the funding of a portion of the cash distribution
and share repurchases with borrowings.  Since interest-earning  assets increased
(principally  an increase in loans  receivable,  net) the spread earned on those
assets  served to offset the loss of net  interest  income on the funds used for
the cash distribution and share repurchases.

                                       39

<PAGE>


               The  average  balance of  interest-earning  assets  increased  to
$527.1  million  during the year ended June 30, 2000 from $510.5  million during
the year ended June 30, 1999.  The average  yield  increased to 7.76% from 7.57%
for the prior year due to higher market  interest rates during the current year.
The average balance of interest-bearing  liabilities increased to $483.9 million
during the year ended June 30,  2000 from $416.0  million  during the year ended
June  30,  1999,  more  than  offsetting  a  decrease  in the  average  cost  of
interest-bearing  liabilities  to 4.39% from 4.41%.  The decrease in the average
cost is  attributable  to deposits  that repriced  during lower market  interest
rates in late  1998 and  throughout  much of 1999.  Recent  increases  in market
interest  rates have not yet had a full impact on deposits since a large portion
of deposits have not yet repriced at prevailing  market  interest  rates as they
have not yet reached their contractual  maturity.  The cost of  interest-bearing
liabilities  is  expected  to  increase  if current  interest  rates  prevail or
increase;   however,   the   amount   cannot   be   quantified.   Net  yield  on
interest-earning  assets  decreased to 3.73% during the year ended June 30, 2000
from  3.97%  during  the year ended  June 30,  1999 due  primarily  to the above
mentioned increase in the average balance of interest-bearing liabilities.

                Net interest  income was $20.3  million for the years ended June
30, 1999 and 1998.  Investment income increased 3% to $38.6 million for the year
ended June 30,  1999 from $37.4  million  for the year ended June 30,  1998 as a
result of an  increase  in the  average  balance of  interest-earning  assets to
$510.5 million from $481.5 million more than  offsetting a decrease in the yield
to 7.57% from 7.77% for the  respective  annual  periods.  The  decrease  in the
average yield on  interest-earning  assets was due primarily to lower prevailing
market  interest rates during the year ended June 30, 1999. The average  balance
of interest-earning assets increased as a result of an increase in average loans
receivable and investment securities,  partially offset by a decrease in average
overnight  interest- bearing  deposits.  Although  interest-earning  assets were
higher  during the year ended June 30, 1999 as compared to June 30, 1998,  share
repurchases  of  approximately  $21.0 million since June 30, 1998  significantly
offset  asset  growth and,  accordingly,  investment  income.  Interest  expense
increased  7% to $18.4  million  for the year  ended  June 30,  1999 from  $17.2
million  for the year  ended  June 30,  1998 as a result of an  increase  in the
average  balance of  interest-bearing  liabilities to $416.0 million from $364.9
million more than offsetting a decrease in the cost of funds to 4.41% from 4.70%
for the respective  annual periods.  The average balance increased as the result
of deposits  obtained  through newly opened branch  offices and various  deposit
promotions as well as increased FHLB advances and other borrowings. The decrease
in the average cost is attributable  to the decrease in prevailing  market rates
since June 30, 1998.  Another  factor that affected net interest  income was net
interest earnings of approximately  $300,000 on excess stock  subscription funds
held and refunded in connection  with the  Conversion in the year ended June 30,
1998, which were absent in the year ended June 30, 1999.


                                       40

<PAGE>


Average Balances, Interest, and Average Yields/Costs

               The  following  table  sets  forth,  for the  periods  indicated,
information  regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing  liabilities and average yields and
costs. Average balances for each period have been calculated using daily average
balances. (Dollar amounts in the table are in thousands.)

<TABLE>
<CAPTION>
                                                                  Year Ended June 30,
                                            ------------------------------------------------------------------------
                                                         2000                                   1999
                                            -------------------------------       -------------------------------
                                                       Interest                                Interest
                                            Average      and        Yield/        Average        and      Yield/
                                            Balance   Dividends      Cost         Balance     Dividends    Cost
                                            -------   ---------      ----         -------     ---------    ----
<S>                                         <C>         <C>          <C>          <C>          <C>         <C>
Interest-earning assets:
 Loans receivable, net(1)                   $474,156    $37,622      7.93%        $441,514     $34,811     7.88%
 Mortgage-backed securities                       38          3      7.89               68           6     8.82
 Investment securities                        31,090      1,927      6.20           30,567       1,668     5.46
 FHLB stock                                    3,692        284      7.69            3,492         262     7.50
 Federal funds sold and overnight
  interest-bearing deposits                   18,147      1,070      5.90           34,902       1,878     5.38
                                            --------    -------      ----         --------     -------     ----
   Total interest-earning assets             527,123     40,906      7.76          510,543      38,625     7.57
                                                        -------      ----                      -------     ----
Non-interest-earning assets                   31,957                                24,740
                                            --------                              --------
   Total assets                             $559,080                              $535,283
                                            ========                              ========
Interest-bearing liabilities(2):
 Savings accounts                           $ 53,001      1,334      2.52         $ 55,485       1,623     2.93
 Money market accounts                        30,905      1,179      3.81           26,656       1,043     3.91
 NOW accounts                                 70,500        962      1.36           60,566       1,034     1.71
 Certificate accounts                        257,055     13,682      5.32          245,720      13,185     5.37
                                            --------    -------      ----         --------     -------     ----
   Total deposits                            411,461     17,157      4.17          388,427      16,885     4.35
 Advances from FHLB of Atlanta                64,104      3,560      5.46           26,836       1,432     5.34
Other borrowings                               8,301        506      6.00              767          49     6.39
                                            --------    -------      ----         --------     -------     ----
   Total interest-bearing liabilities        483,866     21,223      4.39          416,030      18,366     4.41
                                                        -------      ----                      -------     ----
Non-interest-bearing liabilities               7,016                                 5,725
                                            --------                              --------
   Total liabilities                         490,882                               421,755
Stockholders' equity                          68,198                               113,528
                                            --------                              --------
   Total liabilities and stockholders'
     equity                                 $559,080                              $535,283
                                            ========                              ========
Net interest income                                     $19,683                                $20,259
                                                        =======                                =======
Interest rate spread                                                 3.37%                                 3.16%
                                                                     ====                                  ====
Net interest margin                                                  3.73%                                 3.97%
                                                                     ====                                  ====
Ratio of average interest-earning
   assets to average interest-
   bearing liabilities                                               1.09x                                 1.23x
                                                                     ====                                  ====
</TABLE>

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                           -----------------------------------
                                                           1998
                                           -----------------------------------
                                                        Interest
                                              Average      and        Yield/
                                              Balance   Dividends      Cost
                                              -------   ---------      ----
<S>                                           <C>         <C>         <C>
Interest-earning assets:
 Loans receivable, net(1)                     $395,465    $32,146     8.13%
 Mortgage-backed securities                        106          9     8.49
 Investment securities                          18,831      1,111     5.90
 FHLB stock                                      3,122        229     7.34
 Federal funds sold and overnight
  interest-bearing deposits                     63,967      3,919     6.13
                                              --------    -------     ----
   Total interest-earning assets               481,491     37,414     7.77
                                                          -------     ----
Non-interest-earning assets                     17,544
                                              --------
   Total assets                               $499,035
                                              ========
Interest-bearing liabilities(2):
 Savings accounts                             $ 61,931      2,032     3.28
 Money market accounts                          12,733        434     3.41
 NOW accounts                                   48,389      1,039     2.15
 Certificate accounts                          238,845     13,498     5.65
                                              --------    -------     ----
   Total deposits                              361,898     17,003     4.70
 Advances from FHLB of Atlanta                   2,970        150     5.05
Other borrowings                                    --         --       --
                                              --------    -------     ----
   Total interest-bearing liabilities          364,868     17,153     4.70
                                                          -------     ----
Non-interest-bearing liabilities                 6,901
                                              --------
   Total liabilities                           371,769
Stockholders' equity                           127,266
                                              --------
   Total liabilities and stockholders'
     equity                                   $499,035
                                              ========
Net interest income                                       $20,261
                                                          =======
Interest rate spread                                                  3.07%
                                                                      ====
Net interest margin                                                   4.21%
                                                                      ====
Ratio of average interest-earning
   assets to average interest-
   bearing liabilities                                                1.32x
                                                                      ====
</TABLE>

---------------------
(1)   Includes  loans  held-for-sale.  Includes  non-accrual  loans but excludes
        interest on non-accrual loans.
(2)   Excludes escrow balances.

                                       41

<PAGE>

Rate/Volume Analysis

               The following  table sets forth the effects of changing rates and
volumes on interest  income and interest  expense.  Information is provided with
respect  to:  (i)  effects  attributable  to changes  in rate  (changes  in rate
multiplied by prior volume);  and (ii) effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net change attributable to the
combined  impact of rate and volume has been  allocated  proportionately  to the
change due to rate and the change  due to volume.  (Dollar  amounts in the table
are in thousands.)

<TABLE>
<CAPTION>
                                                        Year Ended June 30, 2000                  Year Ended June 30, 1999
                                                     Compared to Year Ended June 30,           Compared to Year Ended June 30,
                                                                  1999                                     1998
                                                           Increase (Decrease)                       Increase (Decrease)
                                                                  Due to                                  Due to
                                                    -----------------------------------      ----------------------------------
                                                       Rate        Volume       Total          Rate         Volume        Total
                                                       ----        ------       -----          ----         ------        -----
<S>                                                 <C>           <C>           <C>           <C>           <C>           <C>
Interest-earning assets:
   Loans receivable, net(1)                        $   222       $ 2,589       $ 2,811       $  (957)      $ 3,622       $ 2,665
   Mortgage-backed securities                           (1)           (2)           (3)           --            (3)           (3)
   Investment securities                               230            29           259           (76)          633           557
   FHLB stock                                            7            15            22             5            28            33
   Federal funds sold and overnight
      interest-bearing deposits                        203        (1,011)         (808)         (433)       (1,608)       (2,041)
                                                   -------       -------       -------       -------       -------       -------
Total net change in income on
    interest-earning assets                            661         1,620         2,281        (1,461)        2,672         1,211
                                                   -------       -------       -------       -------       -------       -------
Interest-bearing liabilities:
   Savings accounts                                   (219)          (70)         (289)         (208)         (201)         (409)
   Money market accounts                               (26)          162           136            72           537           609
   NOW accounts                                       (363)          291           (72)           22           (27)           (5)
   Certificate accounts                               (126)          623           497          (745)          432          (313)
Advances from FHLB of Atlanta                           58         2,070         2,128            10         1,272         1,282
Other borrowings                                        (2)          459           457            --            49            49
                                                   -------       -------       -------       -------       -------       -------
Total net change in expense
    on interest-bearing liabilities                   (678)        3,535         2,857          (849)        2,062         1,213
Net change in net interest income                  $ 1,339       $(1,915)      $  (576)      $  (612)      $   610       $    (2)
                                                   =======       =======       =======       =======       =======       =======
</TABLE>

(1)   Excludes interest on non-accrual loans.

                                       42

<PAGE>

Provision for Loan Losses

               Provisions  for loan  losses are charges to earnings to bring the
total allowance for loan losses to a level  considered by management as adequate
to provide for  estimated  loan losses based on  management's  evaluation of the
collectibility of the loan portfolio. Management assesses the allowance for loan
losses  on a  quarterly  basis and makes  provisions  for loan  losses as deemed
appropriate  in order to maintain the adequacy of the allowance for loan losses.
As the  provision  for loan losses is the result of periodic  evaluation  of the
allowance for loan losses, the resulting provision for loan losses may fluctuate
from period to period.  Factors that  influence  the level of the  allowance for
loan  losses are  discussed  in "--  Financial  Condition  - Asset  Quality  and
Allowance  for Loan  Losses."  The  provision  for  loan  losses  was  $683,000,
$800,000,  and  $460,000  for the years  ended June 30,  2000,  1999,  and 1998,
respectively.

               See "--  Financial  Condition - Asset  Quality and  Allowance for
Loan Losses" for more analysis of the allowance for loan losses.

Non-interest Income

               Non-interest income increased by $158,000 to $4.3 million for the
year ended June 30,  2000 from $4.1  million  for the year ended June 30,  1999,
primarily as a result of an increase in service charges and fees to $3.2 million
for the year ended June 30,  2000 from $2.2  million for the year ended June 30,
1999  principally  due to the  growth in  checking  accounts.  The growth in fee
income,  however,  was offset by a decrease in gain on sale of mortgage loans to
$287,000  for the year ended June 30,  2000 from $1.3  million in the year ended
June 30, 1999.  The Bank  periodically  sells loans in response to interest rate
changes,  liquidity  needs,  and other  factors.  The Bank sold $25.3 million of
mortgage  loans  during the year ended June 30, 2000  compared to $61.4  million
during the year ended June 30, 1999 primarily to reduce the amount of fixed-rate
loans in the loan portfolio.  The amount of fixed- rate loan  originations  were
higher  than  normal  during the year ended  June 30,  1999 due to lower  market
interest  rates  which  led to a  higher  than  normal  level of  mortgage  loan
refinancings.  Management cannot predict the level of such gains, if any, in the
future.

               Non-interest income increased by $1.7 million to $4.1 million for
the year ended June 30, 1999 from $2.4 million for the year ended June 30, 1998,
primarily  as a result of an increase in gain on sale of mortgage  loans to $1.3
million  for the year ended June 30,  1999 from  $342,000 in the year ended June
30, 1998.  The Bank sold $61.4  million of mortgage  loans during the year ended
June 30, 1999  primarily  to reduce the amount of  fixed-rate  loans in the loan
portfolio.  The amount of fixed-rate  loan  originations  was higher than normal
during the year ended June 30, 1999 due to lower  interest  rates which led to a
higher  than normal  level of  mortgage  loan  refinancings.  Management  cannot
predict the level of such gains, if any, in the future. Service charges and fees
increased to $2.2 million for the year ended June 30, 1999 from $1.4 million for
the year ended June 30, 1998 primarily as a result of increased  deposit account
fees, particularly on the increased number of NOW accounts.

Non-interest Expense

               Non-interest  expense  was $13.4  million for the year ended June
30,  2000  compared  to $15.0  million  for the year  ended June 30,  1999.  The
decrease  consisted  principally  of employee  compensation  and benefits  which
decreased to $7.6 million for the year ended June 30, 2000 from $9.3 million for
the year ended June 30,  1999.  The  decrease  in  compensation  expense was due
primarily to a charge of  approximately  $2.1 million  related to the payment of
the special cash distribution on shares of stock awarded under the MRDP in 1999.
The increases in other  categories  of other  operating  expenses  generally are
attributable to the continuing growth of the Company and to inflation.

                                       43

<PAGE>

               Non-interest  expense  was $15.0  million for the year ended June
30, 1999 compared to $9.8 million for the year ended June 30, 1998. The increase
consisted  principally  of increased  employee  compensation  and benefits which
increased to $9.3 million for the year ended June 30, 1999 from $5.0 million for
the year  ended  June  30,  1998.  The  increase  in  compensation  expense  was
attributable  primarily  to the  adoption of the MRDP in the year ended June 30,
1999. In addition to  compensation  associated  with the vesting of shares under
the MRDP,  there was a charge  of  approximately  $2.1  million  related  to the
payment  of the cash  distribution  on shares of stock  awarded  under the MRDP.
Also, the hiring of personnel to staff the newly opened branch offices increased
compensation. These increases to compensation expense were offset partially by a
decrease in ESOP  expense due to a lower  average  stock price used to determine
related  compensation  expense.  The  increases  in  other  categories  of other
operating  expenses  generally are attributable to the growth of the Company and
to inflation.

Income Taxes

               The  provision  for income  taxes was $3.9  million  for the year
ended June 30, 2000  compared  to $3.6  million for the year ended June 30, 1999
primarily due to an increase in income before income taxes.

               The  provision  for income  taxes was $3.6  million  for the year
ended June 30, 1999  compared  to $4.8  million for the year ended June 30, 1998
primarily due to lower income before income taxes.

Analysis of Other Financial and Operating Matters

Liquidity and Capital Resources

               The  Company's  primary  sources of funds are customer  deposits,
proceeds from principal and interest  payments on loans,  proceeds from the sale
of loans,  maturing  securities,  FHLB  advances,  and other  borrowings.  While
maturities  and  scheduled  amortization  of loans are a  predictable  source of
funds,   deposit  flows  and  loan  prepayments,   particularly   mortgage  loan
prepayments,  are influenced  greatly by general interest rates,  other economic
conditions, and competition.

               Regulations  of the OTS  require the Bank to maintain an adequate
level of liquidity to ensure the  availability of sufficient  funds to fund loan
originations,  deposit withdrawals,  and to satisfy other financial commitments.
Currently,  the  OTS  regulatory  liquidity  requirement  for  the  Bank  is the
maintenance  of an average  daily  balance of liquid  assets  (cash and eligible
investments)  equal  to  at  least  4% of  the  average  daily  balance  of  net
withdrawable deposits and short-term  borrowings.  This liquidity requirement is
subject  to  periodic  change.  The  Company  and the  Bank  generally  maintain
sufficient cash and short-term  investments to meet short-term  liquidity needs.
At June 30, 2000,  cash and cash  equivalents  totaled $20.6  million,  or 4% of
total assets, and investment securities  classified as  available-for-sale  with
maturities of one year or less totaled $18.3 million. At June 30, 2000, the Bank
also maintained an uncommitted  credit facility with the FHLB of Atlanta,  which
provides for immediately  available advances up to an aggregate amount of $146.2
million of which $82.0 million had been advanced.

               As of June 30, 2000, the Bank's regulatory  capital was in excess
of all applicable regulatory  requirements.  At June 30, 2000, under regulations
of the OTS, the Bank's actual tangible, core, and risk-based capital ratios were
9.8%, 9.8 %, and 15.1%,  respectively,  compared to requirements of 1.5%,  4.0%,
and 8.0%, respectively.

               At June 30,  2000,  the Company had loan  commitments  (excluding
undisbursed  portions  of  interim  construction  loans) of  approximately  $6.5
million  ($1.0  million  at fixed  rates  ranging  from  8.125% to  8.625%).  In
addition,   at  June  30,  2000,  the  unused  portion  of  credit  (principally
variable-rate  home  equity  lines  of  credit)  extended  by  the  Company  was
approximately  $55.6  million.  Furthermore,  at June 30, 2000,  the Company had
certificates  of  deposit  scheduled  to  mature  in one year or less of  $223.0
million. Based on historical experience, the Company anticipates that a majority
of these certificates of deposit will be renewed at maturity.

                                       44

<PAGE>

               As of June 30, 2000,  the Board of Directors had  authorized  the
repurchase of up to 378,797 shares of the outstanding  stock of the Corporation,
of which  67,700 had been  repurchased.  Management  of the Company is unable to
predict when (or if) the remaining  shares  authorized to be repurchased will be
repurchased or at what price.

Recently Issued Accounting Standards

               See  Note  1 to  the  Consolidated  Financial  Statements  for  a
discussion  of recently  issued  accounting  standards  that affect  accounting,
reporting, and disclosure of financial information by the Company.

Effect of Inflation and Changing Prices

               The consolidated  financial statements and related financial data
presented  in this  report  have been  prepared  in  accordance  with  generally
accepted  accounting  principles,  which  require the  measurement  of financial
position  and  operating   results  in  terms  of  historical   dollars  without
considering the change in the relative  purchasing  power of money over time due
to inflation. The primary impact of inflation is reflected in the increased cost
of the Bank's operations.  Unlike most industrial  companies,  virtually all the
assets and liabilities of a financial  institution are monetary in nature.  As a
result,  interest rates generally have a more significant  impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not  necessarily  move in the same direction or to the same extent as the prices
of goods and services.


Item 7A.          Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Interest Rate Sensitivity

               Market  risk is the risk of loss from  adverse  changes in market
prices and interest rates.  Risk associated with market interest rate volatility
("interest  rate  risk")  is  the  Company's  principal  market  risk  exposure.
Substantially all of the Company's interest rate risk is derived from the Bank's
lending,  investment, and deposit- taking activities.  This risk could result in
reduced net interest income,  loss in fair values of assets,  and/or increase in
fair values of liabilities due to upward changes in interest rates.  The Company
does  not own any  trading  assets  nor does it have any  hedging  contracts  or
derivative  transactions in place such as interest rate swaps,  caps, floors, or
collars.  Further,  the Company is not subject to foreign currency exchange risk
or commodity price risk.

               The Company's  objective is to maximize net interest income while
managing its interest  rate risk.  Interest  rate risk is monitored  and managed
principally  through the Bank's  Asset/Liability  Committee  ("ALCO"),  which is
comprised of five senior officers and a member of the Bank's Board of Directors.
The ALCO  develops  and  reviews  business  strategies  that  further the Bank's
objective of increasing net interest  income while managing  interest rate risk.
The ALCO meets regularly to review the current balance sheet structure,  current
and potential changes in market interest rates, economic outlook, and the impact
of specific business strategies, among other issues. Considered in the review of
the current balance sheet structure are, among other things,  the sensitivity of
assets and liabilities to changes in interest rates, liquidity, loan origination
and sales activity, deposit inflows and outflows, investment portfolio activity,
and borrowings.

                                       45

<PAGE>

               In order to manage its  interest  rate risk,  the  Company has in
recent years sold  fixed-rate  mortgage  loans with terms in excess of 15 years,
emphasized the origination and purchase of  adjustable-rate  mortgage loans, and
implemented  programs  to  increase  shorter-term,  variable-rate  loans such as
construction,  commercial, and consumer loans. In recent years, an emphasis also
has been placed on generating transactional deposit accounts which have a longer
average life and are less sensitive to changes in interest rates. Also, advances
from the FHLB have been  obtained,  some of which have longer  terms to maturity
and /or repricing than the Company's average certificates of deposit.

               The  principal  method  utilized by ALCO to  evaluate  the Bank's
exposure to changes in interest  rates is a sensitivity  analysis which measures
the change in the Bank's net  portfolio  value  ("NPV") and net interest  income
under various interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The calculation
is intended to  illustrate  the change in NPV that will occur in the event of an
immediate  change  in  interest  rates  with no effect  given to any steps  that
management might take to counter the effect of that interest rate movement.  The
Bank utilizes a sensitivity model developed and maintained by the FHLB.

               The  OTS  utilizes  the  NPV  methodology  to  evaluate  interest
sensitivity in its regulation and  supervision of the Bank. The OTS utilizes its
own model with data  submitted  by the Bank on the  quarterly  Thrift  Financial
Report.  The  results of the OTS model may differ  from the  results of the FHLB
model due to differences in assumptions  about loan prepayment  rates, cash flow
reinvestment rates, and deposit decay rates, among others.

               The  following  table sets forth the change in the  Company's NPV
based on the FHLB model.  As with any method of  measuring  interest  rate risk,
certain  shortcomings  are  inherent in the method of analysis  presented in the
following table.  For example,  although certain assets and liabilities may have
similar maturities or periods to repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Additionally,  certain  assets,  such as ARM loans,  have features which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset.  Further, in the event of a change in interest rates,  expected rates
of prepayments on loans and early  withdrawals from  certificates  could deviate
significantly  from those assumed in calculating  the table.  (Dollar amounts in
the table are in thousands.)

                                              June 30,
                          -------------------------------------------------
                                 2000                           1999
                          --------------------          -------------------
        Basis Point        Estimated Change in          Estimated Change in
      Change in Rate      Net Portfolio Value           Net Portfolio Value
      --------------      -------------------           -------------------

          +200           $(14,757)     (25.2)%         $(15,349)   (16.2)%
          +100             (7,239)     (12.4)            (7,244)    (7.6)
             0                 --       --                   --     --
          -100              5,238        8.9              6,404      6.7
          -200              7,890       13.5             12,003     12.6


               The above table illustrates,  for example,  that an instantaneous
200 basis point increase in market  interest rates at June 30, 2000 would reduce
the Company's NPV by approximately $14.8 million at that date. Accordingly,  the
Company could be adversely affected during the periods of rising interest rates.
Certain  assumptions  utilized in assessing  the  interest  rate risk of savings
banks within the Bank's geographic region were utilized in preparing the

                                       46

<PAGE>

preceding table.  These  assumptions  relate to interest rates,  loan prepayment
rates,  deposit  decay  rates,  and the market  values of certain  assets  under
differing  interest rate  scenarios,  among  others.  The level of interest rate
sensitivity as indicated by the table above at June 30, 2000 and 1999 are within
policy limits established by the Company's Board of Directors.

               While  the  Company  principally  relies  on the  NPV  method  to
evaluate its interest rate exposure as previously discussed, the following table
presents the Company's  financial  instruments  that are sensitive to changes in
interest rates,  categorized by expected maturity,  and the instruments' average
rates and fair values at June 30, 2000.  The table was  prepared  based upon the
FHLB interest  sensitivity  model and certain  assumptions about loan prepayment
rates  and  deposit  decay  rates,  among  others,  were  utilized.   There  are
shortcomings  inherent  in this  method of  analysis.  For  example,  although a
financial  instrument may have a similar maturity or remaining term to repricing
as another  financial  instrument,  the two may react  differently to changes in
market  interest  rates.  In the event of material  changes in  interest  rates,
prepayments  and  withdrawals  would  likely  deviate  significantly  from those
assumed in the data  underlying the table.  (Dollar  amounts in the table are in
thousands.)


<TABLE>
<CAPTION>

                                             Average  Within One    One Year    After 3 Years    Beyond
                                               Rate     Year       To 3 Years     To 5 Years    5 Years         Total    Fair Value
                                               ----     ----       ----------     ----------    -------         -----    ----------
<S>                                           <C>    <C>           <C>            <C>           <C>         <C>          <C>
Interest-sensitive assets:
   Loan receivable, net of loans
     in process and deferred loan fees        8.15%  $ 173,405     $ 137,345      $  85,596     $ 110,223   $ 506,569    $ 496,322
   Loans held-for-sale                        7.90       1,933            --             --            --       1,933        1,967
   Investment securities                      6.58      18,275         5,008            337        10,073      33,693       33,693
   Other assets                               4.55       5,171            --             25            --       5,196        5,197
   FHLB stock                                 7.63       4,100            --             --            --       4,100        4,100
   Federal funds sold and overnight
     interest-bearing deposits                7.09       7,231            --             --            --       7,231        7,231
                                                     ---------     ---------      ---------     ---------   ---------    ---------
     Total interest-sensitive assets                   210,115       142,353         85,958       120,296     558,722      548,510
                                                     ---------     ---------      ---------     ---------   ---------    ---------

Interest-sensitive liabilities:
   Savings accounts                           2.47       8,692        13,202          8,607        19,987      50,488       50,488
   Money market accounts                      4.15      21,728         3,026          1,441         1,516      27,711       27,711
   NOW accounts                               1.22      28,606        26,186          7,007        14,648      76,447       76,447
   Certificate accounts                       5.85     223,035        34,818          7,120            --     264,973      263,359
   Advances from FHLB                         6.32      65,000         7,000         10,000            --      82,000       81,164
   Other borrowings                           6.58       8,763            --             --            --       8,763        8,763
                                                     ---------     ---------      ---------     ---------   ---------    ---------
      Total interest-sensitive liabilities             355,824        84,232         34,175        36,151     510,382      507,932
                                                     ---------     ---------      ---------     ---------   ---------    ---------
Rate sensitive gap                                   $(145,709)    $  58,121      $  51,783     $  84,145   $  48,340    $  40,578
                                                     =========     =========      =========     =========   =========    =========
Cumulative rate sensitive gap                        $(145,709)    $ (87,588)     $ (35,805)    $  48,340   $      --    $      --
                                                     =========     =========      =========     =========   =========    =========
Off-balance sheet items:
   Commitments to extend credit               8.40   $   6,490     $      --      $      --     $      --   $   6,490    $   6,490
   Unused lines of credit                    10.51      55,575            --             --            --      55,575       55,575
   Loans in process                           9.63      33,367            --             --            --      33,367       33,367
</TABLE>


                                       47

<PAGE>


Item 8.            Financial Statements and Supplementary Data

[Consolidated  Financial Statements and Notes Thereto of FirstSpartan  Financial
Corp. and Subsidiaries follow]





                                       48


<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
FirstSpartan Financial Corp.
Spartanburg, South Carolina

We have audited the  accompanying  consolidated  balance sheets of  FirstSpartan
Financial Corp. and  subsidiaries  (the "Company") as of June 30, 2000 and 1999,
and the related  consolidated  statements of income,  equity, and cash flows for
each of the three years in the period  ended June 30, 2000.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company at June 30, 2000 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.





/s/ Deloitte & Touche LLP
-------------------------
 Deloitte & Touche LLP

July 19, 2000
(September 5, 2000 as to Note 16)
Greenville, South Carolina

                                       49

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries
                           Consolidated Balance Sheets

                             June 30, 2000 and 1999
                        (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                                                   2000            1999
                                                                             --------------    -------------
<S>                                                                          <C>               <C>
Assets
Cash                                                                          $     13,375      $    14,638
Federal funds sold and overnight interest-bearing deposits                           7,231           43,782
                                                                             --------------    -------------
          Total cash and cash equivalents                                           20,606           58,420
Investment securities available-for-sale - at fair value (amortized cost:
   $34,239 and $23,489 at June 30, 2000 and 1999, respectively)                     33,693           23,344
Loans receivable, net                                                              503,095          435,181
Loans held-for-sale - at lower of cost or market (market value: $1,967
   and $9,089 at June 30, 2000 and 1999, respectively)                               1,933            8,984
Office properties and equipment, net                                                10,241           10,370
Federal Home Loan Bank of Atlanta stock  - at cost                                   4,100            3,612
Real estate acquired in settlement of loans                                            478              348
Other assets                                                                        11,511            5,466
                                                                             --------------    -------------

Total Assets                                                                  $    585,657      $   545,725
                                                                             ==============    =============


Liabilities and Stockholders' Equity

Liabilities:
  Deposit accounts                                                            $    419,619      $   406,011
  Advances from Federal Home Loan Bank of Atlanta                                   82,000           34,000
  Other borrowings                                                                   8,763           35,000
  Other liabilities                                                                  5,891            4,673
                                                                             --------------    -------------
          Total liabilities                                                        516,273          479,684
                                                                             --------------    -------------

Stockholders' Equity:
  Preferred stock, $0.01 par value:
    Authorized - 250,000 shares;  none issued or outstanding at June 30,
       2000 and 1999
  Common stock, $0.01 par value:
    Authorized - 12,000,000 shares;  issued: 4,430,375 at June 30, 2000
       and 1999; outstanding: 3,720,270 and 3,787,970 at June 30,
       2000 and 1999, respectively                                                      44               44
  Additional paid-in capital                                                        42,894           42,648
  Retained earnings                                                                 57,674           54,905
  Treasury stock - at cost (710,105 and 642,405 shares at
     June 30, 2000 and 1999, respectively)                                         (22,126)         (20,955)
  Unearned restricted stock                                                         (3,502)          (4,660)
  Unallocated ESOP stock                                                            (5,261)          (5,851)
  Accumulated other comprehensive loss                                                (339)             (90)
                                                                             --------------    -------------
          Total stockholders' equity                                                69,384           66,041
                                                                             --------------    -------------

Total Liabilities and Stockholders' Equity                                    $    585,657      $   545,725
                                                                             ==============    =============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       50
<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                        Consolidated Statements of Income

                    Years Ended June 30, 2000, 1999, and 1998
                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                              2000          1999          1998
                                                           ----------    ----------    -----------
<S>                                                        <C>           <C>           <C>
Investment Income:
   Interest on loans                                       $  37,622     $  34,811     $   32,146
   Interest and dividends on investment securities,
     mortgage-backed securities, and other                     3,284         3,814          5,268
                                                           ----------    ----------    -----------
          Total investment income                             40,906        38,625         37,414
                                                           ----------    ----------    -----------

Interest Expense:
   Deposit accounts                                           17,157        16,885         17,003
   Advances from Federal Home Loan Bank of Atlanta             3,560         1,432            150
   Other borrowings                                              506            49             --
                                                           ----------    ----------    -----------
          Total interest expense                              21,223        18,366         17,153
                                                           ----------    ----------    -----------

Net Interest Income                                           19,683        20,259         20,261

Provision for Loan Losses                                        683           800            460
                                                           ----------    ----------    -----------

Net Interest Income After Provision for Loan Losses           19,000        19,459         19,801
                                                           ----------    ----------    -----------

Non-interest Income (Loss):
    Service charges and fees                                   3,181         2,225          1,378
    Gain on sale of mortgage loans                               287         1,333            342
    Loss on sale of investments                                   --           (53)            --
    Other, net                                                   788           593            646
                                                           ----------    ----------    -----------
          Total non-interest income, net                       4,256         4,098          2,366
                                                           ----------    ----------    -----------

Non-interest Expense:
    Employee compensation and benefits                         7,627         9,318          5,016
    Federal deposit insurance premium                            265           326            354
    Occupancy and equipment expense                            1,566         1,504          1,106
    Computer services                                            590           481            680
    Advertising and promotions                                   496           543            566
    Office supplies, postage, printing, etc.                     748           751            626
    Other                                                      2,156         2,057          1,472
                                                           ----------    ----------    -----------
          Total non-interest expense                          13,448        14,980          9,820
                                                           ----------    ----------    -----------

Income Before Income Taxes                                     9,808         8,577         12,347

Provision for Income Taxes                                     3,866         3,602          4,807
                                                           ----------    ----------    -----------

Net Income                                                 $   5,942     $   4,975     $    7,540
                                                           ==========    ==========    ===========

Basic and Diluted Earnings Per Share                       $    1.77     $    1.36     $     1.85
                                                           ==========    ==========    ===========

Weighted Average Shares Outstanding                        3,359,824     3,665,778      4,066,692
                                                           ==========    ==========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       51
<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries
                        Consolidated Statements of Equity

                    Years Ended June 30, 2000, 1999, and 1998
                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>

                                                                              Additional
                                                    Common Stock               Paid-In          Retained         Treasury
                                                Shares          Amount         Capital          Earnings           Stock
                                             -------------    -----------    -------------    --------------    ------------

<S>                                          <C>              <C>            <C>              <C>               <C>
Balance, June 30, 1997                       $         --     $       --     $         --     $      46,960     $        --
                                             =============    ===========    =============    ==============    ============

Net income                                             --             --               --             7,540              --
Unrealized loss on securities available-
   for-sale, net of taxes                              --             --               --                --              --
                                             -------------    -----------    -------------    --------------    ------------
     Total comprehensive income                        --             --               --             7,540              --
                                             -------------    -----------    -------------    --------------    ------------
Issuance of common stock                        4,430,375             44           86,981                --              --
ESOP stock committed for release                       --             --              643                --              --
Purchase of treasury stock                       (177,215)            --               --                --          (8,113)
Dividends ($0.45 per share)                            --             --               --            (1,838)             --
                                             -------------    -----------    -------------    --------------    ------------

Balance, June 30, 1998                       $  4,253,160     $       44     $     87,624     $      52,662     $    (8,113)
                                             =============    ===========    =============    ==============    ============

Net income                                             --             --               --             4,975              --
Unrealized loss on securities available-
   for-sale, net of taxes                              --             --               --                --              --
                                             -------------    -----------    -------------    --------------    ------------
     Total comprehensive income                        --             --               --             4,975              --
                                             -------------    -----------    -------------    --------------    ------------
Issuance of treasury stock to MRDP                177,215             --             (670)               --           8,113
ESOP stock committed for release                       --             --              356                --              --
Purchase of treasury stock                       (642,405)            --               --                --         (20,955)
Dividends ($0.75 per share)                            --             --               --            (2,732)             --
Prorata vesting of restricted MRDP stock               --             --               --                --              --
Cash distribution ($12.00 per share)                   --             --          (44,662)               --              --
                                             -------------    -----------    -------------    --------------    ------------

Balance, June 30, 1999                       $  3,787,970     $       44     $     42,648     $      54,905     $   (20,955)
                                             =============    ===========    =============    ==============    ============

Net income                                             --             --               --             5,942              --
Unrealized loss on securities available-
   for-sale, net of taxes                              --             --               --                --              --
                                             -------------    -----------    -------------    --------------    ------------
     Total comprehensive income                        --             --               --             5,942              --
                                             -------------    -----------    -------------    --------------    ------------
ESOP stock committed for release                       --             --              246                --              --
Purchase of treasury stock                        (67,700)            --               --                --          (1,171)
Dividends ($0.95 per share)                            --             --               --            (3,173)             --
Prorata vesting of restricted MRDP stock               --             --               --                --              --
                                             -------------    -----------    -------------    --------------    ------------

Balance, June 30, 2000                       $  3,720,270     $       44     $     42,894     $      57,674     $   (22,126)
                                             =============    ===========    =============    ==============    ============

<CAPTION>

                                                                                 Comprehen-
                                                Unearned        Unallocated         sive
                                               Restricted           ESOP           (Loss)          Total
                                                  Stock            Stock           Income         Equity
                                              --------------    -------------   -------------   ------------

<S>                                           <C>               <C>             <C>             <C>
Balance, June 30, 1997                        $          --     $         --    $         18    $    46,978
                                              ==============    =============   =============   ============

Net income                                               --               --              --          7,540
Unrealized loss on securities available-
   for-sale, net of taxes                                --               --             (32)           (32)
                                              --------------    -------------   -------------   ------------
     Total comprehensive income                          --               --             (32)         7,508
                                              --------------    -------------   -------------   ------------
Issuance of common stock                                 --           (7,089)             --         79,936
ESOP stock committed for release                         --              647              --          1,290
Purchase of treasury stock                               --               --              --         (8,113)
Dividends ($0.45 per share)                              --               --              --         (1,838)
                                              --------------    -------------   -------------   ------------

Balance, June 30, 1998                        $          --     $     (6,442)   $        (14)   $   125,761
                                              ==============    =============   =============   ============

Net income                                               --               --              --          4,975
Unrealized loss on securities available-
   for-sale, net of taxes                                --               --             (76)           (76)
                                              --------------    -------------   -------------   ------------
     Total comprehensive income                          --               --             (76)         4,899
                                              --------------    -------------   -------------   ------------
Issuance of treasury stock to MRDP                   (7,443)              --              --             --
ESOP stock committed for release                         --              591              --            947
Purchase of treasury stock                               --               --              --        (20,955)
Dividends ($0.75 per share)                              --               --              --         (2,732)
Prorata vesting of restricted MRDP stock              1,450               --              --          1,450
Cash distribution ($12.00 per share)                  1,333               --              --        (43,329)
                                              --------------    -------------   -------------   ------------

Balance, June 30, 1999                        $      (4,660)    $     (5,851)   $        (90)   $    66,041
                                              ==============    =============   =============   ============

Net income                                               --               --              --          5,942
Unrealized loss on securities available-
   for-sale, net of taxes                                --               --            (249)          (249)
                                              --------------    -------------   -------------   ------------
     Total comprehensive income                          --               --            (249)         5,693
                                              --------------    -------------   -------------   ------------
ESOP stock committed for release                         --              590              --            836
Purchase of treasury stock                               --               --              --         (1,171)
Dividends ($0.95 per share)                              --               --              --         (3,173)
Prorata vesting of restricted MRDP stock              1,158               --              --          1,158
                                              --------------    -------------   -------------   ------------

Balance, June 30, 2000                        $      (3,502)    $     (5,261)   $       (339)   $    69,384
                                              ==============    =============   =============   ============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       52

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                      Consolidated Statements of Cash Flows

                    Years Ended June 30, 2000, 1999, and 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                               2000             1999              1998
                                                                           -------------    -------------    ---------------
<S>                                                                         <C>              <C>              <C>
Cash Flows from Operating Activities:
    Net income                                                              $     5,942      $     4,975      $       7,540
    Adjustments to reconcile net income to net
       cash provided by operating activities:
       Provision for loan losses                                                    683              800                460
       Deferred income tax benefit                                                 (370)             (60)              (829)
       Amortization of deferred income                                              (98)            (632)              (219)
       Amortization of loan servicing assets                                        191               78                 17
       Amortization (accretion) of premiums (discounts) on
          investment securities                                                     (24)               7                  4
       Depreciation                                                                 821              797                603
       Allocation of ESOP stock at fair value                                       836              947              1,290
       Prorata vesting of restricted MRDP stock                                   1,158            1,450                 --
       Loss on sale of investment securities available-for-sale                      --               53                 --
       Gain on sale of real estate acquired in settlement of loans                  (49)              --                 --
       Loss on disposal of property and equipment                                    --               13                  7
       Decrease (increase) in loans held-for-sale                                 7,051           (1,690)            (5,677)
      (Increase) decrease in other assets                                        (6,236)          (1,471)                96
       Increase (decrease) in other liabilities                                   1,740              (81)              (237)
                                                                           -------------    -------------    ---------------
               Net cash provided by operating activities                         11,645            5,186              3,055
                                                                           -------------    -------------    ---------------

Cash Flows from Investing Activities:

     Net loan originations and principal collections                               (699)          46,613            (30,129)
     Purchase of loans                                                          (68,449)         (65,812)           (23,846)
     Purchase of investment securities available-for-sale                       (10,726)         (17,317)           (29,063)
     Proceeds from sale of investment securities
        available-for-sale                                                           --           17,000                 --
     Proceeds from maturities of investment securities
        available-for-sale                                                           --            5,500             10,500
     Proceeds from sale of real estate acquired
        in settlement of loans                                                      568               --                 --
     Purchase of Federal Home Loan Bank of Atlanta stock                           (488)            (166)              (435)
     Purchase of property and equipment                                            (695)          (2,738)            (2,461)
     Proceeds from sale of property and equipment                                     3                3                 --
                                                                           -------------    -------------    ---------------
               Net cash used in investing activities                            (80,486)         (16,917)           (75,434)
                                                                           -------------    -------------    ---------------

Cash Flows from Financing Activities:

     Net increase in deposits                                                    13,608           36,199             36,661
     Dividends paid                                                              (3,173)          (2,732)            (1,838)
     Cash distribution                                                               --          (43,329)                --
     Advances from Federal Home Loan Bank of Atlanta                             73,000           17,000             17,000
     Repayment of advances from Federal Home Loan Bank of Atlanta               (25,000)              --                 --
     Other borrowings                                                             9,281           35,000                 --
     Principal payments on other borrowings                                     (35,518)              --                 --
     Purchases of treasury stock                                                 (1,171)         (20,955)            (8,113)
     Stock subscription proceeds                                                     --               --                 --
     Stock subscription refunds                                                      --               --           (197,851)
     Stock issuance costs                                                            --               --             (1,584)
                                                                           -------------    -------------    ---------------
               Net cash provided by (used in) financing activities               31,027           21,183           (155,725)
                                                                           -------------    -------------    ---------------
</TABLE>

                                       53

<PAGE>
                  FirstSpartan Financial Corp. and Subsidiaries

                Consolidated Statements of Cash Flows (continued)

                    Years Ended June 30, 2000, 1999, and 1998
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                        2000             1999            1998
                                                                    -------------    -------------    -----------

<S>                                                                 <C>              <C>              <C>
Net (Decrease) Increase in Cash and Cash Equivalents                $    (37,814)    $      9,452     $ (228,104)

Cash and Cash Equivalents at Beginning of Year                      $     58,420     $     48,968     $  277,072
                                                                    -------------    -------------    -----------

Cash and Cash Equivalents at End of Year                            $     20,606     $     58,420     $   48,968
                                                                    =============    =============    ===========

Supplemental Disclosures of Cash Flow Information:
     Cash paid during the year for:
          Interest                                                  $     21,262     $     17,447     $   17,433
                                                                    =============    =============    ===========
          Income taxes                                              $      3,097     $      4,821     $    5,358
                                                                    =============    =============    ===========

Supplemental Disclosures of Non-Cash Transactions:
     Transfers from loans to real estate acquired in
         settlement of loans                                        $        649     $        312     $       --
                                                                    =============    =============    ===========
     Change in unrealized loss on investment securities
         available-for-sale                                         $       (401)    $       (122)    $      (52)
                                                                    =============    =============    ===========
     Change in deferred taxes related to unrealized loss on
         investment securities available-for-sale                   $        152     $         46     $       20
                                                                    =============    =============    ===========
     Transfer of common stock from treasury to MRDP                 $         --     $      7,443     $       --
                                                                    =============    =============    ===========
     Sale of common stock funded by subscription escrow accounts    $         --     $         --     $   61,478
                                                                    =============    =============    ===========
     Sale of common stock funded by deposit accounts                $         --     $         --     $   20,042
                                                                    =============    =============    ===========
     Sale of common stock to ESOP                                   $         --     $         --     $    7,089
                                                                    =============    =============    ===========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       54

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


1.             Summary of Significant Accounting Policies

               Nature of Operations  and Customer  Concentration  - FirstSpartan
Financial  Corp.  (the  "Corporation")  is  a  unitary  thrift  holding  company
incorporated  in the state of Delaware.  The  Corporation's  principal  business
activities are conducted through its wholly-owned subsidiary, First Federal Bank
(the  "Bank"),  which is a  federally  chartered  savings  bank  engaged  in the
business  of  accepting  savings and demand  deposits  and  providing  mortgage,
consumer,  and commercial loans to the general public through its retail banking
offices.  The  Bank's  business  activities  are  primarily  limited  to  within
Spartanburg  County  and  adjacent  counties  of  South  Carolina.  The Bank was
originally founded in 1935 as a federal mutual savings and loan association.  In
1997, the Bank converted to a federal stock savings bank (the  "Conversion") and
as part of the Conversion, the Corporation was formed as the holding company for
the Bank.

               Principles  of   Consolidation  -  The   consolidated   financial
statements  include  the  accounts of the  Corporation,  the Bank and its wholly
owned   subsidiary,   FirstService   Corporation   ("FirstService")(collectively
referred to as the "Company").

               FirstService  has a  one-third  ownership  interest in a mortgage
banking  company which is accounted  for using the equity method of  accounting.
Neither the  investment  nor the equity in the earnings in the mortgage  banking
company was material for any of the periods presented. See Note 3 for disclosure
of the  amount  of  loans  purchased  from  this  company.  There  were no other
transactions with this related party.

               Significant  intercompany  balances  and  transactions  have been
eliminated in consolidation.

               Basis of Accounting - The  accounting  and reporting  policies of
the Company conform to generally accepted  accounting  principles and to general
practices within the banking industry.

               Use of Estimates - The  preparation  of financial  statements  in
conformity with generally accepted accounting  principles requires management to
make  estimates and  assumptions  that affect the reported  amount of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Actual results could differ from those estimates.
The estimate  most  susceptible  to change in the near term is the allowance for
loan losses.

               Cash and Cash Equivalents - For purposes of reporting cash flows,
cash and cash equivalents  includes cash on hand and amounts due from depository
institutions, federal funds sold, and overnight interest-bearing deposits.

               Investment  Securities - Debt securities that the Company has the
positive   intent  and  ability  to  hold  to   maturity   are   classified   as
"held-to-maturity"  securities and reported at amortized  cost.  Debt and equity
securities that are bought and held  principally for the purpose of selling them
in the near term are  classified  as "trading"  securities  and reported at fair
value with  unrealized  gains and losses  included in earnings.  Debt and equity
securities  not  classified  as either  held-to-maturity  securities  or trading
securities  are  classified as  "available-for-sale"  securities and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a  separate  component  of  equity,  net of taxes.  No  securities  have been
classified by the Company as trading securities during the reporting periods.


                                       55

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


               Gains and losses on sales of  securities  are  determined  on the
specific identification method. Premiums and discounts are amortized to maturity
on a method that approximates the level yield method.

               Loans - Loans are reported at the  principal  amount  outstanding
and  reduced by  undisbursed  portions of loans in process,  net  deferred  loan
origination  fees,  and the  allowance  for loan losses.  Loan  origination  and
commitment fees and certain direct loan  origination  costs are deferred and the
net amount is accreted as an  adjustment  of the related  loan's  yield over the
contractual  life of the loan. Net deferred loan fees on loans sold are included
in determining the gain or loss on the sale. Loans  held-for-sale  are stated at
the  lower of cost or  estimated  market  value  as  determined  by  outstanding
commitments  from  investors  or  current  investor  market  yield  requirements
calculated on an aggregate  basis.  Net  unrealized  losses are  recognized in a
valuation allowance by charges to income.

               Upon the sale of mortgage loans, the Company receives cash in the
amount of the fair  value of the loans and a gain or loss is  recognized  at the
time of sale for the  difference  between the proceeds and  carrying  value.  On
mortgage loans sold for which servicing rights are retained,  the carrying value
of the loan is adjusted at the time of sale by allocating  the total cost of the
loan  to the  mortgage  servicing  right  and the  loan  (without  the  mortgage
servicing right) based on their relative fair values.  The cost allocated to the
mortgage  servicing  right is recognized as a separate asset (included in "Other
Assets") and  amortized  equally over the period of the  estimated net servicing
income. The carrying value of loan servicing rights and the amortization thereon
are  periodically  evaluated  in  relation  to  estimated  future net  servicing
revenues.  The Company  evaluates the carrying value of the servicing  portfolio
for  impairment by estimating  the future net servicing  income of the portfolio
based on  management's  best  estimate  of  remaining  loan lives and  estimated
prepayment   rates.   Loan  type  and  note  rate  are  the   predominant   risk
characteristics  of the underlying loans used to stratify  capitalized  mortgage
servicing  rights for  purposes of  measuring  impairment.  At June 30, 2000 and
1999, the cost of the mortgage servicing rights approximated their fair value.

               Interest on loans is credited to income as earned  based upon the
contractual  interest  rate  of the  loans  applied  to  principal  outstanding.
Interest accrual on impaired and unimpaired loans is ceased if collection in the
near term is  uncertain,  or when  principal or interest is 90 days or more past
due. Such interest is accounted for in an allowance for uncollected  interest by
a charge to interest income equal to all interest previously accrued, and income
is subsequently  recognized only to the extent cash payments are received until,
in management's  judgment,  the borrower is able to make periodic  principal and
interest payments.  Loans generally are returned to accrual status when the loan
is brought  current and it appears  likely  that  payments  will  continue to be
received as scheduled.

               Allowance for Loan Losses - The Company  provides for loan losses
on the allowance method.  Accordingly,  loans deemed  uncollectible are deducted
from the allowance and  provisions  for estimated  loan losses and recoveries on
loans  previously  charged off are added to the  allowance.  The allowance is an
amount that  management  believes  will be adequate to absorb  estimated  losses
inherent in existing loans which may become uncollectible. Factors considered in
assessing  the adequacy of the allowance  include  historical  loss  experience,
delinquency   trends,   characteristics  of  specific  loan  types,  growth  and
composition of the loan  portfolios,  the relationship of the allowance for loan
losses to outstanding loans, local and regional economic conditions, evaluations
of impaired loans, and other factors. Based on this assessment, the allowance is
adjusted through a charge to operations.  Because of the uncertainty inherent in
the estimation process,  management's  estimate of the allowance for loan losses
may  change  in the  near  term.  However,  the  amount  of the  change  that is
reasonably possible cannot be estimated.  Further, the allowance for loan losses
is subject to periodic  evaluation by various regulatory  authorities and may be
subject to adjustment upon their examination.


                                       56

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


               Management periodically evaluates speculative construction,  land
development,  commercial,  and restructured loans to determine if any such loans
are impaired. Loans are considered to be impaired when, in management's judgment
the  collection  of  principal or interest is not  collectible  according to the
contractual  terms of the loan  agreement.  When  conducting  loan  evaluations,
management  considers various factors such as historical loan  performance,  the
financial condition of the borrower,  and adequacy of collateral to determine if
a loan is impaired.

               The  measurement  of  impaired  loans  generally  is based on the
present  value of future  cash  flows  discounted  at the  historical  effective
interest rate, except that collateral-dependent loans generally are measured for
impairment  based on the fair value of the collateral.  When the measured amount
of an  impaired  loan is less than the  recorded  investment  in the  loan,  the
impairment  is  recorded  through a valuation  allowance  which is included as a
component of the allowance for loan losses.

               Office Properties and Equipment - Office properties and equipment
are stated at cost less accumulated depreciation.  Depreciation is computed over
the estimated useful lives of the related assets using the straight-line method.

               Real  Estate  Acquired  in  Settlement  of  Loans  - Real  estate
acquired  in  settlement  of loans is  recorded  initially  at fair  value  less
estimated cost of disposal at the date of  foreclosure,  establishing a new cost
basis.  Any accrued  interest on the related loan at the date of  acquisition is
charged to operations. After foreclosure,  valuations are performed periodically
by management  and the real estate is carried at the lower of cost or fair value
minus  estimated  costs  to  sell.  Revenues,  expenses,  and  additions  to the
valuation  allowance  related to real estate acquired in settlement of loans are
charged to  operations.  Such  amounts were not material in the years ended June
30, 2000, 1999 and 1998 and are included in Noninterest Expense.

               Advertising  -  The  Company  expenses  the  production  cost  of
advertising as incurred.

               Income Taxes - Deferred tax assets and  liabilities are reflected
at  currently  enacted  income tax rates  applicable  to the period in which the
deferred tax assets or  liabilities  are expected to be realized or settled.  As
changes in tax laws or rates are enacted,  deferred  tax assets and  liabilities
are adjusted through the provision for income taxes.

               Recently Issued Accounting Standards and Guidance - In June 1998,
the Financial  Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 133, Accounting for Derivative  Instruments and
Hedging  Activities.  This  statement,  as amended,  establishes  accounting and
reporting standards for derivative  instruments and for hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities  in the balance sheet and measure those  instruments  at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative.  The Company adopted this
statement  as of July 1,  2000.  SFAS No.  133 had no  effect  on the  Company's
financial   position  and  is  currently  not  expected  to  affect  results  of
operations.

               In December 1999, the Securities and Exchange  Commission ("SEC")
issued  Staff  Accounting  Bulletin  ("SAB") No.  101,  Revenue  Recognition  in
Financial  Statements which summarizes certain views of the SEC staff related to
the  application of generally  accepted  accounting  principles  with respect to
revenue recognition in financial  statements.  SAB No. 101, as amended,  must be
adopted by the Company no later than April 1, 2001.  The Company  believes  that
adoption of SAB No. 101 will not  materially  affect its  financial  position or
results of operations.


                                       57

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


2.             Investment Securities

               Investment  securities   available-for-sale   are  summarized  as
follows (in thousands):

<TABLE>
<CAPTION>
                                                              June 30, 2000
                                           ----------------------------------------------------
                                                           Gross         Gross
                                           Amortized     Unrealized    Unrealized         Fair
                                             Cost          Gains         Losses          Value
                                           ---------     ----------    ----------        ------
<S>                                        <C>           <C>            <C>            <C>
Debt securities:
   U.S. Government Agency obligations      $ 14,500      $     --       $   (264)      $ 14,236
   State and local obligations                2,241            --            (69)         2,172
                                           --------                     --------       --------
                                             16,741            --           (333)        16,408
Marketable equity securities                 17,498            51           (264)        17,285
                                           --------      --------       --------       --------
                                           $ 34,239      $     51       $   (597)      $ 33,693
                                           ========      ========       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                                June 30, 1999
                                             ---------------------------------------------------
                                                             Gross          Gross
                                             Amortized     Unrealized     Unrealized       Fair
                                               Cost          Gains          Losses         Value
                                             ---------     ----------     ----------       ------
<S>                                          <C>           <C>            <C>            <C>
Debt securities:
  U.S. Government Agency obligations         $  5,497      $     --       $    (61)      $  5,436
  State and local obligations                   1,480            --            (12)         1,468
                                             --------      --------       --------       --------
                                                6,977            --            (73)         6,904
Marketable equity securities                   16,512            76           (148)        16,440
                                             --------      --------       --------       --------
                                             $ 23,489      $     76       $   (221)      $ 23,344
                                             ========      ========       ========       ========
</TABLE>

           Gross  realized  gains and losses on sales of  investment  securities
available-for-sale were as follows (in thousands):


                                          Year Ended June 30,
                                 ----------------------------------
                                  2000         1999           1998
                                 ------       ------         ------
                Gross gains       $--         $  10           $--
                Gross losses       --           (63)           --
                                  ---         -----           ---
                Net losses        $--          $(53)          $--
                                  ===         =====           ===


           Marketable  equity  securities  at June 30,  2000  and  1999  consist
principally of a mutual fund that invests in adjustable-rate mortgages.


           Investment  securities  totaling  approximately $14.8 million at June
30, 2000 were pledged as collateral for public deposits and other borrowings.

           The contractual maturities of debt securities  available-for-sale (at
amortized  cost and estimated  fair value) are summarized as follows at June 30,
2000 (in thousands):



                                       58

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998



                                                 Amortized          Fair
                                                    Cost            Value
                                                 ---------          ------
         Due within one year                       $ 1,000         $   990
         Due after one through five years            5,458           5,345
         Due after five through ten years            9,294           9,123
         Due after ten years                           989             950
                                                   -------         -------
                                                   $16,741         $16,408
                                                   =======         =======


3.         Loans Receivable

           Loans receivable are summarized as follows (in thousands):

<TABLE>
<CAPTION>

                                                                     June 30,
                                                           ---------------------------
                                                              2000             1999
                                                           ---------        ----------
<S>                                                         <C>              <C>
         Real estate mortgage loans:
                Residential (1-4 family)                    $309,096         $290,219
                Construction                                  75,963           72,373
                Land development                              24,150           18,864
                Commercial                                    40,979           23,587
                                                            --------         --------
                                                             450,188          405,043
                                                            --------         --------
         Consumer and commercial loans:
                Home equity                                   52,928           43,623
                Commercial                                    25,259           13,885
                Other                                         12,115           10,894
                                                            --------         --------
                                                              90,302           68,402
                                                            --------         --------
         Gross loans                                         540,490          473,445
                                                            --------         --------

         Less:
                Undisbursed portion of loans in process      (33,367)         (34,807)
                Net deferred loan fees                          (554)            (561)
                Allowance for loan losses                     (3,474)          (2,896)
                                                            --------         --------
         Net loans                                          $503,095         $435,181
                                                            ========         ========
</TABLE>

                                       59

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           The  changes  in the  allowance  for  loan  losses  consisted  of the
following (in thousands):



                                                 Year Ended June 30,

                                            2000          1999        1998
                                           ------        ------      ------
         Allowance, beginning of year      $2,896        $2,179      $1,796
         Provision for loan losses            683           800         460
         Write-offs                          (110)          (85)        (80)
         Recoveries                             5             2           3
                                          -------       -------     -------
         Allowance, end of year            $3,474        $2,896      $2,179
                                          =======       =======     =======


           At June 30,  2000 and  1999,  the  Company  had loans  totaling  $3.4
million which were on non-accrual  status.  Interest income that would have been
recorded for the years ended June 30, 2000, 1999, and 1998 had non-accrual loans
been current in accordance  with their  contractual  terms amounted to $196,000,
$52,000, and $58,000,  respectively. The amount of interest included in interest
income on such loans for such periods amounted to $75,000, $51,000, and $48,000,
respectively.

           Impaired loans are summarized as follows (in thousands):


                                                       June 30,
                                                ----------------------
                                                  2000           1999
                                                -------        -------
   Impaired loans:
            No valuation allowance required     $   132        $  722
            Valuation allowance required          2,448            --
                                                -------        ------
                                                $ 2,580        $  722
                                                =======        ======
   Valuation allowance                          $   215        $   --
                                                =======        ======


           The average  recorded  investment in impaired loans was $1.7 million,
$1.0  million,  and $1.3  million for the years ended June 30, 2000,  1999,  and
1998,  respectively.  Interest  income  recognized  on  impaired  loans  was not
significant during the years ended June 30, 2000, 1999, and 1998.

           Residential real estate loans are presented net of loans serviced for
others totaling  approximately $119.4 million,  $102.9 million and $56.4 million
at June 30,  2000,  1999 and 1998,  respectively.  Servicing  loans  for  others
generally consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, and foreclosure processing. In connection with
these loans serviced for others,  the Company held borrowers' escrow balances of
$571,000, $438,000, and $253,000 at June 30, 2000, 1999, and 1998, respectively.


                                       60

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           The  following  is an analysis  of the changes in mortgage  servicing
rights (in thousands):


                                              Year Ended June 30,
                                   -----------------------------------------
                                     2000            1999            1998
                                   --------       ---------        ---------
Balance, beginning of year         $1,042          $  213            $ 24
Capitalization                        377             907             206
Amortization                         (191)            (78)            (17)
                                   ------          ------            ----
Balance, end of year               $1,228          $1,042            $213
                                   ======          ======            ====


           The Company  originates  loans to  officers  and  directors  at terms
substantially  identical to other  borrowers.  Mortgage  and  consumer  loans to
officers and directors at June 30, 2000 and 1999 were approximately $1.5 million
and $1.2 million, respectively.

           During the years ended June 30,  2000,  1999,  and 1998,  the Company
purchased  $40.0 million,  $32.5 million,  and $14.9 million,  respectively,  of
loans  from a mortgage  banking  company in which the  Company  has a  one-third
equity  interest.  Also, at June 30, 2000 and 1999, the mortgage banking company
serviced  $53.5 million and $32.5  million,  respectively,  of mortgage loans on
behalf of the  Company.  Management  believes  that the loans were  purchased at
terms  (including  the servicing  terms)  similar to those that prevailed in the
mortgage secondary market at the time of purchase.


4.         Office Properties and Equipment

           Office  properties  and  equipment  are  summarized  as  follows  (in
thousands):



                                                            June 30,
                                                    -------------------------
                                                      2000             1999
                                                    --------        ---------
         Major classification:
            Land                                     $ 2,277         $ 2,099
            Office buildings and improvements          8,809           8,472
            Furniture, fixtures, and equipment         4,623           4,445
            Automobiles                                  108             108
                                                     -------         -------
                                                      15,817          15,124
         Less accumulated depreciation                (5,576)         (4,754)
                                                     -------         -------
         Office properties and equipment, net        $10,241         $10,370
                                                     =======         =======


                                       61

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


5.         Deposit Accounts

           Deposit accounts are summarized as follows (dollars in thousands):


<TABLE>
<CAPTION>

                                                                June 30,
                                              ---------------------------------------------
                                                      2000                     1999
                                              --------------------     --------------------
                                                          Weighted                 Weighted
                                                           Average                  Average
                                              Amount        Rate        Amount       Rate
                                              ------        ----        ------       ----
<S>                                         <C>             <C>       <C>             <C>
         Demand accounts:
                 NOW:
                    Non-interest-bearing    $ 27,896          --%     $ 19,163          --%
                    Interest-bearing          48,551        1.92        46,533        2.29
                 Savings                      50,488        2.47        56,225        2.75
                 Money market                 27,711        4.15        30,099        3.91
         Certificate accounts                264,973        5.85       253,991        5.09
                                            --------                  --------
                                            $419,619                  $406,011
                                            ========                  ========
</TABLE>

           Scheduled  maturities of certificate accounts at June 30, 2000 are as
follows (in thousands):



         Within 1 year                                          $223,035
         After 1 but within 2 years                               28,872
         After 2 but within 3 years                                5,946
         Thereafter                                                7,120
                                                                --------
                                                                $264,973
                                                                ========


           The aggregate amount of certificate  accounts with principal  amounts
of  $100,000 or more was $74.7  million  and $61.5  million at June 30, 2000 and
1999, respectively. Deposits in excess of $100,000 are not federally insured.

           Interest  expense  by type of deposit is  summarized  as follows  (in
thousands):


                                              Year Ended June 30,
                                      ----------------------------------
                                       2000           1999         1998
                                      ------         ------       ------
         Demand accounts:
                Savings              $ 1,334        $ 1,623      $ 2,032
                NOW                      962          1,034        1,039
                Money market           1,179          1,043          434
         Certificate accounts         13,682         13,185       13,498
                                     -------       --------     --------
                                     $17,157        $16,885      $17,003
                                     =======        =======      =======


6.         Advances From Federal Home Loan Bank of Atlanta

           FHLB advances are summarized as follows (dollars in thousands):


                                       62
<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


                                              June 30,
                       ------------------------------------------------------
                                2000                          1999
                       -----------------------      -------------------------
                                      Weighted                       Weighted
                                      Average                        Average
Type of Advance         Amount          Rate          Amount          Rate
                       --------        ------        --------        ------
Fixed-rate              $45,000          6.38%       $34,000           5.23%
Adjustable-rate          10,000          6.58             --             --
Variable-rate            27,000          7.40             --             --
                        -------                      -------
                        $82,000          6.32%       $34,000           5.23%
                        =======          ====        =======           ====


           The  fixed-rate  advances  are  convertible  whereby the FHLB has the
option  at a  predetermined  date  to  convert  the  fixed  interest  rate to an
adjustable rate tied to LIBOR.  The Company has the option to prepay any advance
on the conversion date or any subsequent  quarterly interest payment date should
the FHLB exercise its conversion  option.  The  adjustable-rate  advances adjust
quarterly based upon 3-month LIBOR and the  variable-rate  advances adjust daily
based on the overnight funds market.

           Scheduled  maturities  and  repricing  or  conversion  dates  of FHLB
advances as of June 30, 2000 are as follows (in thousands):



                                        Amount              Amount at
                                          at             Next Repricing
                   Year Ended           Stated            or Conversion
                    June 30,           Maturity               Date
                   ----------          ---------           -----------
                      2001               $27,000             $65,000
                      2002                    --                  --
                      2003                16,000               7,000
                      2004                 7,000              10,000
                   2005-2007                  --                  --
                      2008                 7,000                  --
                      2009                10,000                  --
                      2010                15,000                  --
                                         -------             -------
                                         $82,000             $82,000
                                         =======             =======


           The maximum month-end balance of FHLB advances  outstanding was $82.0
million  and $34.0  million  during  the years  ending  June 30,  2000 and 1999,
respectively.  Average  balances of FHLB advances  outstanding  during the years
ended June 30, 2000 and 1999 were $64.1 million and $26.8 million, respectively.
The Company had an approved  credit limit of $146.2  million with the FHLB as of
June 30, 2000.  The advances are secured by FHLB stock and a blanket lien on all
qualifying one- to four-family residential first mortgage loans.

                                       63

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


7.         Short-Term Borrowings

           At  June  30,  2000,  the  Company  had  sold,  under  agreements  to
repurchase,  U.S.  Government agency securities.  The securities  underlying the
agreements were delivered to the broker-dealer who arranged the transaction.

           Information concerning securities sold under agreements to repurchase
is summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           June 30,
                                                                     -------------------
                                                                      2000          1999
                                                                     ------        -----
<S>                                                                   <C>           <C>
Balance outstanding at end of year                                    $8,763          --
Average balance for months outstanding                                 8,908          --
Average interest rate for months outstanding                            6.01%         --
Average interest rate at end of year                                    6.58%         --
Maximum month-end balance during year                                 $9,079          --
Mortgage-related securities underlying the agreements at year end:
       Carrying value                                                  9,000          --
       Estimated fair value                                            8,834          --
</TABLE>



           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 outstanding
stock of the Bank was pledged as  collateral  on the loan.  The note was paid in
full on July 22, 1999.



                                       64

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


8.         Income Taxes

           The  tax  effects  of  temporary   differences   that  give  rise  to
significant  portions of the Company's net deferred tax asset (liability) are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                              June 30,
                                                                                     -------------------------
                                                                                       2000              1999
                                                                                      ------            ------
<S>                                                                                   <C>              <C>
         Deferred tax assets:
                    Allowance for loan losses                                         $1,080           $   599
                    Management recognition and development plan                          232               308
                    Unrealized loss on investment securities available-for-sale          207                55
                    Other                                                                238               160
                                                                                      ------           -------
                                                                                       1,757             1,122
                                                                                      ------           -------
         Deferred tax liabilities:
                    Mortgage servicing rights                                            466               396
                    FHLB stock dividends                                                 431               431
                    Accumulated depreciation                                             340               289
                    Deferred loan fees and costs, net                                     77                17
                    Other                                                                133               201
                                                                                      ------           -------
                                                                                       1,447             1,334
                                                                                      ------           -------
         Net deferred tax asset (liability)                                           $  310           $  (212)
                                                                                      ======           =======
</TABLE>


           No valuation allowance on deferred tax assets has been established as
management  believes  it is more likely  than not that the  existing  deductible
temporary differences will reverse during periods in which the Company generates
net taxable income.

           In years  ended June 30, 1996 and prior,  the Bank was allowed  under
the Internal Revenue Code to deduct,  subject to certain  conditions,  an annual
addition to a reserve for bad debts  ("reserve  method") in determining  taxable
income. Legislation enacted in August 1996 repealed the reserve method effective
for the Bank in the fiscal year ended June 30, 1997.

           Deferred  income taxes have been provided on differences  between the
bad debt reserve for tax  purposes  determined  under the formerly  used reserve
method and the loan loss allowance for financial accounting purposes only to the
extent of  differences  arising  subsequent  to  December  31,  1987.  Under the
legislation  previously  mentioned,  the  Bank  is  required  to  recapture  the
post-1987 tax bad debt reserve of approximately  $2.8 million into income over a
six-year  period  beginning  with the fiscal year ended June 30,  1997.  Since a
deferred tax liability has been provided on this difference,  the recapture will
have no impact on equity or results of operations.

           Retained  earnings as of June 30,  2000  include  approximately  $4.1
million  representing  reserve  method bad debt  reserves  originating  prior to
December  31,  1987 for  which no  deferred  income  taxes  are  required  to be
provided.  These  reserves  may be included  in taxable  income if the Bank pays
dividends in excess of its  accumulated  earnings and profits (as defined by the
Internal  Revenue Code) or in the event of a distribution in partial or complete
liquidation of the Bank.


                                       65

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           The   provision  for  income  taxes  is  summarized  as  follows  (in
thousands):

<TABLE>
<CAPTION>

                                                 Year Ended June 30,
                                           -------------------------------
                                             2000        1999       1998
                                            ------      ------     ------
<S>                                         <C>          <C>        <C>
         Current provision:
                    Federal                $3,645       $3,180     $4,956
                    State                     591          482        680
                                           ------       ------     ------
                                            4,236        3,662      5,636
         Deferred provision:
                    Federal                  (310)         (50)      (700)
                    State                     (60)         (10)      (129)
                                           ------       ------     ------
                                             (370)         (60)      (829)
                                           ------       ------     ------
         Total provision for income taxes  $3,866       $3,602     $4,807
                                           ======       ======     ======
</TABLE>



           For the years ended June 30, 2000,  1999,  and 1998, a tax benefit of
$152,000,  $46,000, and $20,000,  respectively,  was allocated to equity for the
tax effects of unrealized losses on securities available-for-sale.

           The  Company's  effective  tax rate is  greater  than  the  statutory
Federal income tax rate for the following reasons (dollars in thousands):

<TABLE>
<CAPTION>

                                                                      Year Ended June 30,
                                                          -------------------------------------------
                                                           2000              1999              1998
                                                          ------            ------            ------
<S>                                                       <C>               <C>              <C>
        Tax at statutory federal income tax rate (34%)    $3,335            $2,916           $4,198
        Increase (decrease) resulting from:
                   State income taxes                        350               304              364
                   Non-deductible compensation:
                          ESOP                                83               121              218
                          MRDP                               186               217               --
                   Other, net                                (88)               44               27
                                                          ------            ------           ------
                                                          $3,866            $3,602           $4,807
                                                          ======            ======           ======
        Effective income tax rate                           39.4%             42.0%            38.9%
                                                          ======            ======           ======
</TABLE>

9.         Employee Benefit Plans

           401(k)  Plan - The Company  sponsors a 401(k)  plan which  covers all
employees who meet minimum eligibility requirements.  Participants generally may
contribute from 2%-10% of their  compensation and the Company is allowed to make
discretionary contributions,  subject to certain limitations. Expense related to
Company discretionary contributions amounted to $153,000, $125,000, and $105,000
in the years ended June 30, 2000, 1999, and 1998, respectively.


                                       66

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           ESOP - The ESOP is a non-contributory  retirement plan adopted by the
Company  effective  January 1, 1997 which covers all  employees who meet minimum
eligibility requirements.  The ESOP acquired 354,430 shares of the Corporation's
common stock in the  Conversion  at a price of $20 per share with  proceeds of a
loan from the Corporation in the amount of approximately $7.1 million.  The Bank
makes periodic cash  contributions  to the ESOP in an amount  sufficient for the
ESOP to make the scheduled  payments under the note payable to the  Corporation.
In  connection  with the cash  distribution  (discussed  in note  12),  the ESOP
received  approximately  $4.3 million on its shares of the Corporation's  common
stock. The ESOP purchased an additional 180,436 shares with the proceeds.

           The note payable has a term of 12 years,  bears  interest at 8.5% and
requires a level  quarterly  payment of principal and interest of  approximately
$237,000. The note is secured by the shares of common stock held by the ESOP.

           As the note is repaid,  shares are released from collateral  based on
the proportion of the payment in relation to total payments  required to be made
on the  loan.  The  shares  released  from  collateral  are  then  allocated  to
participants  based upon  compensation.  Compensation  expense is  determined by
multiplying  the per share market price of the  Corporation's  stock at the time
the shares are  committed to be released by the number of shares to be released.
Any difference between the market value of the released shares and their cost is
recorded as an addition or deduction to additional paid-in capital.  The Company
recognized  approximately  $836,000,  $947,000, and $1.3 million in compensation
expense in the years ended June 30, 2000, 1999, and 1998, respectively,  related
to the ESOP of which approximately $590,000,  $591,000, and $647,000 reduced the
cost of unallocated  ESOP shares and $246,000,  $356,000 and $643,000  increased
additional paid- in capital on the balance sheet in each respective year.

           The  cost  of the  shares  not  yet  committed  to be  released  from
collateral  is  reflected as a reduction of  stockholders'  equity.  Uncommitted
shares  are  considered  neither  outstanding  shares for  computation  of basic
earnings  per share nor  potentially  dilutive  securities  for  computation  of
diluted  earnings per share.  Dividends on unallocated ESOP shares are reflected
as a  reduction  in the  note  payable  (and  the  Bank's  contribution  reduced
accordingly).

           Shares released or committed to be released for allocation during the
years ended June 30,  2000 and 1999  totaled  44,578 and  29,536,  respectively.
Shares remaining not released or committed to be released for allocation at June
30,  2000  and 1999  totaled  396,975  and  441,553  and had a  market  value of
approximately $6.8 million and $10.3 million, respectively.


10.        Stock Compensation Plans

           Management  Recognition and  Development  Plan - On January 21, 1998,
the  Corporation's   stockholders  approved  the  FirstSpartan  Financial  Corp.
Management  Recognition  and  Development  Plan  ("MRDP").  A maximum of 177,215
shares may be awarded under the MRDP. The objective of the MRDP is to provide an
additional  ownership  interest  in the  Company as a  long-term  incentive  and
retention  program  for key  employees  and  directors.  Shares of common  stock
awarded  under the MRDP vest in equal  amounts over a five-year  period.  In the
event of a change in  control  of the  Company,  all  shares  will  fully  vest.
Compensation  expense is determined by the value of the stock on the award date,
recognized on a straight-line  basis over the vesting period.  Upon the granting
of shares under the MRDP,  participants will be entitled to all voting and other
stockholder   rights  related  to  the  shares,   including   unvested   shares.
Participants may also receive dividends and other  distributions with respect to
the shares, including unvested shares. Also, all such shares will be included in
outstanding shares for the computation of basic earnings per share.


                                       67

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           On July 8, 1998, 177,215 shares of stock were awarded and the closing
price of the stock on that date was $42.00 per share  which  became the basis of
recognizing  compensation over the five-year period ending June 30, 2003. Shares
awarded  under the MRDP were issued from the  177,215  shares of treasury  stock
held at June 30, 1998. In connection with the $12.00 per share cash distribution
on June 25, 1999  (discussed in note 12), a compensation  charge of $2.1 million
was recorded related to the pass through of the cash  distribution on the shares
in the  MRDP.  Also,  as a  result  of  the  cash  distribution,  the  basis  of
recognizing  compensation  over the vesting  period was  reduced  from $42.00 to
$32.67.

           Stock  Option  Plan  -  On  January  21,  1998,   the   Corporation's
stockholders  approved the 1997  FirstSpartan  Financial Corp. Stock Option Plan
("SOP").  The SOP allows the granting to management  and directors of options to
purchase up to 443,038 shares of common stock of the Corporation.  All employees
and  non-employee  directors are eligible to participate in the SOP. Each option
will have a term of 10 years and the  exercise  price of each option will not be
less than the fair market value of the shares on the date of grant. Options will
vest in equal  installments  over a three- year period. In the event of a change
in control of the Company,  all options will become fully vested and immediately
exercisable.  If  provision  is not made for the  assumption  of the  options in
connection  with the change of control,  the SOP provides for cash settlement of
any outstanding options.

           The following is an analysis of stock option activity:


                                                                  Weighted
                                        Options                   Average
                                       Available     Options      Exercise
                                       for Grant   Outstanding      Price
                                       ---------   -----------    ---------
            Balance, June 30, 1998           --           --     $     --
               Plan adopted             443,038           --           --
               Granted                 (414,793)     414,793        21.73
               Forfeited                  1,000       (1,000)       21.75
                                       --------     -------
            Balance, June 30, 1999       29,245      413,793        21.73

               Granted                  (12,437)      12,437        18.31
                                       --------      -------
            Balance, June 30, 2000       16,808      426,230        21.63
                                       ========      =======


           Of the  414,793  options  granted in the year  ended  June 30,  1999,
363,291  were  granted at the plan's  inception  on July 9, 1998 at an  exercise
price of $42.00 per share.  On October 21, 1998, the  Compensation  Committee of
the Board of Directors determined that because of the decline in market value of
the Company's  stock such a short time after the granting of the stock  options,
the  desired   incentive   effect  for  employee   performance   was  diminished
significantly.   Accordingly,  the  Committee  recommended,  and  the  Board  of
Directors  approved,  the  repricing of all options  granted on July 9, 1998. On
October 28, 1998, the Committee repriced the options at the fair market value of
the stock that day which was $33.75 per share. Since the repricing was at market
value, no compensation was recorded as a result of the repricing.

           In connection with the $12.00 per share cash distribution  (discussed
in Note 12), the exercise  price of all options was adjusted in accordance  with
FASB Emerging Issues Task Force Issue No. 90-9, "Changes to Fixed Employee Stock
Option  Plans  as a  Result  of  Equity  Restructuring."  The  weighted  average
reduction in exercise price was $12.00 per share.


                                       68

<PAGE>


           The following is a summary of stock options  outstanding  at June 30,
2000:



                       Weighted
                       Average
                      Remaining
     Exercise         Contractual         Options             Options
      Price           Life (Years)      Outstanding         Exercisable
     --------        -------------      -----------         ------------
      $21.75              8.1              410,793             136,931
       19.39              8.7                3,000               1,000
       18.31              9.6               12,437                  --
                                           -------             -------
       21.63              8.1              426,230             137,931
                                          =======              =======


           The Company applies Accounting  Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees," and related interpretations in
accounting for the plan. No  compensation  cost has been recognized for the plan
because the stock option price is equal to or greater than the fair value at the
grant date. Had compensation cost for the plan been determined based on the fair
value  method  of  SFAS  123  "Accounting  for  Stock-Based  Compensation,"  the
Company's  net income and net income per share would have  decreased  to the pro
forma amounts indicated below (in thousands, except per share data):



                                                   Year Ended June 30,
                                                ---------------------------
                                                  2000               1999
                                                -------             -------
               Net income:
                      As reported               $5,942              $4,975
                      Pro forma                  4,427               3,931
               Basic earnings per share:
                      As reported                 1.77                1.36
                      Pro forma                   1.32                1.07


           The weighted average fair value of options granted in the years ended
June 30,  2000 and 1999 was $4.77 and $13.28 per share,  respectively.  The fair
value of the  option  grant is  estimated  on the date of grant  using an option
pricing model with the following assumptions:


                                          Year Ended June 30,
                                       ------------------------
                                         2000           1999
                                       --------     -----------
Dividend yield                              4%               3%
Risk-free interest rate                  6.82%      5.07%-5.75%
Expected volatility                        25%              25%
Expected life (years)                       8                8


                                       69

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


11.        Commitments and Contingent Liabilities

           Loan Commitments - The Company, in the normal course of business,  is
a party to financial  instruments  and  commitments  which  involve,  to varying
degrees,   elements  of  risk  in  excess  of  the  amounts  recognized  in  the
consolidated  financial statements.  These financial instruments and commitments
include unused consumer lines of credit and  commitments to extend credit.  Loan
commitments,  excluding undisbursed portions of interim construction loans, were
approximately   $6.5  million   ($1.0   million  at  fixed  rates  ranging  from
8.125%-8.625%)  at June 30, 2000.  Commitments,  which are disbursed  subject to
certain  limitations,  extend  over  periods of time with the  majority  of such
commitments  disbursed within a 30-day period.  Additionally,  at June 30, 2000,
unused  lines of  credit  extended  by the  Company  (principally  variable-rate
consumer lines secured by real estate) amounted to approximately $55.6 million.

           Loans  Sold with  Recourse  - At June 30,  2000,  approximately  $1.3
million of loans  serviced  for others had been sold with  recourse  (i.e.,  all
credit risk associated with these loans was retained by the Company). Loans sold
with recourse  resulted from the sale of several pools of loans in 1983.  Due to
the seasoned nature of these loans and their typical low  loan-to-value  ratios,
management  believes that these loans do not present a  significant  risk to the
Company.

           Financial  Instruments with Off-Balance  Sheet Risk - The Company has
no other financial instruments with off- balance sheet risk.

           Concentration  of Credit Risk - The  Company's  business  activity is
principally  with customers  located in South Carolina.  Except for loans in the
Company's market area, there are no other  significant  concentrations of credit
risk.   The  majority  of  the  Company's   loans  are   residential   mortgage,
construction,  home equity, and other mortgage loans. Generally,  first mortgage
loans  are  allowed  up to 80% of  the  value  of the  real  estate  pledged  as
collateral or up to 95% with private mortgage  insurance.  Home equity loans are
generally  allowed  up to  90% of  the  value  of the  real  estate  pledged  as
collateral.

           Potential  Impact  of  Changes  in  Interest  Rates  - The  Company's
profitability depends to a large extent on its net interest income, which is the
difference between interest income on loans and investments and interest expense
on deposits and  borrowings.  Like most  financial  institutions,  the Company's
interest income and interest  expense are affected  significantly  by changes in
market  interest  rates and other  economic  factors  beyond  its  control.  The
Company's  interest-earning  assets  consist  primarily of mortgage  loans which
adjust  more  slowly to changes  in  interest  rates  than its  interest-bearing
savings deposits.  Accordingly, the Company's earnings may be affected adversely
during periods of rising interest rates.

           Litigation  - The Company is involved in legal  actions in the normal
course of  business.  Management,  based on advice  of legal  counsel,  does not
expect any material losses from any current litigation.

           Employment  Agreements  - Both  the  Corporation  and the  Bank  have
entered into employment agreements with four executive officers  ("executives").
The  employment   agreements  establish  the  duties  and  compensation  of  the
executives  and have been  executed  in order to ensure a stable  and  competent
management base. The employment  agreements provide for an initial term of three
years.  The Bank's Board of Directors  may agree after  conducting a performance
evaluation  of  the  executive,  to  extend  an  employment  agreement  on  each
anniversary  date for an  additional  year so that the  remaining  term shall be
three years.

           The employment agreements generally provide for the continued payment
of specified  compensation  and benefits for the remaining term of the agreement
after the executives are  terminated,  unless the  termination is for "cause" as
defined in the employment  agreement.  Additionally,  the employment  agreements
provide for severance payments if employment is terminated following a change in
control in the amount of three times the average annual compensation paid during
the five  calendar  years  immediately  preceding  the  change in control to the
respective  executive.   The  contracts  also  require  indemnification  to  the
executives should any portion of the payments under the employment agreements be
deemed "excess  parachute  payments" under  applicable  Internal Revenue Service
regulations.

                                       70

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           Severance Agreements - The Bank and the Corporation have entered into
severance  agreements with four senior officers  ("officers") (none of whom have
entered  into  employment  agreements)  with an initial  term of two years.  The
severance  agreements  may be  extended  in the same  manner  as the  employment
agreements.  The  severance  agreements  provide for  severance  payments in the
amount of 2 times annual salary (and  continuation of insured  employee  welfare
benefits  for a  two-year  period)  in  connection  with  termination  or  other
specified actions in the event of a change in control of the Company.

           Employee Severance Compensation Plan ("Severance Plan") - In general,
all employees (except for executives and officers who have entered into separate
employment or severance agreements) are eligible to participate in the Severance
Plan.  Under the  Severance  Plan,  employees  terminated  within 12 months of a
change in control are entitled to a severance benefit of 2 weeks to 18 months of
their current compensation based upon length of service and position.


12.        Stockholders' Equity

           Liquidation  Account  - At the  time  of  the  Conversion,  the  Bank
established a liquidation account for the benefit of eligible account holders as
of December 31, 1996 who continue to maintain  their  accounts at the Bank after
the Conversion.  The liquidation  account will be reduced annually to the extent
that eligible account holders have reduced their qualifying deposits. Subsequent
increases  will  not  restore  an  eligible  account  holder's  interest  in the
liquidation  account.  In the event of a complete  liquidation of the Bank, each
eligible  account  holder will be entitled  to receive a  distribution  from the
liquidation  account  in  an  amount   proportionate  to  the  current  adjusted
qualifying  balances for accounts then held before any  distribution may be made
to the Corporation with respect to the Bank's capital stock.

           Dividends  - The  Corporation's  sources  of  income  and  funds  for
dividends to its stockholders are earnings on its investments and dividends from
the Bank. The  Corporation is not subject to any regulatory  restrictions on the
payment of dividends to its stockholders. However, the Bank's primary regulator,
the Office of Thrift  Supervision  ("OTS"),  has regulations that impose certain
restrictions on payment of dividends by the Bank to the Corporation. On June 25,
1999,  the  Corporation  paid a cash  distribution  of  $12.00  per share to its
stockholders.

           Current regulations of the OTS allow the Bank (based upon its current
capital level and  supervisory  status assigned by the OTS) to pay a dividend of
up to 100% of its net income to date during the calendar  year plus its retained
net income  (defined as net income for a specified  period less total  dividends
declared during that period) for the preceding two years.  Supervisory  approval
is not  required,  but 30 days prior notice to the OTS is required.  Any capital
distribution  in excess  of this  amount  would  require  supervisory  approval.
Capital  distributions  are further  restricted  should the Bank's capital level
fall below the fully phased-in capital  requirements of the OTS. In no case will
the Bank be  allowed  to make a  capital  distribution  if it would  reduce  the
regulatory capital of the Bank below the balance of the liquidation account. The
Bank paid dividends to the Corporation amounting to $42.0 million, $600,000, and
$1.0 million in the years ended June 30, 2000, 1999, and 1998, respectively.

           Share  Repurchases - The Company  repurchased  67,700,  642,405,  and
177,215 shares at average prices of $17.30,  $32.62, and $45.78 per share during
the year ended June 30,  2000,  1999,  and 1998,  respectively.  All shares were
repurchased in accordance with applicable OTS regulations.  As of June 30, 2000,
the  Board  had  authorized  the  repurchase  of up to  378,797  shares  of  the
Corporation's outstanding common stock, of which 67,700 had been repurchased.


                                      71

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           Capital Adequacy - The Bank is subject to various  regulatory capital
requirements  administered  by  the  federal  financial  institution  regulatory
agencies.  Failure to meet minimum  capital  requirements  can initiate  certain
mandatory and possibly additional  discretionary  actions by regulators that, if
undertaken,  could  have a direct  material  effect on the  Company's  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's assets,  liabilities,  and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments by the regulators about components, risk weighting, and other factors.

           Quantitative  measures  established  by regulation to ensure  capital
adequacy  require  the  Bank to  maintain  minimum  amounts  and  ratios.  Under
regulations  of the OTS, the Bank must have:  (i) core capital  equal to 4.0% of
adjusted  total assets,  (ii) tangible  capital equal to 1.5% of adjusted  total
assets  and  (iii)  total  capital  equal to 8.0% of  risk-weighted  assets.  In
measuring compliance with all three capital standards,  institutions must deduct
from their  capital  (with several  exceptions,  primarily for mortgage  banking
subsidiaries and insured depository institution  subsidiaries) their investments
in, and advances to,  subsidiaries  engaged (as  principal)  in  activities  not
permissible  for  national  banks,  and certain  other  adjustments.  Management
believes,  as of June 30,  2000,  that  the  Bank  meets  all  capital  adequacy
requirements to which it is subject.

           As  of  June  30,  2000  and  1999,   the  most   recent   respective
notifications  from the OTS classified the Bank as well-  capitalized  under the
regulatory  framework for prompt corrective  action.  There are no conditions or
events since the most recent  notification that management believes have changed
the  Bank's  category.  To be  categorized  as  well-capitalized,  the Bank must
maintain minimum ratios of total capital to risk-weighted  assets,  core capital
to risk-weighted assets, and core capital to adjusted total assets.

           The  Bank's  actual  and  required  capital  amounts  and  ratios are
summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>

                                                                                              Minimum Requirements
                                                                                ---------------------------------------------
                                                                                                               To Be Well-
                                                                                     For Capital            Capitalized Under
                                                                                      Adequacy             Prompt Corrective
                                                            Actual                    Purposes             Action Provisions
                                                     -------------------        --------------------      --------------------
                                                     Amount       Ratio          Amount      Ratio         Amount       Ratio
                                                    --------     -------        --------    -------       --------     -------
<S>                                                 <C>            <C>          <C>           <C>         <C>           <C>
   June 30, 2000
         Tangible capital (to total assets)         $57,310        9.8%         $ 8,770       1.5%            N/A        N/A
         Core capital (to adjusted total assets)     57,310        9.8           23,400       4.0         $29,250        5.0%
         Tier I capital (to risk-weighted assets)    57,310       14.3              N/A       N/A          24,052        6.0
         Total capital (to risk-weighted assets)     60,684       15.1           32,069       8.0          40,086       10.0




   June 30, 1999
         Tangible capital (to total assets)        $ 91,006       16.8%         $ 8,131       1.5%            N/A        N/A
         Core capital (to adjusted total assets)     91,006       16.8           21,685       4.0         $27,107        5.0%
         Tier I capital (to risk-weighted assets)    91,006       26.4              N/A       N/A          20,680        6.0
         Total capital (to risk-weighted assets)     93,902       27.2           27,573       8.0          34,467       10.0
</TABLE>

                                       72

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           The following is a reconciliation of the Bank's  stockholder's equity
determined  under  generally  accepted  accounting  principles to OTS regulatory
capital requirements (in thousands):

<TABLE>
<CAPTION>

                                                                  Tangible          Core         Risk-Based
                                                                  Capital          Capital         Capital
                                                                ------------     -----------    -------------
<S>                                                                 <C>           <C>             <C>
June 30, 2000
         Total stockholder's equity as determined under
           generally accepted accounting principles                $57,102        $57,102          $57,102
         General allowance for loan losses                              --             --            3,259
         Unrealized loss on certain available-
           for-sale securities, net of taxes                           208            208              208
         Other miscellaneous adjustments                                --             --              115
                                                                   -------        -------          -------
         Regulatory capital                                        $57,310        $57,310          $60,684
                                                                   =======        =======          =======

June 30, 1999
         Total stockholder's equity as determined under
           generally accepted accounting principles                $90,959        $90,959          $90,959
         General allowance for loan losses                              --             --            2,896
         Unrealized loss on securities
           available-for-sale, net of taxes                             47             47               47
                                                                   -------        -------          -------
         Regulatory capital                                        $91,006        $91,006          $93,902
                                                                   =======        =======          =======
</TABLE>



13.        Earnings Per Share

           The Company had no dilutive  securities  outstanding  during the year
ended  June 30,  2000 and had no  potentially  dilutive  securities  outstanding
during the year ended  June 30,  2000;  therefore,  diluted  earnings  per share
("EPS") is the same as basic EPS for all periods presented.  For the years ended
June 30, 2000,  1999, and 1998,  3,359,824,  3,665,778,  and 4,066,692  weighted
average   shares,   respectively,   were   outstanding.   For  purposes  of  EPS
calculations,  shares issued in connection with the Conversion have been assumed
to be outstanding as of July 1, 1997.


                                       73

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


14.        Financial Instruments

           The stated and fair value amounts of financial instruments as of June
30, 2000 and 1999, are summarized below (in thousands):


<TABLE>
<CAPTION>
                                                         2000                             1999
                                              -------------------------         -------------------------
                                               Stated             Fair           Stated             Fair
                                               Amount            Value           Amount            Value
                                              -------           -------         -------           -------
<S>                                           <C>               <C>             <C>               <C>
         Financial assets:
                Cash and cash equivalents     $ 20,606          $ 20,606        $ 58,420          $ 58,420
                Investment securities           33,693            33,693          23,344            23,344
                Loans receivable, net          503,095           492,848         435,181           433,336
                Loans held-for-sale              1,933             1,967           8,984             9,089
                FHLB stock                       4,100             4,100           3,612             3,612
                Other assets                    10,572            10,523           4,245             4,114
                                              --------          --------        --------          --------
                                              $573,999          $563,737        $533,840          $531,970
                                              ========          ========        ========          ========
         Financial liabilities:
                Deposit accounts:
                   Demand                     $154,646          $154,646        $152,020          $152,020
                   Certificate                 264,973           263,359         253,991           253,546
                Other borrowings                 8,763             8,763          35,000            35,000
                Advances from FHLB              82,000            81,164          34,000            33,276
                Other liabilities                4,109             4,109           3,521             3,521
                                              --------          --------        --------          --------
                                              $514,491          $512,041        $478,532          $477,363
                                              ========          ========        ========          ========
</TABLE>


           The  Company  had  off-balance  sheet  financial  commitments,  which
include $62.1 million and $57.4 million at June 30, 2000 and 1999, respectively,
of commitments  to originate  loans and unused  consumer lines of credit.  Since
these  commitments  are  based  on  current  rates,  the  commitment  amount  is
considered to be a reasonable estimate of fair market value.

           The  following  methods and  assumptions  were used by the Company in
estimating its fair value disclosures for financial instruments:

           Cash and Cash  Equivalents  - Both  cash  and cash  equivalents  have
maturities of three months or less, and, accordingly,  the stated amount of such
instruments is deemed to be a reasonable estimate of fair value.

           Investment  Securities - Fair values for  investment  securities  are
based on quoted market prices.  If a quoted market price is not available,  fair
value is estimated using market prices of similar securities.

           Loans - Fair values of loans  held-for-investment  are  estimated  by
segregating the portfolio by type of loan and  discounting  scheduled cash flows
using  interest  rates  currently  being  offered for loans with similar  terms,
reduced by an estimate of credit losses inherent in the portfolio.  A prepayment
assumption  is used as an  estimate  of the portion of loans that will be repaid
prior to their scheduled maturity.

          Loans  held-for-sale  are  valued  at the  lower of cost or market as
determined by outstanding  commitments  from investors or current investor yield
requirements calculated on an aggregate basis.


                                       74

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


           FHLB Stock - No ready  market  exists for this  stock,  and it has no
quoted market value. However,  redemption of this stock historically has been at
par value. Accordingly,  the stated amount is deemed to be a reasonable estimate
of fair value.

           Other Assets and Other Liabilities - Other assets consist principally
of accrued interest  receivable,  mortgage  servicing rights, and cash surrender
value of life  insurance.  The fair  value of  accrued  interest  receivable  is
estimated to be its stated value since generally it will be paid in three months
or less.  The  fair  value of  retained  servicing  on  mortgage  loans  sold is
calculated by  discounting  the expected  future cash flows,  which are based on
principal  balances,  remaining terms, and servicing spreads.  The fair value of
life insurance  policies is estimated to be the cash surrender value  determined
under the contractual  terms of the policies,  which equals their stated values.
Other liabilities  consist  principally of advances from borrowers for taxes and
insurance,  outstanding  checks,  and  accrued  interest  payable.  Due  to  the
short-term  nature of these  financial  instruments,  the stated amounts of such
instruments are deemed to be a reasonable estimate of fair value.

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

           Other Borrowings - The stated amount is a reasonable estimate of fair
value.

           Advances  from  the  FHLB - The  fair  value  of  these  advances  is
estimated  by  discounting  the future  cash flows of these  advances  using the
current rates at which similar advances could be obtained.

           Fair value  estimates are made at a specific point in time,  based on
relevant  market  information and  information  about the financial  instrument.
These  estimates  do not reflect any premium or discount  that could result from
offering  for sale the  Company's  entire  holdings  of a  particular  financial
instrument.  Because no active market  exists for a  significant  portion of the
Company's  financial  instruments,  fair value  estimates are based on judgments
regarding future expected loss experience,  current economic conditions, current
interest rates and prepayment trends, risk  characteristics of various financial
instruments,  and other  factors.  These  estimates are subjective in nature and
involve  uncertainties and matters of significant  judgment and therefore cannot
be  determined  with  precision.  Changes  in any of these  assumptions  used in
calculating fair value also would affect  significantly the estimates.  Further,
the fair value estimates were  calculated as of June 30, 2000 and 1999.  Changes
in market interest rates and prepayment  assumptions could change  significantly
the fair value.

           Fair value  estimates are based on existing  recorded and off-balance
sheet  financial  instruments  without  attempting  to  estimate  the  value  of
anticipated future business and the value of assets and liabilities that are not
considered  financial  instruments.  For  example,  the Company has  significant
assets and liabilities  that are not considered  financial assets or liabilities
including loan servicing portfolio,  real estate, deferred tax liabilities,  and
premises  and  equipment.  In  addition,  the tax  ramifications  related to the
realization of the unrealized gains and losses can have a significant  effect on
fair value estimates and have not been considered in any of these estimates.


                                       75

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


15.        Condensed Parent Company Financial Statements

           Condensed financial information of the Corporation is as follows
           (in thousands):

<TABLE>
<CAPTION>

                                                                         June 30,
                                                                ---------------------------
Condensed Balance Sheets                                          2000               1999
                                                                --------           --------
<S>                                                             <C>               <C>
Assets:
           Cash and cash equivalents                              $   728           $  3,616
           Investment in Bank                                      57,103             91,046
           Other investment securities                                122                116
           Note receivable from Bank                                5,843              6,268
           Dividends receivable from Bank                           5,571                 --
           Other assets                                               132                153
                                                                  -------           --------
           Total assets                                           $69,499           $101,199
                                                                  =======           ========

Liabilities and Stockholders' Equity:
           Other borrowings                                       $    --           $ 35,000
           Other liabilities                                          115                158
           Stockholders' equity                                    69,384             66,041
                                                                  -------           --------
           Total liabilities and stockholders' equity             $69,499           $101,199
                                                                  =======           ========
</TABLE>


<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                                             --------------------------------------
Condensed Statements of Income                                 2000             1999          1998
                                                              ------           ------        ------
<S>                                                          <C>               <C>          <C>
Investment Income:
         Interest income                                    $      699        $1,626       $2,474
         Dividends from Bank                                    42,000           600        1,000
                                                            ----------        ------       ------
                                                                42,699         2,226        3,474
Interest Expense                                                   127            49           --
                                                            ----------        ------       ------
Net Interest Income                                             42,572         2,177        3,474
Non-interest Income                                                 --            10           --
Non-interest Expense                                               496           663          415
                                                            ----------        ------       ------
Income Before Income Taxes and Equity
         in Undistributed Earnings of Bank                      42,076         1,524        3,059
Provision for Income Taxes                                          26           315          745
                                                            ----------        ------       ------
Net Income Before Equity in Undistributed Earnings of           42,050         1,209        2,314
Bank

Equity in Undistributed Earnings of Bank                       (36,108)        3,766        5,226
                                                             ---------        ------       ------
Net Income                                                  $    5,942        $4,975       $7,540
                                                            ==========        ======       ======
</TABLE>

                                       76

<PAGE>


                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


<TABLE>
<CAPTION>
                                                                           Year Ended June 30,
                                                                   -----------------------------------
Condensed Statements of Cash Flows                                  2000           1999          1998
                                                                   ------         ------        ------
<S>                                                               <C>            <C>            <C>
Cash Flows from Operating Activities:
         Net income                                               $  5,942       $  4,975       $  7,540
         Adjustments to reconcile net income to net cash
           provided by operating activities:
                  Equity in undistributed earnings of Bank          36,108         (3,766)        (5,226)
                  Net change in other assets and liabilities        (5,593)          (195)           200
                  Gain on sale of investment securities                 --            (10)            --
                                                                  --------       --------       --------
         Net cash provided by operating activities                  36,457          1,004          2,514
                                                                  --------       --------       --------

Cash Flows from Investing Activities:
         Investment in Bank                                             (1)         5,270        (43,516)
         Purchase of investment securities                              (6)       (10,116)            --
         Proceeds from sale of investment securities                    --         10,000             --
         Sale of common stock                                           --             --         81,519
         Collections on note receivable from Bank                        6            214            278
                                                                  --------       --------       --------
         Net cash provided by investing activities                      (1)         5,368         38,281
                                                                  --------       --------       --------

Cash Flows from Financing Activities:
         Other borrowings                                          (35,000)        35,000             --
         Purchase of treasury stock                                 (1,171)       (20,955)        (8,113)
         Stock issuance costs                                           --             --         (1,584)
         Dividends paid                                             (3,173)        (2,732)        (1,838)
         Cash distribution                                              --        (43,329)            --
                                                                  --------       --------       --------
         Net cash used in financing activities                     (39,344)       (32,016)       (11,535)
                                                                  --------       --------       --------

Net (Decrease) Increase in Cash and Cash Equivalents                (2,888)       (25,644)        29,260
Cash and Cash Equivalents at Beginning of Year                       3,616         29,260             --
                                                                  --------       --------       --------
Cash and Cash Equivalents at End of Year                          $    728       $  3,616       $ 29,260
                                                                  ========       ========       ========
</TABLE>

                                       77

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


16.        Subsequent Event

           On September 5, 2000, the Corporation and BB&T  Corporation  ("BB&T")
entered into an Agreement and Plan of Reorganization (the "Agreement")  pursuant
to which the Corporation will merge with and into BB&T. Pursuant to the terms of
the  Agreement,  each  share  of  the  Corporation's  common  stock  issued  and
outstanding  at the  effective  time of the merger will become and be  converted
into the right to receive one share of BB&T common  stock.  Consummation  of the
merger  is  subject  to  various  conditions,  including  the  approval  of  the
Corporation's   stockholders  and  the  receipt  of  all  requisite   regulatory
approvals.

           In connection with the Agreement,  the Corporation  granted to BB&T a
stock option pursuant to a stock option agreement dated as of September 5, 2000,
which under certain defined circumstances, would enable BB&T to purchase 740,300
shares of the Corporation's common stock,  subject to adjustment,  at a price of
$21.25 per share.





                                       78

<PAGE>

                  FirstSpartan Financial Corp. and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999, and 1998


17.        Quarterly Results of Operations (Unaudited)

           Summarized  unaudited quarterly operating results for the years ended
June 30, 2000 and 1999 are as follows (in thousands, except share data):


<TABLE>
<CAPTION>

                                                            First         Second           Third         Fourth
                                                           Quarter        Quarter         Quarter        Quarter
                                                          ---------      ---------       ---------      ---------
<S>                                                      <C>             <C>             <C>             <C>
June 30, 2000
Investment income                                        $    9,787      $   10,049      $   10,233      $   10,837
Interest expense                                              5,019           5,084           5,291           5,829
                                                         ----------      ----------      ----------      ----------
Net interest income                                           4,768           4,965           4,942           5,008
Provision for loan losses                                       100             167             200             216
                                                         ----------      ----------      ----------      ----------
Net interest income after provision for loan losses           4,668           4,798           4,742           4,792
Non-interest income                                           1,023           1,027             963           1,243
Non-interest expense                                          3,400           3,323           3,304           3,421
                                                         ----------      ----------      ----------      ----------
Income before income taxes                                    2,291           2,502           2,401           2,614
Provision for income taxes                                      921             977             964           1,004
                                                         ----------      ----------      ----------      ----------
Net income                                               $    1,370      $    1,525      $    1,437      $    1,610
                                                         ==========      ==========      ==========      ==========
Basic and diluted earnings per share                     $     0.41      $     0.45      $     0.43      $     0.48
                                                         ==========      ==========      ==========      ==========
Weighted average shares outstanding                       3,351,990       3,363,135       3,374,280       3,349,696
                                                         ==========      ==========      ==========      ==========


June 30, 1999
Investment income                                        $    9,628      $    9,684      $    9,547      $    9,766
Interest expense                                              4,597           4,638           4,495           4,636
                                                         ----------      ----------      ----------      ----------
Net interest income                                           5,031           5,046           5,052           5,130
Provision for loan losses                                       200             200             200             200
                                                         ----------      ----------      ----------      ----------
Net interest income after provision for loan losses           4,831           4,846           4,852           4,930
Non-interest income                                             904             970           1,084           1,140
Non-interest expense                                          2,993           3,090           3,208           5,689
                                                         ----------      ----------      ----------      ----------
Income before income taxes                                    2,742           2,726           2,728             381
Provision for income taxes                                    1,056           1,130           1,117             299
                                                         ----------      ----------      ----------      ----------
Net income                                               $    1,686      $    1,596      $    1,611      $       82
                                                         ==========      ==========      ==========      ==========
Basic and diluted earnings per share                     $     0.42      $     0.44      $     0.46      $     0.02
                                                         ==========      ==========      ==========      ==========
Weighted average shares outstanding                       4,040,738       3,622,344       3,484,336       3,491,720
                                                         ==========      ==========      ==========      ==========
</TABLE>

                                       79

<PAGE>



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

<TABLE>
<CAPTION>
                                                                                                Year First
                                                                                                 Elected           Term to
       Name                 Age (1)                    Position with Company                   Director (2)        Expire
--------------------   -------------------    -------------------------------------------     --------------     -----------
<S>                           <C>             <C>                                                  <C>              <C>
E. Lea Salter                 65              Director                                             1988             2003
R. Wesley Hammond             51              Director                                             1990             2003
Billy L. Painter              55              Director, President, and Chief                       1984             2002
                                                 Executive Officer
Robert R. Odom                78              Chairman of the Board                                1953             2002
E.L. Sanders                  66              Director                                             1987             2001
David E. Tate                 60              Director                                             1993             2001

                                            Executive Officers Who Are Not Directors


Hugh H. Brantley              57              Executive Vice President and                          --               --
                                                 Chief Operating Officer
J. Stephen Sinclair           58              Executive Vice President of                           --               --
                                                 Lending
R. Lamar Simpson              41              Chief Financial Officer                               --               --
</TABLE>

-------------
(1)   As of June 30, 2000.
(2)   Includes prior service on the Board of Directors of the Bank.  Each member
      of the Board of  Directors  also serves as a director of the Bank and vice
      versa.


Biographical Information for Last Five Years

               R. Wesley Hammond is the President and Chief Executive Officer of
Hammond-Brown-Jennings,  a  furniture  company.  He  is  past-President  of  the
Southern  Home  Furnishings  Association  and  past-Chairman  of  its  Executive
Committee.

               Robert R. Odom is a senior partner in the law firm of Odom, Terry
& Cantrell,  Spartanburg,  South Carolina, with which he has been associated for
over 50 years.

               Billy L. Painter has been President and Chief  Executive  Officer
of the Corporation since its inception in 1997. He also has served as the Bank's
President  and Chief  Executive  Officer  since  1984.  Mr.  Painter is a former
Chairman of the Spartanburg Area Chamber of Commerce. He serves on the Boards of
Piedmont  Interstate  Fair,  Spartanburg  Development  Council  and  Habitat for
Humanity. He also serves on the Advisory Board of Salvation Army and is Chairman
of the Spartanburg County Transportation Committee.

               E. Lea Salter,  retired,  is the former  President of Christman &
Parsons,  Inc.,  general  contractors.  He  is  active  in  the  Lions  Club  of
Spartanburg.

                                       80

<PAGE>


               E.L.  Sanders  is a  retired  insurance  executive.  He  is  past
Chairman of the Board of Directors for Mobile Meals of Spartanburg and past Vice
Chairman of the Board of Directors of the Foundation for the  Multi-Handicapped,
Blind and Deaf of South  Carolina.  Mr. Sanders is on the Board of Directors and
is a past President of the Civitan Club of Spartanburg.

               David E. Tate has been  President  and sole  owner of Tate  Metal
Works,  Inc., a tank fabrication and erection company,  since 1972. He was named
the South Carolina Small Business Person of the Year in 1998.

               Hugh H. Brantley is the Bank's Executive Vice President and Chief
Operating  Officer,  holding this position since 1987. Mr.  Brantley is Chairman
and Director of Spartanburg  Christian Community Foundation and is a Director of
Upward Basketball.

               J. Stephen  Sinclair is the Bank's  Executive  Vice  President of
Lending, holding this position since 1987. He is a Director of Safe Homes - Rape
Crisis  Coalition,  a former  Director of  Communities  and Schools  through the
Chamber of Commerce,  and a member of the Home Builders  Association  of Greater
Spartanburg.

               R. Lamar Simpson has been the Corporation's Treasurer,  Secretary
and Chief  Financial  officer since its inception in 1997. He is also the Bank's
Chief Financial Officer, holding this position since 1996. He is a member of the
American  Institute  of  Certified  Public  Accountants,  a member  of the South
Carolina  Association  of  Certified  Public  Accountants,  and a member  of the
Financial Managers Society.


Compliance with Section 16(a) of the Exchange Act

               Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than 10% of
any  registered  class of the Company's  equity  securities,  to file reports of
ownership and changes in ownership with the SEC. Executive  officers,  directors
and greater  than 10%  shareholders  are required by  regulation  to furnish the
Company with copies of all Section 16(a) reports they file.

               Based  solely on its review of the  copies of the  reports it has
received  and  written   representations   provided  to  the  Company  from  the
individuals  required to file the reports, the Company believes that each of the
Company's   executive  officers  and  directors  has  complied  with  applicable
reporting  requirements for transactions in FirstSpartan common stock during the
fiscal year ended June 30, 2000.


                                       81

<PAGE>

Item 11.           Executive Compensation


Summary Compensation Table

               The following  information  is furnished for the chief  executive
officer and all other  executive  officers of First Federal who received  salary
and bonus of $100,000  (collectively,  the "Named  Executive  Officers")or  more
during the year ended June 30, 2000.

<TABLE>
<CAPTION>
                                                                                          Long-Term Compensation
                                                                                         ------------------------
                                                            Annual Compensation                  Awards
                                                   ------------------------------------  -------------------------
                                                                             Other       Restricted     Securities
                                                                             Annual        Stock       Underlying       All Other
Name and Principal                                                        Compensation     Awards      Options/SARs    Compensation
Positions                                  Year    Salary($)    Bonus($)      ($)(1)       ($)(2)          (#)             ($)
-----------------------------------       ------   --------   ---------   ------------  -----------   ------------- ----------------
<S>                                        <C>     <C>          <C>            <C>             <C>           <C>       <C>
Billy L. Painter                           2000    $162,154     $30,000        $--      $       --            --       $  62,260(3)
   President and                           1999     156,000      25,000         --       1,265,334        70,886          431,548
   Chief Executive Officer...............  1998     146,620      40,000         --              --            --          69,323

R. Lamar Simpson
   Treasurer, Secretary and Chief
   Financial Officer of the Company        2000    $102,629     $22,000        $--      $       --            --       $  33,314(4)
   and Chief Financial Officer             1999      96,575      20,000         --         372,120        31,013         142,573
   of the Bank...........................  1998      90,666      16,000         --              --            --          33,721

Hugh H. Brantley
   Executive Vice President,               2000    $101,173     $16,000        $--      $       --            --       $  32,311(5)
   Chief Operating Officer and Treasurer   1999      95,064      16,000         --         669,858        31,013         228,804
   of the Bank...........................  1998      92,481      16,000         --              --            --          33,196

J. Stephen Sinclair                        2000    $100,072      15,000        $--      $       --            --       $  32,394(6)
   Executive Vice President                1999      94,509      16,000         --         669,858        31,013         228,455
   of Lending of the Bank................  1998      91,523      16,000         --              --            --          33,265
</TABLE>

--------------------
(1)   Other annual compensation excludes perquisites and other personal benefits
      that were less than 10% of the total annual salary and bonus reported.

(2)   Includes  restricted  stock  awards of  30,127,  8,860,  15,949 and 15,949
      granted to Messrs. Painter, Simpson, Brantley and Sinclair under the MRDP.
      The dollar  amounts set forth in the table  represent  the market value of
      the shares awarded on the date of grant and,  therefore,  do not take into
      account the decrease in the market value of the shares  resulting from the
      $12 per share special cash  distribution paid on June 25, 1999. As of June
      30, 2000, the market value of the shares held by Messrs. Painter, Simpson,
      Brantley and  Sinclair  was  $519,691,  $152,835,  $275,120 and  $275,120,
      respectively. The awards vest in three equal annual installments, provided
      the  recipient  continues  in the  employ  of  the  Company  or the  Bank,
      commencing on July 9, 1999, the first anniversary of the effective date of
      the award.  When shares vest and are  distributed  from the trust in which
      they are held,  the  recipients  will  also  receive  an  amount  equal to
      unaccumulated  cash and stock dividends (if any) paid on the shares,  plus
      accrued earnings.

(3)   Consists of directors'  fees  ($18,000),  market value of stock  allocated
      under  ESOP  ($35,116),   employer  401(k)  Plan  matching   contributions
      ($7,883),  term life insurance  premiums  ($1,065) and  split-dollar  life
      insurance premiums ($196).

(4)   Consists of market value of stock allocated under ESOP ($27,060), employer
      401(k) Plan matching contributions  ($5,959), term life insurance premiums
      ($236) and split-dollar life insurance premiums ($59).

(5)   Consists of market value of stock allocated under ESOP ($25,342), employer
      401(k) Plan matching contributions  ($5,741), term life insurance premiums
      ($1,034) and split-dollar life insurance premiums ($194).

(6)   Consists of market value of stock allocated under ESOP ($25,510), employer
      401(k) Plan matching contributions  ($5,688), term life insurance premiums
      ($1,020) and split-dollar life insurance premiums ($176).


                                       82

<PAGE>


Employment Agreements

               The Company and the Bank have entered into employment  agreements
with Messrs. Painter,  Simpson, Brantley and Sinclair. The employment agreements
provide for three-year terms. The term of the Company employment  agreements may
be extended on a daily basis unless  written  notice of  non-renewal is given by
the Board of Directors and the term of the First Federal  employment  agreements
are renewable on an annual basis.  The  employment  agreements  provide that the
executive's  base salary will be reviewed at least  annually.  The base salaries
which  are  currently  effective  for such  employment  agreements  for  Messrs.
Painter,  Simpson,  Brantley and Sinclair are $165,000,  $104,798,  $102,628 and
$101,506,   respectively.  In  addition  to  the  base  salary,  the  employment
agreements  provide for,  among other things,  participation  in stock  benefits
plans and other fringe benefits applicable to executive personnel.

               The employment  agreements provide for termination by the Company
and the Bank for cause, as defined in the employment agreements, at any time. If
the Company or the Bank  chooses to terminate  the  executive's  employment  for
reasons other than for cause,  or if the  executive  resigns from the Company or
the Bank  after  specified  circumstances  that  would  constitute  constructive
termination, the executive or, if the executive dies, his beneficiary,  would be
entitled to receive an amount equal to the remaining base salary payments due to
the  executive  for the  remaining  term  of the  employment  agreement  and the
contributions  that  would  have  been  made on the  executive's  behalf  to any
employee  benefit plans of the Company and the Bank during the remaining term of
the employment  agreement.  The Company and the Bank would also continue  and/or
pay for the executive's life, health,  medical,  dental and disability  coverage
for the remaining  term of the  employment  agreement.  Upon  termination of the
executive for reasons other than a change in control,  the executive must comply
with a one year non-competition agreement.

               Under the  employment  agreements,  if voluntary  or  involuntary
termination  follows  a change  in  control  of the  Company  or the  Bank,  the
executive or, if the executive  dies,  his  beneficiary,  would be entitled to a
severance payment equal of three times the average of the five preceding taxable
years'  annual  compensation.  The Company and the Bank would also  continue the
executive's life,  health, and disability  coverage for thirty-six months.  Even
though  both  the  Company  and the Bank  employment  agreements  provide  for a
severance payment if a change in control occurs, the executive would not receive
duplicative payments or benefits under the agreements.  The executive would also
be entitled to receive an  additional  tax  indemnification  payment if payments
under the  employment  agreements  or otherwise  triggered  liability  under the
Internal  Revenue  Code for the  excise  tax  applicable  to  "excess  parachute
payments."  Under  applicable  law,  the  excise tax is  triggered  by change in
control-related  payments  which  equal or exceed  three  times the  executive's
average annual compensation over the five years preceding the change in control.
The excise  tax  equals 20% of the amount of the  payment in excess of one times
the executive's average compensation over the preceding five-year period.

               Payments  to the  executive  under the First  Federal  employment
agreement will be guaranteed by the Company if payments or benefits are not paid
by First Federal.  Payment under the Company employment  agreement would be made
by the  Company.  All  reasonable  costs and legal fees paid or  incurred by the
executive  under any  dispute or  question  of  interpretation  relating  to the
employment agreements shall be paid by the Company or the Bank, respectively, if
the executive is successful on the merits in a legal  judgment,  arbitration  or
settlement. The employment agreements also provide that the Company and the Bank
shall indemnify the executive to the fullest extent legally allowable.

Directors' Compensation

               Directors  of  the  Bank  receive  a fee  of  $1,500  per  month.
Directors'  fees totaled  $126,000  for the fiscal year ended June 30, 2000.  In
addition,  Mr. Odom receives  annual  compensation of $10,200 for his service as
Chairman of the Board.  No separate  fees are paid for service on the  Company's
Board of Directors.


                                       83

<PAGE>


Director Emeritus Plan

               The Director Emeritus Plan provides that each director elected to
the Board of  Directors  of the Bank on or after March 17,  1987 shall  become a
director  emeritus  on (i) the  date  the  director  attains  age 72 or (ii) the
expiration of the director's then current term of office after attaining age 72,
whichever event occurs last. In addition,  a director with at least ten years of
service on the Board may,  upon  attaining  age 65, apply to the Board to assume
director emeritus status.  Under the Director Emeritus Plan, a director emeritus
receives  50% of the fee  payable to regular  Board  members for  attendance  at
monthly  Board  meetings.  If the director  emeritus  attends the monthly  Board
meeting,  the amount  payable is  increased to 75% of the fee payable to regular
Board members.  The Board may also  designate as a director  emeritus a director
who becomes  disabled.  An  additional  feature of the  Director  Emeritus  Plan
provides  that,  in the event of a change in control of the  Company or the Bank
(as defined in the Director  Emeritus Plan), each director would be treated as a
director emeritus on the effective date of the change in control. Within 30 days
of such date,  each  director  emeritus  would  receive a payment equal to three
times the fees received by the director  during the 12-month period ending prior
to the effective date of the change in control. Assuming a change in control had
occurred at June 30,  2000,  the  aggregate  amount  payable  under the Director
Emeritus Plan to all directors would be approximately $408,000.


Outstanding Options Held by Executive Officers

               No options were  granted to or  exercised by the Named  Executive
Officers  during  the  fiscal  year ended June 30,  2000.  The  following  table
provides  certain  information  with  respect  to the number of shares of Common
Stock represented by outstanding options held by the Named Executive Officers as
of June 30, 2000. Also reported are the values for "in-the-money"  options which
represent the positive  spread  between the exercise  price of any such existing
stock options and the year end price of the Common Stock.

<TABLE>
<CAPTION>

                                        Fiscal Year-End Option Value

                                          Number of Securities
                                          Underlying Unexercised                   Value of Unexercised
                                            Options at Fiscal                     In-the-Money Options
                                                Year-End(#)                     at Fiscal Year-End($)(1)(2)
                                      ---------------------------------      ---------------------------------
Name                                  Exercisable       Unexercisable        Exercisable         Unexercisable
----------                            ------------    -----------------      -------------      --------------
<S>                                     <C>                  <C>                 <C>                  <C>
Billy L. Painter....................    23,629               47,257               --                   --
R. Lamar Simpson....................    10,337               20,676               --                   --
Hugh H. Brantley....................    10,337               20,676               --                   --
J. Stephen Sinclair.................    10,337               20,676               --                   --
</TABLE>

---------------------
(1)   The options in this table have an exercise price of $21.75 per share.
(2)   The price of the Common Stock on June 30, 2000 was $17.25 per share.

                                      84

<PAGE>


Item 12.          Security Ownership of Certain Beneficial Owners and Management

    (a)     Security Ownership of Certain Beneficial Owners

       Persons  and  groups  beneficially  owning in excess of 5% of the  Common
Stock are required to file with the Securities and Exchange  Commission ("SEC"),
and provide a copy to the Company,  certain  reports  disclosing  such ownership
pursuant to the Exchange Act. Based upon such reports,  the following table sets
forth, as of August 31, 2000,  certain  information as to those persons who were
beneficial  owners of more than 5% of the outstanding  shares of Common Stock. A
person may be  considered to own any shares of common stock over which he or she
has, directly or indirectly, sole or shared voting or investing power.

<TABLE>
<CAPTION>
                                                         Amount and Nature
                                                           of Beneficial       Percent of Common
                  Beneficial Owner                           Ownership         Stock Outstanding
----------------------------------------------------    ------------------   ----------------------
<S>                                                            <C>                   <C>
First Federal Bank Employee Stock Ownership Plan               534,109(1)            14.4%
380 E. Main Street
Spartanburg, South Carolina 29302

First Citizens Bancorporation of                               219,500                5.9%
South Carolina, Inc. (2)
1230 Main Street
Columbia, South Carolina  29201
</TABLE>

---------------------
(1)   Under the terms of the ESOP,  the trustee,  subject to the exercise of its
      fiduciary  duties,  will vote unallocated  shares and allocated shares for
      which no timely voting instructions are received in the same proportion as
      shares  for  which  it  has  received  timely  voting   instructions  from
      participants. As of August 31, 2000, 114,830 shares have been allocated to
      participants' accounts and 419,279 shares remain unallocated.  The trustee
      of the ESOP is The Southeastern Trust Company.

(2)   The information shown is based on a Schedule 13D filed with the Securities
      and Exchange Commission on October 27, 1998.


                                       85

<PAGE>


               (b)           Security Ownership of Management

               The following  table  provides  information as of August 31, 2000
about the  shares of  FirstSpartan  common  stock that may be  considered  to be
beneficially  owned by each director or nominee for director of the Company,  by
the executive  officers named in the summary  compensation table appearing later
in this proxy  statement,  and by all directors  and  executive  officers of the
Company as a group. A person may be considered to beneficially own any shares of
common stock over which he or she has,  directly or  indirectly,  sole or shared
voting  or  investment  power.  Unless  otherwise  indicated,  each of the named
individuals  has sole  voting and  investment  power with  respect to the shares
shown.

<TABLE>
<CAPTION>

                                                             Number of Shares
                                                               That May Be
                                          Number of           Acquired Within           Percent of
                                            Shares              60 Days By             Common Stock
             Name/Title                     Owned            Exercising Options       Outstanding (1)
-------------------------------------   --------------   -----------------------  --------------------
<S>                                        <C>                    <C>                        <C>
Hugh H. Brantley                           40,884(2)              20,676                     1.65
R. Wesley Hammond                          13,111(3)              14,768                      *
Robert R. Odom                             17,060(4)              14,768                      *
Billy L. Painter                           75,977(5)              47,258                     3.28
E. Lea Salter                              14,886(6)              14,768                      *
E.L. Sanders                               27,635(7)              14,768                     1.14
R. Lamar Simpson                           16,008(8)              20,676                      *
J. Stephen Sinclair                        52,292(9)              20,676                     1.95
David E. Tate                              14,980(10)             14,768                      *

All Executive Officers and                272,833                183,126                    11.64
   Directors as a Group (10 persons)
</TABLE>

----------------------
* Less than 1% of shares outstanding.

(1)   Based on 3,720,270  shares of  FirstSpartan  common stock  outstanding and
      entitled to vote as of August 31, 2000, plus the number of shares that may
      be acquired within 60 days by each individual (or group of individuals) by
      exercising stock options.

(2)   Includes  9,569  shares  of  unvested  restricted  stock as to  which  Mr.
      Brantley  exercises voting but not investment power and 3,982 shares owned
      indirectly through the ESOP.

(3)   Includes 5,317 shares of unvested restricted stock as to which Mr. Hammond
      exercises voting but not investment power.

(4)   Includes  5,316 shares of unvested  restricted  stock as to which Mr. Odom
      exercises  voting but not  investment  power and 1,200  shares held by Mr.
      Odom's spouse.

(5)   Includes  18,076  shares  of  unvested  restricted  stock as to which  Mr.
      Painter  exercises  voting but not  investment  power,  5,715 shares owned
      indirectly  through the ESOP,  10 shares held by Mr.  Painter's  child and
      1,117 shares held by Mr. Painter's spouse.

(6)   Includes 5,317 shares of unvested  restricted stock as to which Mr. Salter
      exercises voting but not investment power.

(7)   Includes 5,317 shares of unvested restricted stock as to which Mr. Sanders
      exercises voting but not investment power.

(8)   Includes 5,316 shares of unvested restricted stock as to which Mr. Simpson
      exercises voting but not investment  power,  4,221 shares owned indirectly
      through the ESOP and 136 shares held by Mr. Simpson's spouse.

(9)   Includes  9,569  shares  of  unvested  restricted  stock as to  which  Mr.
      Sinclair  exercises voting but not investment power and 3,968 shares owned
      indirectly through the ESOP.

(10)  Includes  5,317 shares of unvested  restricted  stock as to which Mr. Tate
      exercises voting but not investment power.


                                       86


<PAGE>


Item 13.           Certain Relationships and Related Transactions

               Federal  regulations  require  that all  loans or  extensions  of
credit to executive  officers and directors  must be made on  substantially  the
same terms, including interest rates and collateral,  as those prevailing at the
time  for  comparable  transactions  with  other  persons  (unless  the  loan or
extension of credit is made under a benefit program  generally  available to all
other  employees  and does not give  preference  to any  insider  over any other
employee) and does not involve more than the normal risk of repayment or present
other unfavorable features.  The Bank, therefore,  is prohibited from making any
new loans or extensions of credit to the Bank's executive officers and directors
with  different  rates or terms than those offered to the general public and has
adopted a policy to this effect.  The  aggregate  amount of loans granted by the
Bank to its executive officers and directors was approximately  $600,000 at June
30,  2000.  These loans (i) were made in the ordinary  course of business,  (ii)
were made on  substantially  the same terms and conditions,  including  interest
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions  with the Bank's  other  customers,  and (iii) did not involve more
than the normal risk of  collectibility  or present other  unfavorable  features
when made.

               Robert R.  Odom,  Chairman  of the Board of the  Company  and the
Bank,  is a  senior  partner  with  the law  firm  of  Odom,  Terry &  Cantrell,
Spartanburg,  South  Carolina,  which serves as general counsel to the Bank. The
Bank paid a retainer of $18,000 and legal fees of  approximately  $73,000 to the
firm  during the fiscal year ended June 30,  2000 for  services  rendered to the
Bank.

                                       87

<PAGE>

                               PART IV

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

        (a)   (1)      The following are filed as a part of Item 8
                       of this report:

                        o   Independent Auditors' Report
                        o   Consolidated  Balance  Sheets as of June 30, 2000
                            and 1999
                        o   Consolidated  Statements  of Income for the Years
                            Ended June 30, 2000, 1999, and 1998
                        o   Consolidated  Statements of Changes in Equity for
                            the Year Ended June 30, 2000, 1999, and 1998
                        o   Consolidated  Statements  of Cash  Flows  for the
                            Years Ended June 30, 2000, 1999, and 1998
                        o   Notes to Consolidated Financial
                            Statements

              (2)       All financial statement schedules are omitted because
                        they are not required or applicable,  or the required
                        information  is shown in the  consolidated  financial
                        statements or the notes thereto.

              (3)       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**
                        (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)  Severance    Agreement   with   J.   Timothy
                                 Camp*****
                        (23)     Consent of Deloitte & Touche LLP
                        (21)     Subsidiaries of the Registrant**
                        (27)     Financial Data Schedule

        (b)   Reports on Form 8-K:

        No Forms 8-K were filed during the quarter ended June 30, 2000.
--------------------
*       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  December  31, 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 10-Q for the quarter ended
        December 31, 1999 and incorporated herein by reference.
******  Filed as an exhibit to the Registrant's  Form 10-Q for the quarter ended
        March 31, 2000 and incorporated herein by reference.

                                     88

<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 26, 2000                  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 26, 2000
    ---------------------------------------------
    Billy L. Painter
    President and Chief Executive Officer
    (Principal Executive Officer)



By: /s/ R. Lamar Simpson                                     September 26, 2000
    --------------------------------------------
    R. Lamar Simpson
    Treasurer, Secretary and Chief Financial Officer
    (Principal Financial and Accounting Officer)


By: /s/ Robert R. Odom                                       September 26, 2000
    ---------------------------------------------
    Robert R. Odom
    Chairman of the Board


By: /s/ E. Lea Salter                                        September 26, 2000
    ---------------------------------------------
    E. Lea Salter
    Director


By: /s/ David E. Tate                                        September 26, 2000
    ---------------------------------------------
    David E. Tate
    Director


By: /s/ E.L. Sanders                                         September 26, 2000
    ---------------------------------------------
    E.L. Sanders
    Director



By: /s/ R. Wesley Hammond                                    September 26, 2000
    ----------------------------------------
    R. Wesley Hammond
    Director