UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended December 31, 2000. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from_________ to_________ Commission File Number: 0-22445 --------- FIRSTSPARTAN FINANCIAL CORP. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 56-2015272 -------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 380 East Main Street, Spartanburg, South Carolina 29302 ------------------------------------------------------- (Address of principal executive office) (864) 582-2391 ---------------- (Registrant's telephone number) 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 the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock Outstanding: 3,811,333 shares as of February 8, 2001. FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES Table of Contents

Page ---- Part I. Financial Information Item 1. Financial Statements (unaudited) Consolidated Balance Sheets at ~~September~~December 3031, 2000 and June 30, 2000 1 Consolidated Statements of Income for the ~~Three~~Six-Month Periods Ended ~~September~~December 3031, 2000 and 1999 2 Consolidated Statements of Stockholders' Equity for the ~~Three~~Six-Month ~~Period~~Periods Ended ~~September~~December 3031, 2000 and 1999 3 Consolidated Statements of Cash Flows for the Three- and Six-Month Periods Ended ~~September~~December 3031, 2000 and 1999 4-5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-1113 Item 3. Quantitative and Qualitative Disclosures About Market Risk 1113 Part II. Other Information Item 1. Legal Proceedings 1214 Item 2. Changes in Securities and Use of Proceeds 1214 Item 3. Default Upon Senior Securities 1214 Item 4. Submission of Matters to a Vote of Security Holders 1214 Item 5. Other Information 1214 Item 6. Exhibits and Reports on Form 8-K 1315 Signatures 1416

ITEM 1. FINANCIAL STATEMENTS FirstSpartan Financial Corp. and Subsidiaries Consolidated Balance Sheets (In Thousands, Except Share Data) (Unaudited)

~~September~~December 3031, June 30, 2000 2000 ------------~~----~~ ------------~~---~~ Assets Cash $ 1315,~~667~~136 $ 13,375 Federal funds sold and overnight interest-bearing deposits 54,~~794~~184 7,231 ------------ ------------ Total cash and cash equivalents 19,~~461~~320 20,606 Investment securities available-for-sale - at fair value (amortized cost: $3830,~~024~~803 and $34,239 at ~~September~~December 3031, 2000 and June 30, 2000, respectively) 3730,~~661~~751 33,693 Loans receivable, net ~~512~~513,~~029~~482 503,095 Loans held-for-sale - at lower of cost or market (market value: $23,~~078~~731 and $1,967 at ~~September~~December 3031, 2000 and June 30, 2000, respectively) 23,~~050~~664 1,933 Office properties and equipment, net 10,~~587~~411 10,241 Federal Home Loan Bank of Atlanta stock - at cost 4,100 4,100 Real estate acquired in settlement of loans ~~798~~972 478 Other assets 12,~~116~~003 11,511 ------------ ------------ Total Assets $ ~~598~~594,~~802~~703 $ 585,657 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposit accounts $ ~~430~~435,~~596~~170 $ 419,619 Advances from Federal Home Loan Bank of Atlanta 81,000 82,000 Other borrowings ~~9,169~~-- 8,763 Other liabilities 74,~~348~~165 5,891 ------------ ------------ Total liabilities ~~528~~520,~~113~~335 516,273 ------------ ------------ Stockholders' Equity: Preferred stock, $0.01 par value: Authorized - 250,000 shares; none issued or outstanding at ~~September~~December 3031, 2000 and June 30, 2000 -- -- Common stock, $0.01 par value: Authorized - 12,000,000 shares; issued: 4,430,375 at ~~September~~December 3031, 2000 and June 30, 2000; outstanding: 3,811,333 and 3,720,270 at ~~September~~December 3031, 2000 and June 30, 2000, respectively 44 44 Additional paid-in capital 42,~~987~~524 42,894 Retained earnings 5859,~~336~~010 57,674 Treasury stock - at cost (619,042 and 710,105 shares at ~~September~~December 3031, 2000 and June 30, 2000, respectively) (2219,~~126~~289) (22,126) Unearned restricted stock (32,~~213~~923) (3,502) Unallocated ESOP stock (54,~~113~~965) (5,261) Accumulated other comprehensive loss (~~226~~33) (339) ------------ ------------ Total stockholders' equity 7074,~~689~~368 69,384 ------------ ------------ Total Liabilities and Stockholders' Equity $ ~~598~~594,~~802~~703 $ 585,657 ============ ============

See accompanying notes to consolidated financial statements. 1 FirstSpartan Financial Corp. and Subsidiaries Consolidated Statements of Income (In Thousands, Except Share Data) (Unaudited)

Three Months Ended ~~September~~Six 30Months Ended December 31, December 31, -------------------------------- --------------------------------- 2000 1999 2000 1999 -------------- -------------- -------------- --------------- Investment Income: Interest on loans $ 10,~~421~~599 $ 89,~~837~~166 $ 21,020 $ 18,003 Interest and dividends on investment securities, mortgage-backed securities, and other ~~841~~847 ~~950~~883 1,688 1,833 ---------- ---------- ---------- ---------- Total investment income 11,~~262~~446 910,~~787~~049 22,708 19,836 ---------- ---------- ---------- ---------- Interest Expense: Deposit accounts 5,~~008~~236 4,~~194~~173 10,244 8,367 Other borrowings ~~151~~145 ~~127~~104 296 231 Federal Home Loan Bank of Atlanta advances 1,~~263~~261 ~~698~~807 2,524 1,505 ---------- ---------- ---------- ---------- Total interest expense 6,~~422~~642 5,~~019~~084 13,064 10,103 ---------- ---------- ---------- ---------- Net Interest Income 4,~~840~~804 4,~~768~~965 9,644 9,733 Provision for Loan Losses ~~100~~200 ~~100~~167 300 267 ---------- ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 4,~~740~~604 4,~~668~~798 9,344 9,466 ---------- ---------- ---------- ---------- Non-interest Income: Service charges and fees ~~910~~901 ~~724~~742 1,811 1,466 Gain on sale of mortgage loans 83 79 99162 178 Other, net ~~225~~273 ~~200~~206 498 406 ---------- ---------- ---------- ---------- Total non-interest income, net 1,~~214~~257 1,~~023~~027 2,471 2,050 ---------- ---------- ---------- ---------- Non-interest Expense: Employee compensation and benefits 12,~~910~~006 1,~~909~~858 3,916 3,767 Federal deposit insurance premium 49 8486 98 170 Occupancy and equipment expense ~~384~~380 ~~403~~376 764 779 Computer services ~~172~~156 ~~154~~142 328 296 Advertising and promotions 9776 ~~155~~94 173 249 Office supplies, postage, printing, etc ~~182~~142 ~~178~~179 324 357 Other ~~759~~632 ~~517~~588 1,391 1,105 ---------- ---------- ---------- ---------- Total non-interest expense 3,~~553~~441 3,~~400~~323 6,994 6,723 ---------- ---------- ---------- ---------- Income Before Income Taxes ~~2401~~2,420 2,~~291~~502 4,821 4,793 Provision for Income Taxes ~~914~~920 ~~921~~977 1,834 1,898 ---------- ---------- ---------- ---------- Net Income $ 1,~~487~~500 $ 1,~~370~~525 $ 2,987 $ 2,895 ========== ========== ========== ========== Basic ~~and~~Earnings Per Share $ 0.45 $ 0.45 $ 0.89 $ 0.86 ========== ========== ========== ========== Diluted Earnings Per Share $ 0.43 $ 0.45 $ 0.4188 $ 0.86 ========== ========== ========== ========== Weighted Average Shares Outstanding - Basic 3,~~328~~358,~~870~~064 3,~~351~~363,~~990~~135 3,343,467 3,357,562 ========== ========== ========== ========== Weighted Average Shares Outstanding - Diluted 3,~~330~~455,~~728~~213 3,~~351~~363,~~990~~135 3,400,782 3,357,562 ========== ========== ========== ==========

See accompanying notes to consolidated financial statements. 2 FirstSpartan Financial Corp. and Subsidiaries Consolidated Statements of Stockholders' Equity For the Six Months Ended December 31, 2000 and 1999 (In Thousands, Except Share Data)

Common Stock Additional ~~Unearned~~ ------------------------- Paid-In Retained Treasury ~~Restricted~~ Shares Amount Capital Earnings Stock ~~Stock~~ --------- --------- --------- --------- --------- ~~---------~~ Balance, June 30, 1999 3,787,970 $ 44 $ 42,648 $ 54,905 $ (20,955) ~~$ (4,660)~~ --------- --------- --------- --------- --------- ~~---------~~ Net income -- -- -- 12,~~370~~895 -- -- Unrealized loss on securities available-for-sale, net of taxes -- -- -- -- -- -- --------- --------- --------- --------- --------- ~~---------~~ Total comprehensive income -- -- -- 12,~~370~~895 -- -- --------- --------- --------- --------- --------- ~~---------~~ ESOP stock committed for release -- -- 96154 -- -- -- Dividends ($0.2045 per share) -- -- -- (~~665~~1,496) -- -- Prorata vesting of restricted stock -- -- -- -- -- ~~290~~ --------- --------- --------- --------- --------- ~~---------~~ Balance ~~September~~December 3031, 1999 3,787,970 $ 44 $ 42,~~744~~802 $ 5556,~~610~~304 $ (20,955) ~~$ (4,370)~~ ========= ========= ========= ========= ========= ~~=========~~ Balance, June 30, 2000 3,720,270 $ 44 $ 42,894 $ 57,674 $ (22,126) ~~$ (3,502)~~ --------- --------- --------- --------- --------- ~~---------~~ Net income -- -- -- 12,~~487~~987 -- -- Unrealized gain on securities available-for-sale, net of taxes -- -- -- -- -- -- --------- --------- --------- --------- --------- ~~---------~~ Total comprehensive income -- -- -- 12,~~487~~987 -- -- --------- --------- --------- --------- --------- ~~---------~~ ESOP stock committed for release -- -- 93296 -- -- Reissuance of treasury stock for stock options exercised 91,063 -- (666) -- 2,837 Dividends ($0.2550 per share) -- -- -- (~~825~~1,651) -- -- Prorata vesting of restricted stock -- -- -- -- -- ~~289~~ --------- --------- --------- --------- --------- ~~---------~~ Balance ~~September~~December 3031, 2000 3,~~720~~811,~~270~~333 $ 44 $ 42,~~987~~524 $ 5859,~~336~~010 $ (2219,~~126~~289) ~~$ (3,213)~~ ========= ========= ========= ========= ========= ~~=========~~

Accumulated Other ~~Comprehen-~~Unearned Unallocated ~~sive~~Comprehen- Total Restricted ESOP ~~(Loss)~~sive Stockholders' Stock ~~Income~~Stock (Loss) Equity --------- ----------- --------- --------- Balance, June 30, 1999 $ (4,660) $ (5,851) $ (90) $ 66,041 --------- --------- --------- --------- Net income -- -- 1-- 2,~~370~~895 Unrealized loss on securities available-for-sale, net of taxes -- -- (6095) (6095) --------- --------- --------- --------- Total comprehensive income -- -- (6095) 12,~~310~~800 --------- --------- --------- --------- ESOP stock committed for release ~~147~~-- 295 -- ~~243~~449 Dividends ($0.2045 per share) -- -- -- (~~665~~1,496) Prorata vesting of restricted stock 579 -- -- ~~290~~579 --------- --------- --------- --------- Balance ~~September~~December 3031, 1999 $ (4,081) $ (5,~~704~~556) $ (~~150~~185) $ 6768,~~219~~373 ========= ========= ========= ========= Balance, June 30, 2000 $ (3,502) $ (5,261) $ (339) $ 69,384 --------- --------- --------- --------- Net income -- -- 1-- 2,~~487~~987 Unrealized gain on securities available-for-sale, net of taxes -- ~~113~~-- ~~113~~306 306 --------- --------- --------- --------- Total comprehensive income -- ~~113~~-- 1306 3,~~600~~293 --------- --------- --------- --------- ESOP stock committed for release ~~148~~-- 296 -- ~~241~~592 Reissuance of treasury stock for stock options exercised -- -- -- 2,171 Dividends ($0.2550 per share) -- -- -- (~~825~~1,651) Prorata vesting of restricted stock 579 -- -- ~~289~~579 --------- --------- --------- --------- Balance ~~September~~December 3031, 2000 $ (52,~~113~~923) $ (~~226~~4,965) $ 70(33) $ 74,~~689~~368 ========= ========= ========= =========

See accompanying notes to consolidated financial statements. 3 FirstSpartan Financial Corp. and Subsidiaries Consolidated Statements of Cash Flows (In Thousands) (Unaudited)

~~Three~~Six Months Ended ~~September~~December 3031, ----------------------------- 2000 1999 ------------ ------------ Cash Flows from Operating Activities: Net income $ 12,~~487~~987 $ 12,~~370~~895 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ~~100~~300 ~~100~~267 Deferred income tax (benefit) provision (155) 60 Accretion (amortization) of deferred income 4457 (5485) Amortization of loan servicing assets 55112 4595 Accretion of discounts on investment securities -- (121) Depreciation ~~203~~400 ~~207~~415 Allocation of ESOP stock at fair value ~~241~~592 ~~243~~449 Prorata vesting of restricted MRDP stock ~~289~~579 ~~290~~579 Gain on disposal of property and equipment (83) -- Gain on sale of real estate acquired in settlement of loans (2125) --(20) (Increase) decrease in loans held-for-sale (~~117~~1,731) 47,~~489~~062 Increase in other assets (~~660~~604) (5,~~468~~772) ~~Increase~~(Decrease) increase in other liabilities (1,~~387~~758) ~~2,275~~892 ----------- ----------- Net cash provided by operating activities ~~3,000~~751 36,~~496~~816 ----------- ----------- Cash Flows from Investing Activities: Net loan originations and principal collections 610,~~168~~989 (24,~~381~~103) Purchase of loans (1522,~~426~~282) (1333,~~350~~979) Purchase of investment securities available-for-sale (35,~~785~~566) (110,~~012~~216) Proceeds from maturities of investment securities available-for-sale 9,001 -- Proceeds from sale of real estate acquired in settlement of loans 46300 42349 Improvements on real estate acquired in settlement of loans (~~165~~220) -- Purchase of property and equipment (~~549~~575) (~~318~~471) Proceeds from sale of property and equipment 8 -- ----------- ----------- Net cash used in investing activities (138,~~703~~345) (1748,~~019~~420) ----------- ----------- Cash Flows from Financing Activities: Net increase in deposits 1015,~~977~~551 1,~~997~~520 Dividends paid (~~825~~1,651) (~~665~~1,496) Advances from Federal Home Loan Bank of Atlanta 2,000 2537,000 Repayment of ~~Advances~~advances from Federal Home Loan Bank of Atlanta (3,000) --(10,000) Other borrowings ~~406~~563 8,910 Proceeds from exercise of stock options 2,171 -- Principal payments on other borrowings --(9,326) (35,000) ----------- ----------- Net cash provided by ~~(used in)~~ financing activities ~~$ 9~~6,~~558~~308 $934 ~~(8,668)~~ ----------- -----------

4 FirstSpartan Financial Corp. and Subsidiaries Consolidated Statements of Cash Flows (In Thousands) (Unaudited)

~~Three~~Six Months Ended ~~September~~December 3031, 2000 1999 ------------ ------------- Net Decrease in Cash and Cash Equivalents $ (1,~~145~~286) $ (2240,~~191~~670) Cash and Cash Equivalents at Beginning of Period 20,606 58,420 ----------- ----------- Cash and Cash Equivalents at End of Period $ 19,~~461~~320 $ 3617,~~229~~750 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 612,~~268~~900 $ 59,~~121~~477 =========== =========== Income taxes $ --2,354 $ --722 =========== =========== Transfers from loans to real estate acquired in settlement of ~~loan~~loans $ ~~180~~549 $ 42164 =========== =========== Change in unrealized loss on investment securities available-for-sale $ ~~183~~493 $ (96153) =========== =========== Change in deferred taxes related to unrealized loss on investment securities available-for-sale $ (70187) $ 3658 =========== =========== Tax benefit from exercise of stock options $ 415 $ -- =========== ===========

See accompanying notes to consolidated financial statements. 5 FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Basis of Presentation FirstSpartan Financial Corp. ("FirstSpartan" or the "Company"), a Delaware corporation, is the holding company for First Federal Bank ("First Federal" or the "Bank"), a federally chartered stock savings bank. The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three- and six-month periods ended December 31, 2000 are not necessarily indicative of the results to be expected for the year ending June 30, 2001. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended June 30, 2000. 2. Pending Merger On September 5, 2000, the Company and BB&T Corporation ("BB&T") entered into an Agreement and Plan of Reorganization (the "Agreement") pursuant to which the Company will merge with and into BB&T. Pursuant to the terms of the Agreement, each share of the Company'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. The merger was approved by the Company's stockholders on January 17, 2001. Consummation of the merger is expected in March 2001. In connection with the Agreement, the Company 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 Company's common stock, subject to adjustment, at a price of $21.25 per share. 6 3. Earnings Per Share The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the three- and six-month periods ended December 31, 2000 and 1999. Diluted common shares arise from the potentially dilutive effect of the Company's stock options outstanding.

4. Stock Options The following is an analysis of stock option activity for the six months ended December 31, 2000 and 1999:

7 5. 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. The adoption of SFAS No. 133 had no effect on the Company's financial position or 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. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This new statement replaces SFAS No.125 and provides further standards on accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company has not completed the analysis of the impact that this standard may have on the Company's financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Private Securities Litigation Reform Act Safe Harbor Statement This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends," and similar expressions. 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. 8 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. Comparison of Financial Condition at December 31, 2000 and June 30, 2000 Total assets were $594.7 million at December 31, 2000 and $585.7 million at June 30, 2000, an increase of $9.0 million or 2%. The primary component of this increase was $10.4 million, or 2%, in loans receivable, net. Loans receivable, net, increased primarily as a result of an increase of $5.0 million in mortgage loans since June 30, 2000. Included in the $5.0 million increase were increases of $5.8 million in commercial mortgage loans and $800,000 in one- to four-family mortgage loans and land development loans combined, offset by a decline of $1.6 million in construction loans. Loans receivable, net, also increased due to increases of $3.5 million in non-mortgage commercial loans and $1.5 million in home equity loans. Deposit accounts increased $15.6 million to $435.2 million at December 31, 2000 from $419.6 million at June 30, 2000 primarily as a result of an increase in certificates of deposit. Stockholders' equity increased by $5.0 million to $74.4 million at December 31, 2000 from $69.4 million at June 30, 2000. Items that increased stockholders' equity were the allocation of shares in the amount of $1.2 million under the Bank's Employee Stock Ownership Plan ("ESOP") and restricted stock plan, net income of $3.0 million for the six months ended December 31, 2000, and proceeds of $2.2 million from shares issued in connection with the exercise of stock options. Offsetting these increases to stockholders' equity was the payment of cash dividends of $1.6 million. Non-performing assets increased by $2.9 million to $6.8 million, or 1.15% of total assets, at December 31, 2000 from $3.9 million, or 0.67% of total assets, at June 30, 2000. The increase was due primarily to an increase of $2.4 million in loans on non-accrual status and $490,000 in real estate acquired in settlement of loans. Comparison of Operating Results for the Three Months Ended December 31, 2000 and December 31, 1999 Net Income. Net income was $1.5 million for the three months ended December 31, 2000 and 1999. An increase in non-interest income was offset by a decrease in net interest income and an increase in non-interest expense. Net Interest Income. Net interest income decreased by $161,000 for the three months ended December 31, 2000 from the three months ended December 31, 1999. Investment income increased by $1.4 million, or 14%, to $11.4 million for the three months ended December 31, 2000 from $10.0 million for the three months ended December 31, 1999. The increase in investment income was offset by an increase in interest expense of $1.5 million, or 29%, to $6.6 million for the three months ended December 31, 2000 from $5.1 million for the three months ended December 31, 1999. 9 The average balance of interest-earning assets was $562.9 million during the quarter ended December 31, 2000 compared to $522.5 million during the quarter ended December 31, 1999. The average yield increased to 8.13% from 7.69% for the prior year quarter due to higher market interest rates in recent quarters. The average balance of interest-bearing liabilities increased to $519.0 million during the three months ended December 31, 2000 from $480.4 million during the three months ended December 31, 1999. The average cost of interest-bearing liabilities increased to 5.08% from 4.24% for the prior year quarter due to higher market interest rates in recent quarters. Due to the inability to predict future interest rates, the amount of future increases in the cost of deposits and borrowings, if any, cannot be quantified. Net yield on interest-earning assets decreased to 3.41% for the quarter ended December 31, 2000 from 3.80% for the quarter ended December 31, 1999. 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. The allowance for loan losses represents an amount that management believes will be adequate to absorb estimated losses inherent in the total loan portfolio 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, loans classified under OTS regulations, and other factors. Management also considers the level of problem assets that the Company classifies in accordance with regulatory requirements. The Company gives greater weight to the level of classified assets than to the level of non-performing assets (non-accrual loans, accruing loans contractually past due 90 days or more, and real estate acquired in settlement of loans) because classified assets include not only non-performing assets but also performing assets that otherwise exhibit, in management's judgment, potential credit weaknesses. The provision for loan losses was $200,000 for the three months ended December 31, 2000 and $167,000 for the three months ended December 31, 1999. Non-performing assets increased primarily because of a related group of one- to four-family mortgage loans, however, management did not believe that an increase in the provision for loan losses was warranted for these loans. See Comparison of Financial Condition at December 31, 2000 and June 30, 2000. Management deemed the allowance for loan losses to be adequate at December 31, 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 could be adjusted as a result of their examinations. The allowance for loan losses increased to $3.7 million at December 31, 2000 from $3.5 million at June 30, 2000 and was 0.68% of gross loans receivable at December 31, 2000 compared to 0.64% at June 30, 2000. The ratio of allowance for loan losses to non-performing loans decreased to 63.11% at December 31, 2000 from 100.9% at June 30, 2000 due primarily to the increase in non-performing loans described above. 10 Non-interest Income. Non-interest income increased to $1.3 million for the three months ended December 31, 2000 from $1.0 million for the three months ended December 31, 1999. Fee income increased to $901,000 from $742,000 principally due to the growth in fee-based products and certain fee increases. Non-interest Expense. Non-interest expense was $3.4 million for the three months ended December 31, 2000 compared to $3.3 million for the same period in 1999. Non-interest expense increased primarily due to expenses incurred in connection with the pending merger with BB&T Corporation (which was approved by stockholders on January 17, 2000) and due to increased expense associated with the employee stock ownership plan (the Company's principal retirement benefit plan) in which the Company's average stock price is a factor in the determination of the plan's expense each period. The Company's average stock price increased substantially for the current three and six- month periods. Income Taxes. The provision for income taxes was $920,000 for the three months ended December 31, 2000 compared to $977,000 for the three months ended December 31, 1999. Comparison of Operating Results for the Six Months Ended December 31, 2000 and December 31, 1999 Net Income. Net income increased to $3.0 million for the six months ended December 31, 2000 from $2.9 million for the six months ended December 31, 1999. An increase in non-interest income was offset by a decrease in net interest income and an increase in non-interest expense. Net Interest Income. Net interest income decreased by $89,000 for the six months ended December 31, 2000 from the six months ended December 31, 1999. Investment income increased by $2.9 million, or 15%, to $22.7 million for the six months ended December 31, 2000 from $19.8 million for the six months ended December 31, 1999. The increase in investment income was offset by an increase in interest expense of $3.0 million, or 30%, to $13.1 million for the six months ended December 31, 2000 from $10.1 million for the six months ended December 31, 1999. The average balance of interest-earning assets was $559.8 million during the six months ended December 31, 2000 compared to $519.3 million during the six months ended December 31, 1999. The average yield increased to 8.11% from 7.64% for the prior year period due to higher market interest rates in recent quarters. The average balance of interest-bearing liabilities increased to $516.2 million during the six months ended December 31, 2000 from $475.7 million during the six months ended December 31, 1999. The average cost of interest-bearing liabilities increased to 5.02% from 4.21% for the prior year quarter due to higher market interest rates in recent quarters. Due to the inability to predict future interest rates, the future amount of increases in the cost of deposits and borrowings, if any, cannot be quantified. 11 Net yield on interest-earning assets decreased to 3.45% for the six months ended December 31, 2000 from 3.75% for the six months ended December 31, 1999. Provision for Loan Losses. The provision for loan losses was $300,000 for the six months ended December 31, 2000 compared to $267,000 for the six months ended December 31, 1999. See Comparison of Operating Results for the Three Months Ended December 31, 2000 and December 31, 1999 - Provision for Loan Losses for a discussion of management's process for determining the provision for loan losses. Non-interest Income. Non-interest income increased to $2.5 million for the six months ended December 31, 2000 from $2.1 million for the six months ended December 31, 1999. Fee income increased to $1.8 million from $1.5 million principally due to the growth in fee-based products and certain fee increases. Non-interest Expense. Non-interest expense was $7.0 million for the six months ended December 31, 2000 compared to $6.7 million for the same period in 1999. Non-interest expense increased primarily due to expenses incurred in connection with the pending merger with BB&T Corporation (which was approved by stockholders on January 17, 2000) and due to increased expense associated with the employee stock ownership plan (the Company's principal retirement benefit plan) in which the Company's average stock price is a factor in the determination of the plan's expense each period. The Company's average stock price increased substantially for the current three and six-month periods. Income Taxes. The provision for income taxes was $1.8 million for the six months ended December 31, 2000 compared to $1.9 million for the six months ended December 31, 1999. Liquidity and Capital Resources The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments from loans, the sale of loans, maturing securities, FHLB of Atlanta advances, and other borrowings. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are influenced greatly by general interest rates, other economic conditions, and competition. The Company and the Bank generally maintain sufficient cash and short-term investments to meet short-term liquidity needs. At December 31, 2000, cash and cash equivalents totaled $19.3 million, or 3% of total assets, and investment securities classified as available-for-sale with maturities of one year or less totaled $20.5 million, or 3% of total assets. At December 31, 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 approximately $148.2 million of which $81.0 million had been advanced. 12 FirstSpartan is not subject to any separate regulatory capital requirements. As of December 31, 2000, the Bank's regulatory capital was in excess of all applicable regulatory requirements. At December 31, 2000, under applicable regulations, the Bank's actual tangible, core, and risk-based capital ratios were 10.5%, 10.5%, and 15.9%, respectively, compared to requirements of 1.5%, 3.0%, and 8.0%, respectively. At December 31, 2000, the Company had loan commitments (excluding undisbursed portions of interim construction loans) of approximately $3.0 million ($1.6 at fixed rates ranging from 7.125% to 10%). In addition, at December 31, 2000, the unused portion of lines of credit (principally variable- rate home equity lines of credit) extended by the Company was approximately $63.2 million. Furthermore, at December 31, 2000, the Company had certificates of deposit scheduled to mature in one year or less of $241.1 million. Based on historical experience, the Company anticipates that a majority of such certificates of deposit will be renewed at maturity. Item 3. Quantitative and Qualitative Disclosures About Market Risk As of December 31, 2000, there have been no material changes in the quantitative and qualitative disclosures about market risks presented in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. 13 FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES Part II. Other Information Item 1. Legal Proceedings ----------------- The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that such routine legal proceedings, in the aggregate, are not material to the Company's financial condition or results of operations. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- Not applicable Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable Item 5. Other Information ----------------- Not applicable 14

* 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. ****** Filed as an exhibit to the Registrant's Current Report on Form 8-K, filed on September 8, 2000, and incorporated herein by reference. 15 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FirstSpartan Financial Corp. Date: By: /S/ Billy L. Painter --------------- ------------------------------------------------ Billy L. Painter President and Chief Executive Officer Date: By: /s/ R. Lamar Simpson --------------- ------------------------------------------------ R. Lamar Simpson Treasurer, Secretary and Chief Financial Officer 16

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