<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996
Commission File Number: 0-18932
-------
FIRST PALMETTO FINANCIAL CORPORATION
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-0921284
- -------------------- ---------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
407 DeKalb Street, Camden, S.C. 29020
- ------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 803-432-1416
------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
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 if 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of its 10-K or any amendments to this Form
10-K. X
---
The registrant's voting stock is not regularly and actively traded in any
established market, and there are no regularly quoted bid and asked prices for
the registrant's voting stock. As of October 25, 1996, the aggregate market
value of the voting stock held by non-affiliates of the registrant, computed by
reference to the most recent privately negotiated sales prices known to
management, was approximately $13.4 million (406,514 shares at $33.00 per
share). It is assumed for purposes of this calculation that all of the
registrant's directors and executive officers are affiliates of the registrant.
As of October 25, 1996 there were issued and outstanding 693,010 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1996 (the "Annual Report"). (Parts I and II)
2. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
(Part II).
Page 1 of 41 pages Exhibit Index on Page 41
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Index to Form 10-K
Fiscal Year Ended September 30, 1996
Part I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and
Management
Item 13 Certain Relationships and Related Transactions
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Signatures
<PAGE>
PART I
ITEM 1. Business
- -----------------
General
- -------
First Palmetto Financial Corporation. First Palmetto Financial Corporation
------------------------------------
("First Palmetto") was incorporated under the laws of the State of Delaware on
January 24, 1990 but did not issue stock or begin operations until October 31,
1990.
First Palmetto is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. First Palmetto's principal business is the business
of its subsidiary, First Palmetto Savings Bank, F.S.B. (the "Bank") and the
Bank's subsidiary. Except as otherwise noted, references herein to First
Palmetto include the Bank. The holding company structure permits First Palmetto
to expand the financial services currently offered through the Bank and its
subsidiaries. As a holding company, First Palmetto has greater flexibility than
the Bank to diversify its business activities, through existing or newly formed
subsidiaries, or through acquisition or merger. So long as First Palmetto
remains a unitary savings and loan holding company and the Bank satisfies the
Qualified Thrift Lender Test, First Palmetto may diversify its activities in
such a manner as to include any activities allowed by regulation to a unitary
savings and loan holding company. See Regulation.
Under current federal law, thrift institutions, including federal savings
and loan associations or savings banks, are called "savings associations." As a
federally chartered savings association, First Palmetto is subject to extensive
regulation and examination by the OTS and the Federal Deposit Insurance
Corporation ("FDIC"), as the administrator of the Savings Association Insurance
Fund ("SAIF") which insures First Palmetto's deposits.
The Bank's main office is located at 407 DeKalb Street, Camden, South
Carolina (telephone (803) 432-1416). First Palmetto also has fourteen branch
offices in other South Carolina locations in Beaufort, Bishopville, Camden,
Columbia, Darlington, Elgin, Irmo, Kershaw, Lancaster, Lugoff, Manning, Pageland
and Pontiac.
Recently Enacted Legislation
On September 30, 1996, President Clinton signed the omnibus appropriations
bill for Fiscal Year 1997 (the "1997 Appropriations Bill"). Among its many
banking provisions, the statute provided for the recapitalization of the SAIF by
imposing a one-time special assessment on SAIF-insured deposits to bring the
fund's reserve ratio to the statutorily required minimum level of 1.25% of
deposits. The rate of the special assessment was 65.7 basis points and applied
to the Bank's deposits as of March 31, 1995. At September 30, 1996, the Bank
recorded an accrual of $1.3 million to reflect this special assessment. The
legislation also provides that, no later than January 1, 2000, the obligation to
pay interest on the bonds of the Financing Corporation ("FICO"), which currently
is borne entirely by members of the SAIF, will be shared on a pro rata basis
with Bank Insurance Fund ("BIF") member institutions. From 1997 through 1999,
partial sharing will occur, with SAIF deposits assessed 6.44 basis points and
BIF deposits assessed 1.29 basis points for servicing of the FICO debt. As a
result of the recapitalization of the SAIF and the sharing of the FICO
obligation, the Bank's FDIC assessments will be materially reduced. See
"Regulation -- Savings Association Regulation -- Deposit Insurance."
3
<PAGE>
The 1997 Appropriations Bill also contained a number of provisions providing
regulatory relief for savings associations and banks. The bill's regulatory
relief provisions include sweeping amendments to the "qualified thrift lender"
test applicable to savings associations that will ease such test's restrictions
on the diversification of a savings association's loan portfolio. See
"Regulation -- Savings Association Regulation -- Qualified Thrift Lender Test."
In addition, on August 20, 1996, the President signed legislation that
repealed the tax bad debt reserve method for thrifts effective for taxable years
beginning after December 31, 1995. As a result, thrifts must recapture into
taxable income the amount of their post-1987 tax bad debt reserves over a six-
year period beginning after 1995. This recapture can be deferred for up to two
years if the thrift satisfies a residential loan portfolio test. The Bank is
expected to recapture $1.2 million of its tax bad debt reserves into taxable
income over six years as a result of this new law. However, the bad debt
reserves of the Bank would not be subject to further recapture except under
certain narrow circumstances, including stock repurchases or redemptions by the
Bank (as opposed to First Palmetto) and conversion to a type of institution that
is not considered a bank for tax purposes. No further recapture would be
required if the Bank converted to a commercial bank charter or was acquired by a
commercial bank. See "Taxation -- Federal Income Taxation."
4
<PAGE>
Selected Consolidated Financial and Other Data
Financial Condition Data. The following tables present selected
------------------------
consolidated financial information and other data for First Palmetto at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
Consolidated Financial Condition Data
At September 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $344,547 $323,183 $278,056 $226,370 $211,423
Loans 227,209 198,373 163,649 158,551 165,818
Cash and investment
securities (a) 70,519 71,807 72,826 34,232 35,258
Mortgage-backed
securities 33,010 39,410 31,159 25,466 453
Deposits 288,157 267,313 225,417 189,334 191,524
Federal home loan
bank advances 32,550 33,367 31,000 17,000 -
Stockholders' equity,
substantially
restricted 20,208 19,345 17,804 16,429 15,012
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes cash and due from banks, interest-bearing deposits in other banks,
certificates of deposit in other banks, available-for-sale securities and
investment securities.
<TABLE>
<CAPTION>
Consolidated Summary of Operations
Years Ended September 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $26,016 $22,795 $16,890 $15,497 $17,065
Interest expense 14,186 12,484 8,213 7,376 9,350
---------- ---------- ---------- ---------- ----------
Net interest income 11,830 10,311 8,677 8,121 7,715
Provision for loan
losses 885 482 523 720 1,114
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 10,945 9,829 8,154 7,401 6,601
Other income 2,255 1,933 1,651 1,466 1,792
Other expense 9,993 8,104 6,597 5,958 5,936
Income tax expenses 1,195 1,300 1,184 1,137 843
Cumulative effect of
change in accounting
principle - - 243 - -
---------- ---------- ---------- ---------- ----------
Net income $ 2,012 $ 2,358 $2,267 $1,772 $ 1,614
========== ========== ========== ========== ==========
Net income per share $ 2.90 $ 3.40 $ 3.36 $ 2.65 $ 2.40
========== ========== ========== ========== ==========
Book value per share $ 29.16 $ 27.90 $25.68 $24.51 $ 22.46
========== ========== ========== ========== ==========
Dividends per share $ 1.60 $ 1.40 $ 1.25 $ 1.10 $ 1.05
========== ========== ========== ========== ==========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Financial Ratios
At September 30,
------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Return on average assets (net income
divided by average total assets) .61% .78% .90%
Return on average equity (net income
divided by average equity) 10.33% 13.17% 13.25%
Dividend payout ratio (dividends declared
divided by net income) 55% 41% 38%
Average equity-to-average assets ratio (average
equity divided by average total assets) 5.87% 5.90% 6.79%
</TABLE>
Lending Activities
General. First Palmetto offers: residential, construction, commercial real
-------
estate, installment and commercial business loans.
6
<PAGE>
Loan Portfolio Data. The following table sets forth selected data relating
-------------------
to the composition of First Palmetto's Loan portfolio by type of loan and type
of security at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
1-4 Family $123,155 54.2% $106,264 53.6% $ 98,649 60.2% $ 98,602 62.2% $114,896 69.3%
Commercial 62,043 27.3 56,489 28.4 43,347 26.6 39,688 25.0 31,211 18.8
Construction Loans 8,695 3.8 5,431 2.7 6,716 4.1 4,891 3.1 5,015 3.0
Commercial business loans 12,578 5.5 10,055 5.1 5,906 3.6 3,970 2.5 4,160 2.5
Installment loans 27,847 12.3 24,376 12.3 14,064 8.6 14,847 9.4 13,968 8.4
Less:
Undisbursed loan proceeds 4,461 2.0 2,240 1.1 3,145 1.9 1,677 1.1 1,830 1.1
Deferred loan fees 284 .1 202 .1 233 .2 290 .2 221 .1
Allowance for loan losses 2,364 1.0 1,800 .9 1,655 1.0 1,480 .9 1,381 .8
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total $227,209 100.0% $198,373 100.0% $163,649 100.0% $158,551 100.0% $165,818 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
7
<PAGE>
Large Loans. At September 30, 1996, First Palmetto's five largest loans
-----------
ranged from $692,000 to $1.1 million. All of these loans were secured by real
property in First Palmetto's primary market area.
Sensitivities of Loans to Changes in Interest Rates. The following table
---------------------------------------------------
sets forth certain information as of September 30, 1996, regarding the dollar
amount of loans maturing in First Palmetto's portfolio based on their
contractual terms to maturity, including scheduled repayments of principal.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due two Due more
Due through five than five
during the years after years after
year ending year ending year ending
September 30, September 30, September 30,
1997 1996 1996 Total
---------- ------------- ------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Real Estate $39,697 $116,513 $32,938 $189,148
Commercial Business 7,305 4,152 1,121 12,578
Installment 5,790 19,969 2,088 27,847
---------- ---------- ---------- ----------
Total $52,792 $140,634 $36,147 $229,573
========== ========== ========== ==========
</TABLE>
The following table sets forth, as of September 30, 1996, the dollar amount
of loans in First Palmetto's portfolio due more than one year after such date
which had predetermined interest rates and had floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Floating or
Predetermined Adjustable
Rates Rates Total
------------- ----------- --------
(In thousands)
<S> <C> <C> <C>
Real Estate $106,482 $42,969 $149,451
Commercial 4,215 1,058 5,273
Installment 20,819 1,238 22,057
---------- ---------- --------
Total $131,516 $45,265 $176,781
========== ========== ========
</TABLE>
Residential Loans. Residential loans, which comprise 54.2% of the loan
-----------------
portfolio or $123.2 million at September 30, 1996, are generally underwritten to
the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. Charge-offs
for these type loans totaled $63,000 for the fiscal year ended September 30,
1996 and $16,000 for the previous year. Residential loans, the largest category
of loans, represents the least amount of credit risk.
Construction Loans. Construction loans totaled a net $8.7 million or less
------------------
than 3.8% of the loan portfolio at September 30, 1996.
During fiscal 1996, First Palmetto originated $14.7 million of construction
loans, which represented 10.5% of its total loans originated during the period.
Substantially all of First Palmetto's construction loan portfolio at September
30, 1996 consisted of loans secured by single-family dwellings.
8
<PAGE>
Construction financing is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. First
Palmetto's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of construction cost or the salability of the
property upon completion of the project proves to be inaccurate, First Palmetto
may be required to advance funds beyond the amount originally committed to
permit the completion of the development.
Commercial Real Estate Loans. First Palmetto's commercial real estate loan
----------------------------
portfolio generally consists of income producing properties or owner occupied
properties.
Commercial real estate loans, including loans secured by multi-family
apartment projects with more than four units, constituted approximately $62.0
million, or 27.3% of First Palmetto's net loan portfolio at September 30, 1996.
These loans are typically secured by commercial real estate located in Kershaw
or Richland County, South Carolina. Commercial real estate loans are generally
made in amounts up to $1.0 million and are generally considered to involve
higher risks than owner-occupied residential real estate loans. First
Palmetto's largest single commercial real estate loan at September 30, 1996 was
approximately $1.1 million. Commercial properties are evaluated based on
whether the income produced would be sufficient to pay the scheduled payments.
Installment Loans. Installment loans increased by $3.4 million or 14.2% to
-----------------
$27.8 million at September 30, 1996. The significant increase during 1996 was
consistent with management's goal of increasing the consumer loan portfolio as a
percentage of total loans. First Palmetto's consumer lenders focus on a
customer's debt obligations, ability and willingness to repay and general
economic trends in evaluating credit request. Charge-offs on consumer loans
totaled $220,000 and $200,000 for the fiscal years ended September 30, 1996 and
1995, respectively. Due to the higher credit risks and operating costs inherent
in consumer loans, rates are generally higher than those required on residential
and commercial loans.
Commercial Business Loans. Commercial business loans increased from $10.1
-------------------------
million at September 30, 1995 to $12.6 million at September 30, 1996. As with
commercial real estate loans, these type loans result in higher credit risk to
First Palmetto. Commercial business loans are frequently unsecured or secured
by inventory, accounts receivable and other types of personal property. In the
event of default, the collateral, if any, is difficult to liquidate at market
prices. To manage this risk, First Palmetto assesses the financial condition of
the borrower as well as the marketability of the collateral on the loan (if
applicable) in evaluating the loan request. Restrictive debt covenants which
limit such items as officers' salaries, working capital and equity capital are
included in commercial business loan agreements.
Charge-offs for commercial real estate and business loans totaled $284,000
and $180,000 for the fiscal years ended September 30, 1996 and 1995,
respectively.
First Palmetto originates commercial business loans on a limited basis.
9
<PAGE>
The following table sets forth loans and loan participations originated,
purchased and sold by First Palmetto during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans Originated:
Residential $ 71,530 $ 39,039 $ 71,653 $ 93,164 $126,031
Residential construction 14,747 9,079 11,909 9,560 7,688
Commercial real estate, including construction 35,235 43,248 35,977 16,711 8,917
Consumer 19,456 19,838 13,387 10,154 10,050
-------- -------- -------- -------- --------
Total loans originated $140,968 $111,204 $132,926 $129,589 $152,686
======== ======== ======== ======== ========
Loans purchased $ -- $ -- $ -- $ 101 $ 1,578
======== ======== ======== ======== ========
Loans sold $ 16,210 $ 9,227 $ 36,176 $ 41,933 $ 59,250
======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
Non-Performing Assets and Asset Classification. Loans are reviewed on a
----------------------------------------------
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Management and
the directors of First Palmetto review on a monthly basis individual loans which
are classified as non-performing assets. Management also evaluates the adequacy
of the allowance for loan losses based on specific review of delinquent loans
and other loans with problems, composition of the Bank's loan portfolio, general
economic conditions, value of collateral and other factors. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Gross interest income that was foregone on the non-accrual loans of $984,000
at September 30, 1996 that would have been recorded if the loans had been
current and in accordance with their original terms, amounted to $94,868 at
September 30, 1996. Interest income recognized on non-accrual loans for the
year ended September 30, 1996 amounted to $52,032.
Real estate acquired by First Palmetto as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired, it is recorded at the lower of the
unpaid principal balance of the related loan or its fair value. Thereafter,
such properties are carried at lower of original basis or fair value less
estimated costs to sell. At September 30, 1996, real estate owned in the amount
of $232,000 was secured by single family dwellings or land and $248,000 was
secured by commercial property. All such property is located in First
Palmetto's primary lending area and management is currently seeking to sell all
property.
At September 30, 1996, the allowance for loan losses totaled $2.4 million
compared to $1.8 million at September 30, 1995. The allowance for loan losses
as a percentage of loans was 1.04% and .91% at September 30, 1996 and 1995,
respectively. Asset quality has improved for the comparative years with the
ratio of non-performing assets to total assets decreasing to .45% at September
30, 1996 from .57% and .67% at September 30, 1995 and 1994, respectively. All
of the allowance for loan losses has been allocated to general reserves.
Approximately $700,000 has been allocated to commercial properties, $200,000
has been allocated to consumer loans and the remainder of the allowance has been
allocated to other loans. Based upon management's review policy described
above, management currently anticipates that charge-offs for 1997 will
approximate charge-offs for 1996.
While First Palmetto believes it has established its existing allowances for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing First Palmetto's loan
portfolio will not request First Palmetto to increase its allowance for loan
losses, thereby negatively impacting First Palmetto's financial condition and
earnings.
At September 30, 1996, there were no concentrations of loans in any types of
industry which exceeded 10% of First Palmetto's total loans that were not
otherwise disclosed as a loan category above. In addition, there were no loans
which were not classified as non-accrual or restructured at September 30, 1996
which may be so classified in the near future because of management concerns as
to the ability of the borrowers to comply with repayment terms.
11
<PAGE>
The following table sets forth an analysis of First Palmetto's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,800 $1,655 $1,480 $1,381 $ 869
------ ------ ------ ------ ------
Transfer of allowance for loan losses
from merger of First Federal of Darlington -- -- -- -- 141
Loans charged off:
Residential 63 16 15 199 121
Consumer 220 200 220 80 194
Commercial 284 180 167 379 458
------ ------ ------ ------ ------
Total charge-offs 567 396 402 658 773
------ ------ ------ ------ ------
Recoveries
Residential -- 2 2 11 5
Consumer 52 30 30 4 7
Commercial 194 27 22 22 18
------ ------ ------ ------ ------
Total Recoveries 246 59 54 37 30
------ ------ ------ ------ ------
Provision for loan losses 885 482 523 720 1,114
------ ------ ------ ------ ------
Balance at end of period $2,364 $1,800 $1,655 $1,480 $1,381
====== ====== ====== ====== ======
Ratio of net charge-offs to the allowance
for loan losses 13.6% 18.7% 21.0% 42.0% 53.8%
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding during the period .15% .19% .22% .38% .47%
====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
The following table sets forth information regarding First Palmetto's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Total Total Total Total Total
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans $ 984 .31% $ 823 .25% $ 722 .26% $2,355 1.04% $3,243 1.53%
Accruing loans 90 days
or more past due - - - - - - - - - -
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Total 984 .31 823 .25 722 .26 2,355 1.04 3,243 1.53
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Other non-performing
assets (a) 480 .14 1,031 .32 1,134 .41 850 .37 1,939 .92
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Troubled debt restructurings - - - - - - 852 .38 - -
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Total non-performing assets $1,464 .45% $1,854 .57% $1,856 .67% $4,057 1.79% $5,182 2.45%
====== ========== ====== ========== ====== ========== ====== ========== ====== ==========
</TABLE>
(a) Other non-performing assets represents property acquired by First Palmetto
through foreclosure or repossession. This property is initially recorded
at the lower of its fair value or the cost of the related loan at time of
foreclosure.
13
<PAGE>
Investment Activities
Interest on investment securities, available-for-sale securities, interest-
bearing deposits and mortgage-backed securities have provided First Palmetto's
second largest source of revenue after interest on loans. Interest on such
investments constituted 23.1%, 27.6% and 20.9% of the total interest and other
revenues of First Palmetto in fiscal years 1996, 1995 and 1994, respectively.
At September 30, 1996, investments, mortgage-backed securities, Federal Home
Loan Bank Stock and interest-bearing deposits in other banks totaled $96.8
million or 28.0% of First Palmetto's total assets.
In accordance with generally accepted accounting principles, First Palmetto
reports its investments, other than investments available-for-sale, at cost as
adjusted for discounts and unamortized premiums. Investments available-for-sale
are reported at fair value.
First Palmetto's mortgage-backed securities ("MBS") portfolio at September
30, 1996 was composed of adjustable rate mortgage (ARM) MBS of $7.9 million and
fixed rate MBS of $25.1 million. The ARM MBS have weighted average adjustment
dates in the period from December, 1996 to June, 1997. At the present level of
interest rates, the fixed rate MBS portfolio has a duration of less than two
years. As interest rates increase, market value will decrease and the duration
of the fixed rate portfolio will lengthen as borrowers are less likely to
refinance the loans collateralizing the MBS. ARM MBS often experience decreased
prepayments in rising interest rate environments as borrowers are less likely to
fix their mortgage rates. Similar to fixed rate MBSs, the ARM MBS decrease in
value as rates rise, but not in the same magnitude, because the interest rate
adjusts annually to market rate. See "ASSET and LIABILITY MANAGEMENT and
INTEREST RATE SENSITIVITY" in the consolidated financial statements for a
discussion of First Palmetto's interest rate sensitivity risk and the associated
prepayment risk.
First Palmetto's MBSs portfolio is classified as held to maturity and is
therefore carried at amortized costs. Although these securities are in the held
to maturity category, they are readily marketable and have a market value which
is slightly less than their book carrying value at September 30, 1996.
As a member of the FHLB System, First Palmetto is required to maintain
minimum levels of liquid assets specified by the OTS which vary from time to
time. See "Regulation -- Savings Association Regulation -- Liquidity
Requirements." The following table sets forth the carrying value of First
Palmetto's interest-bearing deposits, available-for-sale securities, investment
securities and mortgage-backed securities at September 30, 1996. The market
values of First Palmetto's interest-bearing deposits, available-for-sale
securities, investment securities and mortgage-backed securities at September
30, 1996 were $13.6 million, $1.0 million, $47.1 million and $32.8 million,
respectively.
14
<PAGE>
The following table sets forth the carrying value of First Palmetto's
investments:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Interest-bearing deposits $14,048 $ 3,184 $ 5,447
======= ======= =======
Investment securities
U.S. Government and
agency securities $46,607 $57,389 $59,307
Available-for-sale investments 997 1,039 766
------- ------- -------
Total investments $47,604 $58,428 $60,073
======= ======= =======
Mortgage-backed securities
FHLMC and FNMA $32,842 $39,254 $30,970
GNMA 168 156 189
------- ------- -------
$33,010 $39,410 $31,159
======= ======= =======
FHLB of Atlanta stock $ 2,122 $ 2,122 $ 2,122
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of First Palmetto's
investments at September 30, 1996:
<TABLE>
<CAPTION>
Due after Due after
Due in One year 5 years Due
One year through through after
or Less 5 Years 10 years 10 Years Total
-------- --------- --------- -------- -----
(Dollars In thousands)
<S> <C> <C> <C> <C> <C>
Available-for-
sale investments $ 997 $ - $ - $ - $ 997
Investment
securities 16,953 29,654 - - 46,607
Mortgage-backed
securities - - - 33,010 33,010
------- ------- ------- ------- -------
Total $17,950 $29,654 $ -0- $33,010 $80,614
======= ======= ======= ======= =======
Weighted Average
Yield 6.16% 6.41% -0-% 6.69% 6.48%
======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
Deposits
Deposits. First Palmetto offers a number of deposit accounts, including
--------
statement, regular savings accounts, NOW/Checking, IRA accounts, money market
accounts and certificate accounts ranging in maturity generally from 90 days to
three years. Deposit account terms vary, with the principal differences being
the minimum balance required, the time period the funds must remain on deposit,
with the related penalty for early withdrawal, and the interest rate. Deposits
can also be affected by branch acquisitions, branch sales and the rates being
offered for deposits compared to other investment opportunities.
First Palmetto's deposits are obtained primarily from residents of the State
of South Carolina. Management of First Palmetto estimated that less than 1/2 of
1% of deposits are obtained from customers residing outside the State of South
Carolina. The principal methods used by First Palmetto to attract deposit
accounts include the offering of a wide variety of services and accounts,
competitive interest rates and convenient office locations and service hours.
First Palmetto utilizes traditional marketing methods to attract new customers
and savings deposits, including mass media advertising and direct mailings.
At September 30, 1996, First Palmetto had $136.7 million of fixed-rate
certificates with remaining terms of one year or longer, or 47.5% of total
deposits. Substantially all time deposits renew at maturity. As of September
30, 1996, there were no concentrations of deposits which would have a material
impact on the Bank if they were not renewed.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by First Palmetto on a periodic basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors and growth goals.
Management's current policy is to not accept brokered deposits, which are
more likely to be withdrawn than deposits made by other depositors. At
September 30, 1996, First Palmetto had no brokered deposits.
16
<PAGE>
Deposit Flow. The following table sets forth the changes in dollar amounts
------------
of deposits in the various types of accounts offered by First Palmetto between
the dates indicated.
<TABLE>
<CAPTION>
Balance at Percent Balance at Percent Balance at Percent
September of September of Increase September of Increase
30, 1996 Deposits 30, 1995 Deposits (Decrease) 30, 1994 Deposit (Decrease)
---------- -------- ---------- -------- ---------- ---------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW checking and noninterest
bearing checking $ 45,447 15.8% $ 45,226 16.9% $ 221 $ 32,270 14.3% $12,956
Money market deposit 26,539 9.2 18,534 6.9 8,005 14,108 6.3 4,426
Savings 22,057 7.7 23,920 8.9 (1,863) 22,188 9.8 1,732
Certificates of Deposit 194,114 67.3 179,633 67.3 14,481 156,851 69.6 22,782
-------- ------ -------- ------ ------- -------- ------ -------
$288,157 100.0% $267,313 100.0% $20,844 $225,417 100.0% $41,896
======== ====== ======== ====== ======= ======== ====== =======
</TABLE>
17
<PAGE>
The following table sets forth First Palmetto's average balances and
interest rates based on daily balances during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-
bearing
demand
deposits $ 54,503 2.53% $ 45,956 2.68% $ 29,583 2.30%
Savings
deposits 23,181 2.53 22,939 2.79 19,399 2.53
Time
deposits 183,357 5.65 165,717 5.13 142,216 4.10
-------- ------- -------- ------- -------- -------
$261,041 4.72% $234,612 4.42% $191,198 3.66%
======== ======= ======== ======= ======== =======
</TABLE>
The following table sets forth First Palmetto's time deposits classified by
rates as of dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Less than 3.00% $ 33 $ 65 $ 180
3.00% - 4.99% 14,974 17,715 126,311
5.00% - 6.99% 176,152 152,994 29,543
7.99% - 9.99% 2,955 8,859 817
-------- -------- --------
$194,114 $179,633 $156,851
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of First Palmetto's
time deposits at September 30, 1996.
<TABLE>
<CAPTION>
After One After Two
Through Through Through After
Rate One Year Two Years Three Years Three Years Total Rate
- ---------- -------- --------- ----------- ----------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Less than
3.00% $ 1 $ - $ - $ 32 $ 33 2.73%
3.00% -
4.99% 14,639 221 55 59 14,974 4.82
5.00% -
6.99% 150,857 18,542 6,151 602 176,152 5.51
7.00% -
9.99% 1,187 1,570 4 194 2,955 7.36
-------- ------- ------ ---- -------- -----
$166,684 $20,333 $6,210 $887 $194,114 5.49%
======== ======= ====== ==== ======== =====
</TABLE>
The following table indicates the amount of First Palmetto's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity of Deposit
-------- ------------
(In thousands)
<S> <C>
Three months or less $17,898
Over three through six months 16,382
Over six through twelve months 10,420
Over twelve months 6,086
-------
Total $50,786
=======
</TABLE>
18
<PAGE>
First Palmetto had new deposits of $1.2 billion, withdrawals of $1.1 billion
and interest credited to the deposit accounts of $10.3 million resulting in a
net increase of $20.8 million.
Borrowings. Deposits and loan sales and repayments are the primary sources of
- ----------
funds for First Palmetto's lending and investment activities and for its general
purposes. First Palmetto also may rely upon advances (borrowings) from the FHLB
of Atlanta to supplement its supply of lendable funds, meet deposit withdrawal
requirements and to extend the term of its liabilities. The FHLB of Atlanta
traditionally has served as First Palmetto's primary borrowing source. Advances
from the FHLB of Atlanta are collateralized by First Palmetto's stock in the
FHLB of Atlanta and a portion of First Palmetto's first mortgage loans. At
September 30, 1996, the Bank had $32.6 million outstanding in FHLB advances of
which $12.5 million had fixed interest rates and $21.1 million had variable
interest rates. The advances are to mature as follows:
<TABLE>
<CAPTION>
Weighted
Average
Interest
--------
(Dollars in thousands)
<S> <C> <C>
Maturing in the year ended September 30, 1997 $ 8,750 5.57%
Maturing in the year ended September 30, 1998 7,800 5.51%
Maturing in the year ended September 30, 1999 13,000 5.31%
Maturing in the year ended September 30, 2000 1,000 6.00%
Maturing in the year ended September 30, 2001 2,000 5.69%
------- -----
$32,550 5.55%
======= =====
</TABLE>
The following table sets forth certain information regarding First
Palmetto's FHLB advances:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances
Balance at
September 30, $32,550 5.55% $33,367 5.73% $31,000 5.25%
Average
during year 33,202 5.59 37,314 5.64 23,832 5.09
Maximum
month-end
balance
during year 36,867 - 64,500 - 31,833 -
</TABLE>
The FHLB of Atlanta functions as a central reserve bank providing credit for
savings banks and certain other member financial associations. As a member,
First Palmetto is required to own capital stock in the FHLB of Atlanta and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. See "Regulation -- Savings
Association Regulation -- Federal Home Loan Bank System."
19
<PAGE>
Subsidiary Activities
The Bank is permitted by regulation to invest an amount equal to 2% of its
assets in subsidiaries (service corporations), with an additional investment of
1% of assets where such investment serves primarily community, inner-city and
community development purposes. In addition, associations meeting regulatory
capital requirements and certain other tests may invest up to 50% of their net
worth in conforming first mortgage loans to service corporations. At September
30, 1996, the net book value of the Bank's investments in stock, unsecured loans
and conforming loans in its service corporation was $201,000.
Palmetto State Service Corporation ("PSSC") was formed in 1976 for the
purpose of investing in real estate for future development and/or sale. These
investments are wholly owned by PSSC and do not represent joint ventures with
First Palmetto. During fiscal 1996, PSSC had a net loss of $17,000. At
September 30, 1996, First Palmetto had $500,000 invested in PSSC's common stock,
and negative retained earnings in PSSC amounting to $299,000. PSSC is engaged
in activities not permissible to national banks. For a discussion of the effect
of this investment on First Palmetto's regulatory capital requirements, see
"Regulation -- Savings Association Regulation -- Regulatory Capital
Requirements."
During the year ended September 30, 1996, the Bank dissolved First Service,
Inc. and it's wholly owned subsidiary Midlands Financial and Insurance Company,
Inc.
Competition
First Palmetto faces strong competition in the attraction of deposits (its
primary source of lendable funds) and in the origination of loans. Its most
direct competition for deposits comes from other thrift associations and from
commercial banks located in its primary market area. Particularly in times of
high interest rates, First Palmetto also faces additional significant
competition for investors' funds from short-term money market securities and
other corporate and government securities. First Palmetto's competition for
loans comes principally from other savings associations, commercial banks and
mortgage banking companies.
First Palmetto competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers and home builders. First Palmetto competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts, convenient office locations, drive-in facilities, tax-deferred
retirement programs, travelers checks, money orders, safety deposit boxes and
other miscellaneous services.
Employees
First Palmetto and its subsidiaries had 137 full time employees at September
30, 1996. None of First Palmetto's employees are represented by a collective
bargaining agreement, and First Palmetto believes that it enjoys good relations
with its personnel.
First Palmetto currently maintains a comprehensive employee benefit program
for qualified employees providing among other benefits, health insurance, life
insurance, long-term disability insurance, pension plans and stock option plans.
20
<PAGE>
REGULATION
Savings Association Regulation
General. As a savings association, First Palmetto is subject to extensive
-------
regulation by the OTS for compliance with various regulatory requirements. The
FDIC also has the authority to conduct special examinations. First Palmetto
must file reports with OTS describing its activities and financial condition.
It is also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). This
supervision and regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulatory Capital Requirements. Under OTS regulations, savings
-------------------------------
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has adopted regulations which impose certain restrictions on
savings associations that have a total risk-based capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to adjusted total assets of less than 4.0%
(or 3.0% if the institution is rated composite 1 under the OTS examination
rating system). For the purpose of these regulations, Tier 1 capital has the
same definition as core capital. See "--Prompt Corrective Regulatory Action."
Core capital is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of a savings
association's intangible assets, with limited exceptions for mortgage servicing
rights ("MSRs"), purchased credit card relationships and certain grandfathered
intangible assets. Tangible capital is given the same definition as core
capital, with the exception that qualifying supervisory goodwill is not
included, and is reduced by the amount of a savings association's intangible
assets, with limited exceptions for MSRs and certain grandfathered intangibles.
At September 30, 1996, First Palmetto's tangible capital ratio was 4.8%, its
core capital ratio was 5.0% and its risk-based capital ratio was 10.1%. At that
date, First Palmetto had $848,000 of qualifying intangible assets and $201,000
of investments in and extensions of credit to subsidiaries engaged in activities
not permissible for national banks.
21
<PAGE>
The following table reconciles the Bank's stockholders' equity under
generally accepted accounting principles at September 30, 1996 to its tangible
capital, core capital and total regulatory capital.
<TABLE>
<CAPTION>
(Dollars
in thousands)
<S> <C>
Stockholder's equity under generally
accepted accounting principles $19,064
Less:
Unrealized gain on certain available-for-sale securities (18)
Deductible investments in and extensions
of credit to subsidiary (201)
Deductible intangible assets (2,623)
-----------
Tangible capital 16,222
Add:
Grandfathered core deposit intangible 848
-----------
Core capital 17,070
Add:
Allowances for loan losses 2,364
-----------
Total capital $19,434
===========
Tangible capital as a percentage of
adjusted total assets 4.8%
===========
Core capital as a percentage of
adjusted total assets 5.0%
===========
Total capital as a percentage of risk-weighted assets 10.1%
===========
</TABLE>
The following table sets forth First Palmetto's capital position relative to
its various minimum regulatory capital requirements at September 30, 1996.
<TABLE>
<CAPTION>
Percent of
Amount Assets (a)
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital $16,222 4.8%
Tangible Capital Requirement 5,106 1.5
---------- ----------
Excess $11,116 3.3%
========== ==========
Core Capital $17,070 5.0%
Core Capital Requirement 10,237 3.0
---------- ----------
Excess $ 6,833 2.0%
========== ==========
Total Capital (i.e., Core and
Supplementary Capital) $19,434 10.1%
Risk-Based Capital Requirement 15,377 8.0
---------- ----------
Excess $ 4,057 2.1%
========== ==========
</TABLE>
(a) Percent of adjusted total assets for the purposes of the tangible and
core capital requirements and risk-weighted assets for the purpose of the risk-
based capital requirement.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. The
Director of OTS may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings association which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.
22
<PAGE>
In addition, the OTS risk-based capital requirements require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is
measured in terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present value
of expected cash inflows from existing assets and off-balance sheet contracts
less the present value of expected cash outflows from existing liabilities. A
savings institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk will be required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount equal to one-half the
difference between the institution's measured interest rate risk and the normal
level of interest rate risk, multiplied by the economic value of its total
assets. The OTS, however, has indefinitely delayed enforcement of its interest
rate risk capital requirements.
Federal Home Loan Bank System. First Palmetto is a member of the FHLB
-----------------------------
System, which consists of 12 regional Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB"). The
FHLB provides a central credit facility primarily for member associations. As a
member of the FHLB of Atlanta, First Palmetto is required to acquire and hold
shares of capital stock in the FHLB of Atlanta in an amount at least equal to 1%
of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB of Atlanta, whichever is greater. First
Palmetto was in compliance with this requirement with an investment in FHLB of
Atlanta stock at September 30, 1996 of $2.1 million. As of September 30, 1996,
First Palmetto had outstanding advances of $32.5 million from the FHLB of
Atlanta.
Liquidity Requirements. Savings associations are required to maintain
----------------------
average daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of their net withdrawable savings deposits plus short-
term borrowings. Savings associations also are required to maintain average
daily balances of short-term liquid assets at a specified percentage (currently
1%) of the total of their net withdrawable savings accounts and borrowings
payable in one year or less. Monetary penalties may be imposed for failure to
meet liquidity requirements. At September 30, 1996, First Palmetto exceeds the
liquidity percentages required.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA") requires
----------------------------
all savings institutions to meet a Qualified Thrift Lender ("QTL") test or to
suffer a number of sanctions, including restrictions on activities. Under the
statutory QTL test, a savings institution is required to maintain at least 65%
of its "portfolio assets" in certain "Qualified Thrift Investments" in at least
nine months of the most recent 12-month period. The QTL provisions of the HOLA
in effect through September 30, 1996 defined Qualified Thrift Investments to
include, among other things, (i) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing, (ii) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions and (iii) subject to an aggregate 20% of portfolio assets limit,
loans for personal, family, household or education purposes (subject to a 10%
limit) and 200% of an institution's investments in loans to finance "starter
homes" and loans for
23
<PAGE>
construction, development or improvement of housing and community service
facilities or for financing small business in "credit needy" areas. Legislation
enacted into law on September 30, 1996, as part of the 1997 Appropriations Bill
made certain amendments to the HOLA that significantly liberalize the QTL test.
First, the new law permits loans to small businesses, student loans and credit
card loans to be counted as Qualified Thrift Investments without percentage
limits. The current 10% limit on all other loans to households is eliminated
by the new law, and such loans may now be counted toward the QTL test within the
20% of portfolio assets limit. In addition, the new statute amends the QTL test
to provide that a savings institution may be considered a qualified thrift
lender either (i) by satisfying the HOLA's QTL requirements or (ii) by
qualifying as a "domestic building and loan association" as defined under the
Internal Revenue Code (the "Code"). In order for a savings association to be
defined as a domestic building and loan, at least 60% of its total assets must
consist of specific types of assets, including cash, certain types of government
securities, loans secured by and other assets related to residential real
property, educational loans, and investments in premises of the association. At
September 30, 1996, the Bank was a "domestic building and loan association" as
defined under the Code.
Loans-to-One-Borrower Limitations. Savings institutions generally are
---------------------------------
subject to the lending limits applicable to national banks. With certain
limited exceptions, the maximum amount that a savings institution or a national
bank may lend to any borrower (including certain related entities of the
borrower) at one time may not exceed 15% of the unimpaired capital and surplus
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans fully secured by readily marketable collateral. Savings institutions are
additionally authorized to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, by order of the Director of OTS, in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
to develop residential housing, provided: (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000; (ii) the savings
institution is in compliance with its fully phased-in capital requirements;
(iii) the loans comply with applicable loan-to-value requirements; and (iv) the
aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus.
At September 30, 1996, First Palmetto's loans-to-one borrower limit was $3.0
million, and First Palmetto did not have any loans over its limit.
Real Estate Lending Standards. Under OTS regulations, savings associations
-----------------------------
must adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. First Palmetto believes that its current lending policies
conform to the requirements.
Deposit Insurance. First Palmetto is required to pay assessments based on a
-----------------
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act (the "FDI Act"), the FDIC is
required to set semiannual assessments for SAIF-insured institutions to maintain
the designated reserve ratio of the SAIF at 1.25% of estimated insured deposits
24
<PAGE>
or at a higher percentage of estimated insured deposits that the FDIC determines
to be justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC established a risk-based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. Under its risk-based assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the reporting period ending seven months before the
assessment period. The three capital categories consist of (a) well-
capitalized, (b) adequately capitalized or (c) undercapitalized, and use the
same percentage criteria as under the prompt corrective action regulations. See
"-- Prompt Corrective Regulatory Action". The FDIC also assigns an institution
to one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
----
supervisory subgroups) to which different assessment rates are applied. For the
first nine months of 1996, the assessment rate for SAIF-insured institutions
ranged from 0.23% of deposits for well-capitalized institutions in the highest
supervisory subgroup, to 0.31% of deposits for undercapitalized institutions in
the lowest supervisory subgroup.
The FDIC recently amended the risk-based assessment schedule for depository
institutions with deposits insured by the Bank insurance Fund ("BIF"), resulting
in a dramatic reduction in FDIC assessments for BIF-Insured institutions.
Beginning with the first half of 1996, the FDIC reduced the BIF assessment rate
for "well-capitalized" banks without any significant supervisory concerns to the
statutory minimum of $2,000 annually, and the rates for other BIF-insured banks
ranged from zero to 0.27% of deposits for 1996.
In response to the SAIF/BIF assessment disparity, the Deposit Funds
Insurance Act of 1996 (the "1996 Act") was enacted into law on September 30,
1996 as part of the 1997 Appropriations Bill. The 1996 Act amended the FDI Act
in several ways to recapitalize the SAIF and reduce the disparity between the
assessment rates for the BIF and the SAIF. The 1996 Act authorized the FDIC to
impose a special assessment on all institutions with SAIF-assessable deposits in
the amount necessary to recapitalize the SAIF to the required reserve ratio of
1.25%. Pursuant to FDIC regulations implementing the 1996 Act, SAIF-insured
institutions on November 27, 1996, paid a special assessment (subject to
adjustment in certain limited cases) equal to 65.7 basis points per $100 of each
institution's SAIF-assessable deposits as of March 31, 1995. The 1996 Act
provides the amount of the special assessment will be deductible for federal
income tax purposes for the taxable year in which the special assessment is
paid. Based on the foregoing, the Bank recorded an accrual for the special
assessment of $1.3 million at September 30, 1996. The impact on operations, net
of related tax effects, reduced net income by $813,000 for the year ended
September 30, 1996.
In view of the recapitalization of the SAIF, on October 8, 1996, the FDIC
proposed to reduce the assessment rate for SAIF-assessable deposits for periods
beginning on October 1, 1996. Under the FDIC's proposal, the proposed deposit
25
<PAGE>
insurance assessment rates for SAIF-insured institutions, like the Bank, range
from 18 to 27 basis points for the last quarter of 1996 and would range from 0
to 27 basis points for the following periods.
In addition, the 1996 Act expanded the assessment base for the payments on
the bonds (the "FICO bonds") issued in the late 1980s by the Financing
Corporation in the recapitalization of the now defunct Federal Savings and Loan
Insurance Corporation to include the deposits of both BIF- and SAIF-insured
institutions beginning January 1, 1997. Until December 31, 1999, or such
earlier date on which the last savings association ceases to exist, the rate of
assessment imposed on BIF-assessable deposits will be one-fifth of the rate
imposed on SAIF-assessable deposits. The rates of assessment for the payment of
the interest on FICO bonds will be approximately 1.3 basis points for BIF-
assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits.
The 1996 Act also provides that the FDIC has no authority to assess regular
insurance assessments for the SAIF or the BIF unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except for such assessments on
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses. Accordingly,
assuming that the designated reserve ratio is maintained by the SAIF after the
collection of the special SAIF assessment, First Palmetto, as long as it
maintains its capital and supervisory status, will pay substantially lower FDIC
assessments compared to those it paid in recent years.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital (generally the same as "core capital"
as defined under OTS capital regulations) to total assets of less than 2%,
unlike First Palmetto, will be deemed to be operating in an unsafe or unsound
condition, which would constitute grounds for the initiation of termination of
deposit insurance proceedings. The FDIC, however, will not initiate termination
of insurance proceedings if the depository institution has entered into and is
in compliance with a written agreement with its primary regulator, and the FDIC
is a party to the agreement, to increase its Tier 1 capital to such level as the
FDIC deems appropriate. Insured depository institutions with Tier 1 capital
equal to or greater than 2% of total assets may also be deemed to be operating
in an unsafe or unsound condition notwithstanding such capital level. The
regulation further provides that in considering applications that must be
submitted to it by savings associations, the FDIC will take into account whether
the savings association is meeting with the Tier 1 capital requirement for state
non-member banks of 4% of total assets for all but the most highly rated state
non-member banks.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
----------------------------------
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires that the OTS, together with the other federal bank regulatory agencies,
to prescribe standards, by regulation or guideline, relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, stock valuation, and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to the
statute. The safety and soundness guidelines establish standards relating to
internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and
26
<PAGE>
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer employee, director or principal stockholder. The OTS safety
and soundness guidelines authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that is not satisfying any of
such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings association would be required to maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the operations of the Bank.
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
-----------------------------------
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become under capitalized. As required by FDICIA, the banking
regulators, including the OTS, issued regulations that classify insured
depository institutions by capital levels and provide that the appropriate
agency will take various prompt corrective actions to resolve the problems of
any institution that fails to satisfy the capital standards.
Under the prompt corrective action regulations, a "well-capitalized"
institution is one that is not subject to any regulatory order or directive to
meet any specific capital level and that has or exceeds the following capital
levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a leverage ratio of 5%. An "adequately capitalized"
institution is one that does not qualify as "well-capitalized" but meets or
exceeds the following capital requirements: a total risk-based capital of 8%, a
Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or
(ii) 3% if the bank has the highest composite examination rating. An
institution not meeting these criteria is treated as "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized" depending on
the extent to which the institution's capital levels are below the adequately
capitalized standards. An institution that falls within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by FDICIA and the implementing regulations.
27
<PAGE>
The table below presents First Palmetto's capital position at September 30,
1996, relative to the various minimum regulatory capital requirements under the
prompt corrective action regulations.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible equity $16,222 4.8%
Tangible equity requirement 6,820 2.0
---------- ----------
Excess $ 9,402 2.8%
========== ==========
Tier 1 or leverage capital $17,070 5.0%
Tier 1 or leverage capital requirement 13,640 4.0
---------- ----------
Excess $ 3,430 1.0%
========== ==========
Tier 1 risk-based capital $19,434 10.1%
Tier 1 risk-based capital requirement 7,688 4.0
---------- ----------
Excess $11,746 6.1%
========== ==========
Risk-based capital $19,434 10.1%
Risk-based capital requirement 15,377 8.0
---------- ----------
Excess $ 4,057 2.1%
========== ==========
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible equity and
Tier 1 or leverage capital requirements, and risk-weighted assets for
purposes of the Tier 1 risk-based and risk-based capital requirements.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
----------------------
Board, a thrift association must maintain average daily reserves. No reserves
are required to be maintained on the first $4.3 million of transaction accounts,
and reserves equal to 3% must be maintained on the next $52 million of
transaction accounts, plus reserves equal to 10% on the remainder. These
percentages are subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the association's interest-earning
assets. First Palmetto meets its reserve requirements.
Dividend Limitations. Under OTS regulations, First Palmetto may not pay
--------------------
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of First Palmetto at the time of its
conversion to stock form. In addition, savings association subsidiaries of
savings and loan holding companies are required to give OTS 30 days prior notice
of any proposed declaration of dividend to the holding company.
Federal regulations impose limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by First
Palmetto. Under these regulations, a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, to make capital
distributions during a calendar year in the amount equal to the greater of (i)
75% of net income for the previous four quarters or (ii) up to 100% of its net
income to date during the calendar year plus an amount that would reduce by one-
half the
28
<PAGE>
amount by which its total capital to assets ratio exceeded its fully phased-in
capital requirement to assets ratio at the beginning of the calendar year. At
September 30, 1996, the Bank was a Tier 1 Association.
The Bank is prohibited from making any capital distributions if after making
the distribution, it would be undercapitalized as defined in the OTS' prompt
corrective action regulations. See "--Prompt Corrective Regulatory Action."
After consultation with the FDIC, the OTS may permit a savings association to
repurchase, redeem, retire or otherwise acquire shares or ownership interests if
the repurchase, redemption, retirement or other acquisition; (i) is made in
connection with the issuance of additional shares or other obligations of the
institution in at least an equivalent amount; and (ii) will reduce the
institution's financial obligations or otherwise improve the institution's
financial condition.
In addition to the foregoing, earnings of First Palmetto appropriated to bad
debt reserves and deducted from Federal income tax purposes are not available
for payment of cash dividends without payment of taxes at the then current tax
rate by First Palmetto on the amount of earnings removed from the reserves for
such distributions. See "--Taxation." First Palmetto intends to make full use
of this favorable tax treatment afforded to the Bank and First Palmetto and does
not contemplate use of any earnings of the Bank in a manner which would limit
the Bank's bad debt deduction or create federal tax liabilities.
Savings and Loan Holding Company Regulation
First Palmetto is a savings and loan holding company within the meaning of
the Home Owners' Loan Act. As such, First Palmetto is registered with the OTS
and is subject to regulations, examinations, supervision and reporting
requirements. As a subsidiary of First Palmetto, the Bank is subject to certain
restrictions in its dealing with First Palmetto and any affiliates of First
Palmetto. First Palmetto also is required to file certain reports with, and
otherwise comply with the rules and regulations of, the Securities and Exchange
Commission ("SEC") under the federal securities laws.
Activities Restrictions. The Board of Directors of First Palmetto presently
-----------------------
intends to continue to operate First Palmetto as a unitary savings and loan
holding company. There are generally no restrictions on the activities of a
unitary savings and loan holding company. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of an activity constitutes a serious risk to
the financial safety, soundness or stability of its subsidiary savings
institution, the Director of the OTS may impose such restrictions as deemed
necessary to address such risk including limiting: (i) payment of dividends by
the savings institution; (ii) transactions between the savings institution and
its affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution.
Restrictions on Acquisitions. A savings and loan holding company must
----------------------------
obtain prior approval of the Director of OTS before acquiring (i) control of any
other savings association or savings and loan holding company or substantially
all the assets thereof or (ii) more than 5% of the voting shares of a savings
association or holding company thereof which is not a subsidiary. Except with
the prior approval of the Director of OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
29
<PAGE>
The OTS has amended its regulations to permit federal savings institutions
to branch in any state or states of the United States and its territories.
Except in supervisory cases or when interstate branching is otherwise permitted
by state law or other statutory provision, a federal savings institution may not
establish an out-of-state branch unless (i) it qualifies as a "domestic building
and loan association" under {7701(a)(19) of the Internal Revenue Code of 1986 as
amended ("the Code") and the total assets attributable to all branches of the
association in the state would qualify such branches taken as a whole for
treatment as a domestic building and loan association and (ii) such branch would
not result in (a) formation of a prohibited multi-state multiple savings and
loan holding company or (b) a violation of certain statutory restrictions on
branching by savings association subsidiaries of banking holding companies. A
federal savings institution generally may not establish new branches unless it
meets or exceeds minimum regulatory capital requirements. The OTS will also
consider the institution's record of compliance with the Community Reinvestment
Act of 1977 in connection with any branch application.
Transactions with Affiliates. Transactions between savings associations and
----------------------------
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a savings association is any company or entity which controls,
is controlled by or is under common control with the savings association. In a
holding company context, the parent holding company of a savings association
(such as First Palmetto and any companies which are controlled by such parent
holding company) are affiliates of the savings association. Generally, Sections
23A and 23B (i) limit the extent to which the savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such association's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the association or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for an affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal shareholders. Under Section 22(h), loans to an
executive officer and to holders of more than 10% of any class of a savings
association's voting stock, and certain affiliated entities of either, may not
exceed together with all other outstanding loans to such person and affiliated
entities the association's loans to one borrower limit (generally equal to 15%
of the association's unimpaired capital and surplus). Section 22(h) also
prohibits loans, above the amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and holders of more than 10% of any
class of a savings associations' voting stock, and their respective affiliates,
unless such is approved in advance by a majority of the board of directors of
the association with an "interested" director not participating in the voting.
The Federal Reserve Board has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior board of
directors approval is required, as being the greater of $25,000 or 5% of capital
and surplus (up to $500,000). Further, to Section 22(h) requires that loans to
directors, executive
30
<PAGE>
officers and principal shareholders be made on terms substantially the same as
offered in comparable transactions to other persons. Section 22(h) also
prohibits a depository institution from paying the overdraft of any of its
executive officers or directors.
Savings associations are further subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. {1972 on certain tying arrangements
and extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers, and
imposes reporting requirements for any additional restrictions on the type,
amount and terms of credits to such officers. Section 1972 prohibits (i) a
depository institution from extending credit to or offering any other services,
or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the
institution or certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions, and (ii) extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present unfavorable features.
Taxation
General. First Palmetto files consolidated federal income tax returns on a
-------
September 30 fiscal year end basis. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Federal Income Taxation. Savings associations generally are subject to the
-----------------------
provisions of the Code in the same general manner as other corporations.
However, savings institutions such as the Bank which meet certain definitional
tests and other conditions prescribed by the Code may benefit from certain
favorable provisions regarding their deductions from taxable income for annual
additions to their bad debt reserve. For purposes of the bad debt reserve
deduction, loans are separated into "qualifying real property loans," which
generally are loans secured by interest in certain real property, and
nonqualifying loans, which are all other loans. The bad debt reserve deduction
with respect to nonqualifying loans must be based on actual loss experience.
The amount of the bad debt reserve deduction with respect to qualifying real
property loans may be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method"). For the three years
ended September 30, 1996, 1995 and 1994, First Palmetto has calculated the bad
debt reserve deduction based upon the percentage of taxable income method.
Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans is computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments, effective for taxable years beginning after 1986.
The bad debt deduction under the percentage of taxable income method is
subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not exceed the amount necessary to
increase
31
<PAGE>
the balance of such reserve at the close of the taxable year to 6% of such loans
outstanding at the end of the taxable year. Further, the addition to the
reserve for losses on qualifying real property loans cannot exceed the amount
which, when added to that year's addition to the bad debt reserve for losses on
nonqualifying loans, equals the amount by which 12% of total deposits or
withdrawable accounts of depositors at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. Finally, the
percentage bad debt deduction under the percentage of taxable income method is
reduced by the deduction for losses on nonqualifying loans.
Under legislation enacted on August 20, 1996, the percentage of taxable
income method was repealed for tax years beginning after December 31, 1995. In
future years, the Bank must use the "Bank" experience method or the specific
write-off method. Under the recent legislation, the Bank will also be required
to recapture into income the portion of its bad debt reserves that exceeds its
base year reserves. The amount of bad debt reserves subject to recapture over
six years for the Bank is $1.2 million. The portion of the Bank's tax bad debt
reserve that is not recaptured under the new law (i.e., the Bank's base year
----
reserves of $4.6 million) is subject to recapture at a later date only under
certain limited circumstances, including stock repurchases or redemptions by the
thrift or the conversion of the thrift to a type of institution (such as a
credit union) that is not considered a bank for tax purposes. Importantly, the
new law eliminated any further recapture in the event that a savings association
converts to a commercial bank charter or is acquired by a bank.
First Palmetto's federal income tax returns have not been audited since
1984.
State Income Taxation. Under South Carolina law, First Palmetto is required
---------------------
to pay income tax at the rate of 6% of net income, as defined in the South
Carolina statute. This tax is imposed on financial associations in lieu of the
general state business corporation income tax. State income taxation of First
Palmetto has not been material.
Accounting Changes. The FASB has issued SFAS No. 122, "Accounting for
------------------
Certain Mortgage Banking Activities," which requires that a mortgage banking
enterprise recognize as separate assets the rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values if it is practicable to estimate
those fair values. If it is not practicable to estimate the fair values of the
mortgage servicing rights and the mortgage loans (without the mortgage servicing
rights), the entire cost of purchasing or originating the loans should be
allocated only to the mortgage loans without the mortgage servicing rights.
Additionally, this standard requires that a mortgage banking enterprise
periodically assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. This statement is effective for years
beginning after December 15, 1995. Management has not determined the impact
that adoption of SFAS No. 122 will have on the financial statements.
The FASB has also issued SFAS No. 123 "Accounting for Stock - Based
Compensation". SFAS No. 123 established a fair value-based method of accounting
for stock options and other equity instruments. It requires the use of that
method for transactions with other than employees and encourages its use for
transactions with employees. It permits entities to continue to use the
32
<PAGE>
intrinsic value method included in Accounting Principles Board ("APB") 25
(Accounting for Stock Issued to Employees), but regardless of the method used to
account for the compensation cost associated with stock option and similar
plans, it requires employers to disclose information in accordance with SFAS No.
123.
The general principle underlying SFAS No. 123 is that equity instruments are
recognized at the fair value of the consideration received for them. If the
fair value of the consideration received cannot be reasonably determined, the
fair value of the equity instrument itself may be used. The fair value method
of accounting for stock options and other instruments applies this general
principle, measuring compensation cost for employers as the excess of the fair
value of the equity instrument over the amount paid by the employee.
The FASB has also issued SFAS No 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets.
Liabilities and derivatives incurred or obtained by transferors in
conjunction with the transfer of financial assets are required to be measured at
fair value, if practicable. Servicing assets and other retained interests in
transferred assets are required to be measured by allocating the previous
carrying amount between the assets sold, if any, and the interest that is
retained, if any, based on the relative fair values of the assets at the date of
the transfer. Servicing assets retained are subsequently subject to
amortization and assessment for impairment.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. It is to
be applied prospectively; earlier or retroactive application is not permitted.
Management does not expect that adoption of SFAS No. 125 will have a material
impact on the consolidated financial statements of First Palmetto.
33
<PAGE>
Item 2. Properties
- -------------------
The following table sets forth the locations of First Palmetto's offices, as
well as certain additional information relating to those offices, as of
September 30, 1996.
<TABLE>
<CAPTION>
Year
Facility Leased Approximate
Commenced or Square Net Book
Office Location Operations Owned Footage Value
- --------------- ---------- ------ ----------- --------
<S> <C> <C> <C> <C>
Main Office
407 DeKalb Street 1963 Owned 10,337 $594,525
Camden, S.C. 29020
Beaufort Branch Office
921 Bay Street 1995 Leased 2,300 $ 35,252
Beaufort, SC 29902 (Expires 1998)
Bishopville Branch Office
104 East Church Street 1994 Leased 1,300 $ -
Bishopville, S.C. 29010 (Expires 2000,
with five year
renewal option)
Camden Operations Center
Broad and DeKalb Street 1934 Owned 7,900 $241,719
Camden, S.C. 29020
Columbia Branch Offices
3932 Forest Drive 1988 Owned 4,950 $566,665
Columbia, S.C. 29206
9221 Two Notch Road 1980 Leased 2,200 $ 41,663
Columbia, S.C. 29223 (Expires 1999,
with two ten
year renewal
options)
Darlington Branch Office
266 Cashua Street 1992 Owned 1,600 $ -
Darlington, S.C. 29532
Dusty Bend Branch Office
2310 North Broad Street 1981 Leased 1,600 $ 37,611
Camden, S.C. 29020 (Expires 2002,
with ten year
renewal option)
Elgin Branch Office
Highway #1 1986 Leased 1,200 $ 60,090
Elgin, S.C. 29045 (Expires 1996,
with ten year
renewal option)
Irmo Branch Office
7327 St. Andrews Road 1996 Owned 2,200 $526,955
Irmo, S.C. 29063
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Year
Facility Leased Approximate
Commenced or Square Net Book
Office Location Operations Owned Footage Value
- --------------- ---------- ------ ----------- --------
<S> <C> <C> <C> <C>
Kershaw Branch Office
301 Hampton Street 1996 Owned 2,850 $387,658
Kershaw, S.C. 29067
Lancaster Branch Office
977 North Main Street 1973 Leased 3,040 $ 25,414
Lancaster, S.C. 29721 (Expires 1998,
with two year
renewal option)
Lugoff Branch Office
Highway #1 South 1969 Owned 3,900 $810,751
Lugoff, S.C. 29078
Manning Branch Office
111 N. Brooks Street 1995 Owned 4,000 $215,617
Manning, SC 29102
Pageland Branch Office
201 N. Pearl Street 1994 Owned 1,300 $329,352
Pageland, S.C. 29728
Pontiac Branch Office
10540 Two Notch Road 1989 Leased 1,300 $ 83,964
Elgin, S.C. 29045 (Expires 2019,
with ten year
renewal option)
</TABLE>
Item 3. Legal Proceedings
- --------------------------
Although First Palmetto, from time to time, is involved in various legal
proceedings occurring in the ordinary course of business, there are no material
legal proceedings to which First Palmetto or its subsidiary is a party or to
which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the final
quarter of fiscal 1996.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The information required by this item is incorporated by reference to the
section captioned "Corporate Information -- Common Stock Information" in the
Annual Report.
Item 6. Selected Financial Data
- --------------------------------
The information required by this item is incorporated by reference to the
tables captioned "Selected Consolidated Financial and Other Data" in Part I of
this report.
35
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information required by this item is incorporated by reference to the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
First Palmetto's Consolidated Statements of Financial Condition at September
30, 1996 and 1995, Consolidated Statements of Income for the three years ended
September 30, 1996, Consolidated Statements of Stockholders' Equity for the
three years ended September 30, 1996, and Consolidated Statements of Cash Flows
for the three years ended September 30, 1996, together with the related notes
and report of KPMG Peat Marwick, LLP, independent certified public accountants,
are contained in the Annual Report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
For information concerning the Board of Directors of First Palmetto, the
information contained under the section captioned "Election of Directors" in
First Palmetto's definitive proxy statement for First Palmetto's 1997 Annual
Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference. For information concerning the executive officers of First Palmetto,
see "Item 1, Business -- Executive Officers of the Registrant," which is
incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Election of Directors
- -- Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Principal Holders of Common Stock" of the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the sections captioned "Stock Ownership of Management" of the Proxy
Statement.
(c) Changes in Control
Management of First Palmetto knows of no arrangements, including any
pledge by any person of securities of First Palmetto, the operation of
which may at a subsequent date result in a change of control of First
Palmetto.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference to
the section captioned "Election of Directors -- Certain Transactions" of the
Proxy Statement.
37
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements - The following financial statements are included
--------------------
in the Annual Report. The remaining information appearing in the Annual Report
is not deemed to be filed as part of this report, except as expressly provided
herein.
1. Certified Public Accountant's Report
2. Consolidated Statements of Financial Condition at
September 30, 1996 and 1995
3. Consolidated Statements of Income for the
Years Ended September 30, 1996, 1995 and 1994
4. Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 1996, 1995 and 1994
5. Consolidated Statements of Cash Flows for the
Years Ended September 30, 1996, 1995 and 1994
6. Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules - All financial statement schedule have
-----------------------------
been omitted as the required information is either inapplicable or included in
the Consolidated Financial Statements or related notes.
(a)(3) Exhibits - The following exhibits are either filed as part of this
--------
report or are incorporated herein by reference:
Exhibit No. 3.1 Restated Certificate of Incorporation of First Palmetto
Financial Corporation (incorporated by reference to
Exhibit 3.1 to First Palmetto's registration statement
on Form S-4 filed with the SEC on June 14, 1990)
Exhibit No. 3.2 Bylaws of First Palmetto Financial Corporation
(incorporated by reference to Exhibit 3.2 to First
Palmetto's registration statement on Form S-4
filed with the SEC on June 14, 1990)
Exhibit No. 10.1 Stock Option Plan of First Palmetto Financial
Corporation (incorporated by reference to
Exhibit 10.8 to First Palmetto's registration
statement on Form S-4 filed with the SEC on
June 14, 1990)
38
<PAGE>
Exhibit No. 10.2 Agreement and Plan of Conversion and Reorganization
(incorporated by reference to Exhibit 2.1 to First
Palmetto's registration statement on Form S-4
filed with the SEC on June 14, 1990)
Exhibit No. 10.3 Amended and Restated Agreement and Plan of Merger
dated June 12, 1990 (incorporated by reference to
Exhibit 2.2 to First Palmetto's registration
statement on Form S-4 filed with the SEC on June 14,
1990)
Exhibit No. 13 1995 Annual Report to Stockholders (Except for those
portions of the Annual Report which are expressly
incorporated herein by reference, the Annual Report
is furnished for the information of the SEC and is not
deemed "filed" as part of this report)
Exhibit No. 22 Subsidiaries
(a) Reports on Form 8-K - None.
-------------------
(b) Exhibits - All exhibits to this report are attached or incorporated
--------
by reference as stated above.
(c) Financial Statement Schedules - None.
-----------------------------
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of December 16,
1996.
FIRST PALMETTO FINANCIAL CORPORATION
By: /s/ Samuel R. Small
_______________________________________
Samuel R. Small
President, Chief Executive Officer and
Director
(Duly Authorized Representative)
Pursuant to the requirement 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 indicated as of December 16, 1996.
By: /s/ H. Davis Green, Jr. By: /s/ Samuel R. Small
___________________________ ___________________________
H. Davis Green, Jr. Samuel R. Small
Chairman of the Board President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ Steve G. Williams, Jr. By: /s/ Pierce W. Cantey, Jr.
___________________________ __________________________
Steve G. Williams, Jr. Pierce W. Cantey, Jr.
Senior Vice President,Treasurer, Director
Chief Financial Officer, and Director
(Principal Financial and Accounting
Officer)
By: /s/ William R. Clyburn By: /s/ James L. Creed
___________________________ __________________________
William R. Clyburn James L. Creed
Director Director
By: /s/ Frank D. Goodale, Jr. By: /s/ Donald H. Holland
___________________________ __________________________
Frank D. Goodale, Jr. Donald H. Holland
Director Director
By: /s/ Charlie E. Nash By: /s/ Glenn G. Tucker
___________________________ __________________________
Charlie E. Nash Glenn G. Tucker
Director Director
40
<PAGE>
INDEX TO EXHIBITS
Exhibit
3.1 Restated Certificate of Incorporation of First Palmetto
Financial Corporation (incorporated by reference to Exhibit
3.1 to First Palmetto's registration statement on Form S-4
filed with the SEC on June 14, 1990)
3.2 Bylaws of First Palmetto Financial Corporation (incorporated
by reference to Exhibit 3.2 to First Palmetto's registration
statement on Form S-4 filed with the SEC on June 14, 1990)
10.1 Stock Option Plan of First Palmetto Financial Corporation
(incorporated by reference to Exhibit 10.8 to First
Palmetto's registration statement on Form S-4 filed with the
SEC on June 14, 1990)
10.2 Agreement and Plan of Conversion and Reorganization
(incorporated by reference to Exhibit 2.1 to First Palmetto's
registration statement on Form S-4 filed with the SEC on
June 14, 1990)
10.3 Amended and Restated Agreement and Plan of Merger dated
June 12, 1990 (incorporated by reference to Exhibit 2.2
to First Palmetto's registration statement on Form S-4
filed with the SEC on June 14, 1990)
13 1996 Annual Report to Stockholders (Except for those
portions of the Annual Report which are expressly
incorporated herein by reference, the Annual Report
is furnished for the information of the SEC and is
not deemed "filed" as a part of this report.)
22 Subsidiaries
41
<PAGE>
EXHIBIT 13
Annual Report
<PAGE>
ANNUAL REPORT
September 30, 1996
FIRST PALMETTO FINANCIAL CORPORATION
<PAGE>
TABLE of CONTENTS
Letter to Stockholders 1-2
FIRST PALMETTO FINANCIAL CORPORATION
- ------------------------------------
The Company 3
Selected Consolidated Financial and Other Data 3-4
Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-17
Consolidated Financial Statements
Consolidated Statements of Financial Condition 18
Consolidated Statements of Income 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21-23
Notes to Consolidated Financial Statements 24-47
Independent Auditors' Report 48
Board of Directors and Executive Officers 49-50
Corporate Information 51
Common Stock Information 52
<PAGE>
[LETTERHEAD OF FIRST PALMETTO FINANCIAL CORPORATION]
Dear First Palmetto Stockholder:
We are happy to report to you that First Palmetto again had a very successful
year. Prior to a special one-time assessment by the F.D.I.C., our earnings were
a record $2.82 million or $4.07 per share. This is compared to our previous
highest earnings, for the September 30, 1995 fiscal year, of $2.36 million or
$3.40 per share.
Effective September 30, 1996, in order to bring the Savings Association
Insurance Fund portion of Federal Deposit Insurance to the required levels, the
F.D.I.C. assessed our industry a one-time recapitalization fee. Our portion of
that industry wide assessment resulted in an $813,000 charge, net of tax,
against earnings and decreased net income from operations for the fiscal year
ended September 30, 1996, to $2.0 million or $2.90 per share. There is a silver
lining to this assessment, however, in that we expect future payments to the
insurance fund to decrease by more than 70% which will allow us to recoup the
assessment in a five to six year period.
Financial Highlights for Fiscal 1996 were:
Increase in assets to $344.5 million from $323.2 million, an increase of
6.6%.
Loans increased to $227.2 million from $198.4 million, an increase of 14.5%.
Dividends paid of $1.60 per share up from $1.40 per share the previous year.
We have continued to look for opportunities for growth and during the year we
opened a new branch office in Irmo. This branch has shown excellent early
growth and has provided us a new market opportunity to attract deposits and to
make loans. We are now in the process of constructing a new office in Lexington
and anticipate opening for business in March of 1997.
We also have a constant review process for all of our current branch locations
and we measure our expectations and efforts against actual results of earnings,
growth and service. In October of 1996, we consummated the sale of our branch
office located in Winnsboro, S.C.
We have been able to maintain high quality in our asset portfolio and our
nonperforming assets at September 30, 1996, were $1.5 million or .45% of total
assets compared to $1.9 million or .57% of total assets at the end of the
previous year. Total loan loss reserves at September 30, 1996, were $2.4
million compared to $1.8 million at September 30, 1995.
1
<PAGE>
We are very pleased with the financial condition and the results of operations
of First Palmetto and look forward to the continuing successful operations of
your Bank. The staff and directors of First Palmetto are committed to share
enhancement by providing excellent service to our customers and to staying
actively involved in the communities we serve.
Very truly yours,
/s/ Samuel R. Small
Samuel R. Small, President and
Chief Executive Officer
2
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
THE COMPANY
First Palmetto Financial Corporation ("First Palmetto") is a holding company
organized to provide ownership for First Palmetto Savings Bank, F.S.B. (the
"Bank"), a wholly owned subsidiary. The Bank is a federally chartered stock
savings bank. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") and the Bank is regulated by the Office of Thrift
Supervision ("OTS"). The Bank's business is conducted through its home office
located in Camden, South Carolina and through fourteen branch offices in other
South Carolina locations of Beaufort, Bishopville, Camden, Columbia, Darlington,
Elgin, Irmo, Kershaw, Lancaster, Lugoff, Manning, Pageland and Pontiac.
The Bank is engaged in the business of attracting deposits from the general
public and investing in loans secured by first liens on single and multi-family
residences, condominiums, commercial properties, and on other improved real
estate. The Bank originates loans secured by first liens on land to be
developed into lots ready for construction of single family homes. The Bank
also invests in unsecured and secured home improvement loans, automobile loans,
equity loans on residential real estate, interest-bearing bank deposits, U.S.
Government and agency obligations, mortgage-backed securities and other
investments as permitted by applicable laws and regulations.
First Palmetto's results of operations depend primarily on its net interest
income, which is the difference between the interest income it receives from
its loan and investment portfolios and its cost of funds. Other significant
sources of income are service charges on deposit accounts and loan servicing
fees.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present selected consolidated financial information and
other data for First Palmetto at the dates and for the periods indicated.
Consolidated Financial Condition Data
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands)
Assets $344,547 $323,183 $278,056 $226,370 $211,423
Loans, net 227,209 198,373 163,649 158,551 165,818
Cash and investment
securities (a) 70,519 71,807 72,826 34,232 35,258
Mortgage-backed securities 33,010 39,410 31,159 25,466 453
Deposits 288,157 267,313 225,417 189,334 191,524
Federal Home Loan
Bank ("FHLB") advances 32,550 33,367 31,000 17,000 -
Stockholders' equity,
substantially restricted 20,208 19,345 17,804 16,429 15,012
</TABLE>
(a) Includes cash and due from banks, interest-bearing deposits in other banks,
certificates of deposit in other banks, available-for-sale securities and
investment securities.
3
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Summary of Operations-The following table summarizes First Palmetto's results of
operations for the periods indicated:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
(In thousands)
Interest income $26,016 $22,795 $16,890 $15,497 $17,065
Interest expense 14,186 12,484 8,213 7,376 9,350
------- ------- ------- ------- ------
Net interest income
before provision for
loan losses 11,830 10,311 8,677 8,121 7,715
Provision for loan losses 885 482 523 720 1,114
------- ------- ------- ------- ------
Net interest income
after provision for
loan losses 10,945 9,829 8,154 7,401 6,601
Other income 2,255 1,933 1,651 1,466 1,792
Other expense 9,993 8,104 6,597 5,958 5,936
------- ------- ------- ------- ------
Income before
income taxes 3,207 3,658 3,208 2,909 2,457
Income taxes 1,195 1,300 1,184 1,137 843
Cumulative effect of change
in accounting principle - - 243 - -
------- ------- ------- ------- ------
Net income $ 2,012 $ 2,358 $ 2,267 $ 1,772 $ 1,614
======= ======= ======= ======= =======
</TABLE>
Financial Ratios
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on assets (net
income divided by
average total assets) .61% .78% .90% .81% .80%
Return on equity (net
income divided by
average equity) 10.33% 13.17% 13.25% 11.27% 11.01%
Equity-to-assets ratio
(average equity divided
by average total assets) 5.87% 5.90% 6.79% 7.17% 7.23%
Net income per share $ 2.90 $ 3.40 $ 3.36 $ 2.65 $ 2.40
Book value per share $ 29.16 $27.90 $25.68 $24.51 $22.46
Dividends per share $ 1.60 $ 1.40 $ 1.25 $ 1.10 $ 1.05
</TABLE>
4
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS of OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1995
Net income for the fiscal year ended September 30, 1996, was $2.0 million as
compared to $2.4 million for the preceding fiscal year. Net income decreased by
$346,000 or 14.7%.
The reason for the decrease in net income was a one-time assessment by the
FDIC in the amount of $1.3 million ($813,000 net of income tax) which
recapitalized the Savings Association Insurance Fund (SAIF). This one-time
charge resulted in total federal deposit insurance premiums for the fiscal year
in the amount of $1.8 million as compared to $618,000 for the preceding fiscal
year.
Net interest income for fiscal 1996 equaled $11.8 million as compared to
$10.3 million for the fiscal year ended September 30, 1995. The increase of
14.6% amounted to $1.5 million. Other income for fiscal 1996 was $2.3 million
as compared to $1.9 million for fiscal 1995 while other expense for the
respective fiscal years were $10.0 million and $8.1 million. A more detailed
discussion of the comparative years is as follows:
Net interest income increased by $1.5 million or 14.6%. The primary reasons
for the increase in net interest income were an increase in average interest-
earning assets for fiscal 1996 of approximately $26 million and an increase in
yield on interest-earning assets. The increase in yield on interest-earning
assets was primarily a result of the Bank's mix of assets moving into higher
interest-earning categories. Average cost of funds increased during the year
from 4.59% during the year ended September 30, 1995 to 4.82% during the year
ended September 30, 1996. Interest rate spread increased to 3.55% as compared
to 3.41% for the previous year.
Total interest income for fiscal 1996 was $26.0 million, up $3.2 million or
14.0% from $22.8 million for fiscal 1995. The primary reason for the increase
was an increase in average interest-earning assets due to an increase in loan
demand mainly in commercial real estate and in 1-4 family real estate loans.
The average yield on interest earning assets increased to 8.37% for fiscal 1996
versus 8.00% for fiscal year 1995.
Total interest expense for fiscal 1996 was $14.2 million compared to $12.5
million for fiscal 1995. The increase of $1.7 million represented a 13.6%
increase in interest expense. The increase in interest expense was primarily
due to the increase in average interest-bearing liabilities as a result of
deposits received by offering highly competitive rates in targeted markets.
Cost of funds increased to 4.82% for the 1996 period as compared to 4.59% for
the 1995 period. Average interest-bearing liabilities were $294.2 million at
September 30, 1996 as compared to $271.9 million at September 30, 1995.
5
<PAGE>
Averages Balances, Interest and Average Yields
- ----------------------------------------------
The following table sets forth certain information relating to First
Palmetto's average balance sheets and reflect the average yields on assets and
average costs of liabilities for the periods indicated and the average yields
earned and rates paid at September 30, 1996. Such yields and costs are derived
by dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------ ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-
earning
assets:
Loans (1) $212,955 $19,477 9.15% $178,475 $15,950 8.94% $156,606 $13,010 8.31%
Interest
earning
deposits 9,619 694 7.21 7,856 485 6.17 7,671 386 5.03
Investment
securities (2) 51,882 3,411 6.57 58,997 3,684 6.24 34,879 1,635 4.69
Mortgage-backed
securities 36,365 2,434 6.69 39,604 2,676 6.76 26,243 1,859 7.08
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total
interest-
earning
assets 310,821 26,016 8.37 284,932 22,795 8.00 225,399 16,890 7.49
-------- ------ ---- ------ ---- ------ ----
Noninterest-
earning assets 21,127 18,286 15,903
-------- -------- --------
Total
assets $331,948 $303,218 $241,302
======== ======== ========
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes available-for-sale securities.
<TABLE>
<CAPTION>
At September 30, 1996
---------------------
Balance Rate
------- ----
<S> <C> <C>
Interest-
earning
assets:
Loans (1) $227,209 8.81%
Interest
earning
deposits 14,048 5.15
Investment
securities (2) 46,607 6.65
Mortgage-backed
securities 33,010 6.69
-------- -----
Total
interest-
earning
assets 320,874 8.11
-----
Noninterest-
earning assets 23,673
--------
Total
assets $344,547
========
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes available-for-sale securities.
6
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-
bearing
liabilities:
Interest-
bearing
demand
deposits $ 54,503 1,378 2.53 $ 45,956 1,234 2.68 $ 29,583 679 2.30
Savings
deposits 23,181 586 2.53 22,939 641 2.79 19,399 491 2.53
Time
deposits 183,357 10,365 5.65 165,717 8,505 5.13 142,216 5,831 4.10
FHLB
borrowings 33,202 1,857 5.59 37,314 2,104 5.64 23,832 1,212 5.09
-------- ------- ---- -------- ------- ---- -------- ------ ----
Total
interest-
bearing
liabilities 294,243 14,186 4.82 271,926 12,484 4.59 215,030 8,213 3.82
------- ---- ------- ---- ------ ----
Noninterest-
bearing
liabilities:
Noninterest
demand
deposits 15,585 - 10,864 - 6,920 -
Other 2,645 - 2,524 - 2,237 -
-------- ------- -------- ------- -------- ------
Total
liabilities 312,473 285,314 224,187
Stockholders'
equity 19,475 17,904 17,115
-------- -------- --------
Total
liabilities
and
stockholders'
equity $331,948 $303,218 $241,302
======== ======== ========
Net interest
income $11,830 $10,311 $8,677
======= ======= ======
Interest rate spread 3.55% 3.41% 3.67%
==== ==== ====
Net yield on average interest-earning
assets 3.81% 3.62% 3.85
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.06% 1.05% 1.05%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
---------------------
Balance Rate
------- ----
<S> <C> <C>
Interest-
bearing
liabilities:
Interest-
bearing
demand
deposits $ 56,359 2.49
Savings
deposits 22,057 2.53
Time
deposits 194,114 5.49
FHLB
borrowings 32,550 5.55
-------- -----
Total
interest-
bearing
liabilities 305,080 4.71
-----
Noninterest-
bearing
liabilities:
Noninterest
demand
deposits 15,627
Other 3,632
--------
Total
liabilities 324,339
Stockholders'
equity 20,208
--------
Total
liabilities
and
stockholders'
equity $344,547
========
Net interest
income 3.40%
Interest rate spread =====
Net yield on average interest-earning
assets
Ratio of average interest-earning
assets to average interest-bearing
liabilities
</TABLE>
7
<PAGE>
Rate/Volume Analysis
- --------------------
The following table sets forth certain information regarding changes in
First Palmetto's interest income and interest expense for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume (change
in volume multiplied by the prior year's rate); (2) changes in rates (change in
rate multiplied by the prior year's volume); and (3) changes in rate-volume
(change in rate multiplied by the change in volume). The combined effect of
changes in rate-volume has been allocated proportionately to changes in volume
and rate.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
-------------------------------------------- ---------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- ---------------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $3,119 $409 $3,528 $1,906 $1,034 $2,940
Investment securities (457) 184 (273) 1,384 665 2,049
Mortgage-backed securities (218) (24) (242) 907 (90) 817
Other 118 91 209 9 90 99
------ ---- ------ ------ ------ ------
Total interest-earning assets 2,562 660 3,222 4,206 1,699 5,905
------ ---- ------ ------ ------ ------
Interest expense:
Deposits 1,286 664 1,950 1,763 1,614 3,377
FHLB advances (230) (17) (247) 750 144 894
------ ---- ------ ------ ------ ------
Total interest-bearing liabilities 1,056 647 1,703 2,513 1,758 4,271
------ ---- ------ ------ ------ ------
Net interest income $1,506 $ 13 $1,519 $1,693 $ (59) $1,634
====== ==== ====== ====== ====== ======
</TABLE>
8
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The provision for loan losses for fiscal 1996 was $885,000 compared to
$482,000 for the preceding year. The increased provision for loan losses
resulted from the higher level of loans outstanding and the continuing shift in
the loan mix from lower risk residential lending to higher risk consumer and
commercial lending. Net charge-offs to the allowance for loan losses were
$321,000 during the fiscal year ended September 30, 1996, as compared to
$337,000 for the year ended September 30, 1995. The balance in the allowance
for loan losses at September 30, 1996 was $2.4 million compared to $1.8 million
at September 30, 1995. The allowance for loan losses as a percentage of loans
was 1.04% and .91% at September 30, 1996 and 1995, respectively. Management
continually reviews the adequacy of the allowance for loan losses, considering
such factors as reviews of delinquent loans and other loans with problems,
composition of the Bank's loan portfolio, general economic conditions that may
affect borrowers ability to repay and the value of collateral.
Other income for fiscal 1996 was $2.3 million as compared to $1.9 million
for fiscal 1995. Service charges increased to $1.2 million, from $948,000, due
to a change in the fee schedule for deposits and the increase in number of
checking and NOW accounts. The increase in miscellaneous income included
$239,000 received as a deposit premium on the sale of a branch.
Other expenses for fiscal 1996 was $10.0 million compared to $8.1 million
for fiscal 1995, an increase of $1.9 million or 23.5%. The primary increase was
in federal insurance premiums. On September 30, the Bank was assessed by the
FDIC a one-time special assessment of $1.3 million. This assessment was made in
order to recapitalize the SAIF. Insurance, telephone, postage, supplies and
other increased primarily due to increased expenses as a result of the opening
of a new branch in fiscal 1996 and having expenses for three other branches
purchased during fiscal 1995 for the entire fiscal 1996 year. Tabular
comparisons of broad expense categories for fiscal 1996 compared to fiscal 1995
are as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
-----------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Compensation and related benefits $3,658 $3,544
Occupancy and data processing fees 1,848 1,680
Federal deposit and other insurance
premiums 1,877 689
Telephone, postage, supplies and other 2,610 2,192
------ ------
Totals $9,993 $8,105
====== ======
</TABLE>
The effective tax rate was 37.3% for the year ended September 30, 1996 as
compared to 35.5% for the year ended September 30, 1995. See Note 12 to the
Notes to Consolidated Financial Statements.
RESULTS of OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1994
Net income for the fiscal year ended September 30, 1995, was $2.4 million as
compared to $2.3 million for the preceding fiscal year. Net income increased by
$91,000 or 4.0%.
9
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Net interest income for fiscal 1995 equaled $10.3 million as compared to
$8.7 million for the fiscal year ended September 30, 1994. The increase of $1.6
million amounted to 18.8%. Other income for fiscal 1995 was $1.9 million as
compared to $1.7 million for fiscal 1994 while other expense for the respective
fiscal years were $8.1 million and $6.6 million. A more detailed discussion of
the comparative years is as follows:
Net interest income increased by $1.6 million or 18.8%. The primary reason
for the increase in net interest income was an increase in average interest-
earning assets for fiscal 1995 by approximately $59.5 million. Average cost of
funds increased during the year from 3.82% during the year ended September 30,
1994 to 4.59% during the year ended September 30, 1995 resulting in a
contracting interest rate spread, decreasing to 3.41% as compared to 3.67% for
the previous year.
Total interest income for fiscal 1995 was $22.8 million up $5.9 million or
35.0% from $16.9 million for fiscal 1994. The primary reason for the increase
was an increase in average interest-earning assets due to an increase in loan
demand. All categories of loans increased with 1-4 family real estate mortgage
loans increasing $10.3 million for the comparative years, commercial real estate
increasing $13.2 million for the comparative years and installment loans
increasing $7.4 million for the comparative years. The average yield on earning
assets increased to 8.00% for fiscal 1995 versus 7.49% for fiscal year 1994.
Total interest expense for fiscal 1995 was $12.5 million compared to $8.2
million for fiscal 1994. The increase of $4.3 million represented an 52.0%
increase in interest expense. The increase in interest expense was primarily
due to the increase in average interest-bearing liabilities as a result of
deposits received through branch purchases and increased average FHLB advances.
Cost of funds increased to 4.59% for the 1995 period as compared to 3.82% for
the 1994 period. Average interest-bearing liabilities were $271.9 million for
fiscal 1995 as compared to $215.0 million for fiscal 1994.
The provision for loan losses for fiscal 1995 was $482,000 compared to
$522,000 for the preceding year. Net charge-offs to the allowance for loan
losses were $337,000 during the fiscal year ended September 30, 1995, as
compared to $348,000 for the year ended September 30, 1994. The balance in the
allowance for loan losses at September 30, 1995 was $1.8 million compared to
$1.7 million at September 30, 1994. The allowance for loan losses as a
percentage of loans was .91% and 1.01% at September 30, 1995 and 1994,
respectively. Asset quality improved for the comparative years with
nonperforming assets decreasing to .57% of total assets at September 30, 1995
from .67% at September 30, 1994. This was a contributing factor in the decrease
in the percentage of the allowance to loan losses to total loans. Management of
the Bank continually reviews the adequacy of allowance for loan losses,
considering such factors as reviews of delinquent loans and other loans with
problems, composition of the Bank's loan portfolio, general economic conditions
that may affect borrowers ability to repay or the value of collateral.
10
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Other income for fiscal 1995 was $1.9 million as compared to $1.7 million
for fiscal 1994. Service charges increased to $948,000, from $489,000, due to a
change in the fee schedule for deposits and the increase in number of checking
and NOW accounts. Other increases included gains on the sale of several vacant
branch sites during the year.
Other expense for fiscal 1995 was $8.1 million compared to $6.6 million for
fiscal 1994, an increase of $1.5 million or 22.9%. The primary increases were
in compensation and other fringe benefits due to the addition of several
employees due to branch purchases as well as normal increases. Insurance,
telephone, postage, supplies and other primarily increased due to increased
expense as a result of branch purchases and the related amortization of the
deposit base premium. Tabular comparisons of expense categories for fiscal 1995
compared to fiscal 1994 were as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
-----------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Compensation and related benefits $3,544 $2,940
Occupancy and data processing fees 1,680 1,467
Insurance, telephone, postage, supplies
and other 2,881 2,189
------ ------
Totals $8,105 $6,596
====== ======
</TABLE>
The effective tax rate was 35.5% for the year ended September 30, 1995 as
compared to 36.9% for the year ended September 30, 1994. See Note 12 to the
Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets at September 30, 1996, were $344.5 million as compared to
$323.2 million at September 30, 1995, an increase of $21.3 million or 6.6%.
Loans receivable at September 30, 1996, increased by $28.8 million to $227.2
million as compared to $198.4 million at the previous year-end. The increase
was primarily as a result of the employment of several loan officers whose
primary function is the production of consumer and commercial loans and the
entry into new markets as a result of branching efforts.
Deposits increased $20.9 million to $288.2 million at September 30, 1996,
compared to $267.3 million at the previous year end as First Palmetto targeted
several markets for growth by offering highly competitive rates.
Stockholders' equity increased to $20.2 million at September 30, 1996
compared to $19.3 million at September 30, 1995. Increases were $2.0 million
from net income. Decreases were cash dividends of approximately $1.1 million,
the purchase of treasury stock of $4,000 and a decrease in unrealized gains on
available for-sale-securities in the amount of $37,000.
11
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
CAPITAL RESOURCES
Regulatory Capital Requirements. Under OTS regulations savings associations
-------------------------------
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital at least equal to 3% of adjusted total assets and a
combination of core and "supplementary" capital equal to at least 8% of "risk-
weighted" assets. For purposes of the regulations, core capital is defined as
common stockholders' equity, noncumulative perpetual preferred stock and related
surplus, minority interest in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
qualifying intangibles. Core capital is generally reduced by the amount of the
savings association's intangible assets for which no market exists. Limited
exceptions to the deduction of intangible assets are provided for mortgage
servicing rights and certain intangibles. Tangible capital is given the same
definition as core capital but does not include qualifying intangibles and is
reduced by the amount of all the savings association's intangible assets with
only a limited exception for mortgage servicing rights and certain grandfathered
intangibles. Both core and tangible capital are to be further reduced by an
amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks.
At September 30, 1996, the Bank's tangible capital ratio was 4.8%, core
capital ratio was 5.0% and its risk-based capital ratio was 10.1%. At that
date, the Bank had $848,000 of qualifying intangibles and $201,000 of
investments in and extensions of credit to subsidiaries engaged in activities
not permissible for national banks.
ASSET and LIABILITY MANAGEMENT and INTEREST RATE SENSITIVITY
First Palmetto manages the different maturity and repricing characteristics
of its interest-earning asset and interest-bearing liability portfolios to
achieve a desired interest rate sensitivity position and thereby limiting its
exposure to interest rate risk. The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent to interest rate movements.
An important measure of interest rate risk is the Asset/Liability Gap ratio.
The difference between the amount of interest-earning assets and interest-
bearing liabilities to be repriced during a specified time period is referred to
as the "asset (liability) gap position". Key assumptions for determining the
period for repricing are as follows: (1) fixed rate loans and mortgage-backed
securities are generally amortized adjusted by market based prepayment rates;
(2) adjustable rate loans and mortgage-backed securities are repriced on their
respective adjustment dates; (3) loans with call features are amortized without
any prepayment assumption with the balance repricing at the call date; (4)
investment securities are repriced at maturity; (5) NOW, money market and
savings are repriced using market based decay rates; (6) time deposits are
repriced at maturity; (7) fixed rate borrowings are repriced at maturity
adjusted for contractual principal repayments; and (8) adjustable rate
borrowings are repriced on their adjustment dates. Management believes these
assumptions are reasonable based upon First Palmetto's historical experience.
12
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
First Palmetto's liability sensitive cumulative gap position for one year at
September 30, 1996 was (7.39%). A liability sensitive gap indicates that over
the course of a year an upward movement in rates will negatively impact net
interest income (and consequently operating results) since liabilities will
reprice faster than assets. Conversely, a liability sensitive gap in a
declining interest rate environment will positively impact net interest income
(and consequently operating results) since liabilities will reprice faster than
assets.
Management forecasts interest rates will remain stable during the first six
months of calendar 1997 and remain stable or decrease slightly for the remainder
of the year. Since the Bank has a liability sensitive gap position for one
year, a declining interest rate scenario in that time frame will positively
effect net interest income as previously discussed.
13
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The following table presents First Palmetto's asset/liability gap ratios as of
September 30, 1996.
<TABLE>
<CAPTION>
Six months
At September 30, 1996 Six months to one One to Three to Over five
or less year three years five years years Total
---------- -------- ----------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans and mortgage-backed securities (1) $105,566 $ 49,764 $56,436 $23,157 $27,660 $262,583
Investment securities (2) 9,001 8,949 24,670 4,984 - 47,604
Other interest-earning assets (3) 14,048 - - - - 14,048
---------- -------- ----------- ---------- --------- --------
Total interest-earning assets 128,615 58,713 81,106 28,141 27,660 324,235
---------- -------- ----------- ---------- --------- --------
Interest-bearing liabilities
Interest-bearing deposits 169,954 29,013 47,341 9,002 17,220 272,530
Borrowings 4,700 7,617 17,233 3,000 - 32,550
---------- -------- ----------- ---------- --------- --------
Total interest-bearing liabilities 174,654 36,630 64,574 12,002 17,220 305,080
---------- -------- ----------- ---------- --------- --------
Sensitivity gap
Period $(46,039) $ 22,083 $16,532 $16,139 $10,440 $19,155
========== ======== =========== ========== ========= ========
Cumulative $(46,039) $(23,956) $(7,424) $ 8,715 $19,155 $19,155
========== ======== =========== ========== ========= ========
Gap as a percentage of interest-earning assets
Period (14.20%) 6.81% 5.10% 4.98% 3.22% 5.91%
========== ======== =========== ========== ========= ========
Cumulative (14.20%) (7.39%) (2.29%) 2.69% 5.91% 5.91%
========== ======== =========== ========== ========= ========
</TABLE>
(1) Excludes the allowance for loan losses.
(2) Includes available-for-sale securities.
(3) Includes interest-earning deposits and certificates of deposit in other
banks.
14
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
To reduce First Palmetto's exposure to interest rate risk, management has
implemented the following strategies:
(1) Originate for its own portfolio only adjustable rate mortgages and longer-
term amortization loans with call provisions of five years or less (unless
specific exceptions are made).
(2) Originate fixed rate mortgages according to the specifications of the
Federal Home Loan Mortgage Corporation, making them salable in the
secondary mortgage market.
(3) Increase commercial real estate and consumer lending activities in order to
increase outstanding loans with shorter maturities or adjustable rates so
as to increase the interest rate sensitivity of First Palmetto's loan
portfolio.
(4) Invest in securities with maturities of five years or less.
(5) Extend the life of liabilities through the use of Federal Home Loan Bank
advances or other extended maturity obligations to reduce interest rate
sensitivity.
Senior management oversees implementation of the strategies noted above. It
reviews national and local market economic data and interest rate projections.
Senior management also regularly reviews the relationship between interest
sensitive assets and interest sensitive liabilities and reports to the full
Board of Directors on the progress of First Palmetto's attempt to reduce the
mismatch existing between them.
IMPACT OF INFLATION
First Palmetto does not believe that inflation has had a material effect on
its operations during the last three fiscal years. Increases in personnel
costs, supplies, occupancy or data processing fees or other operating expenses
should the current rates of inflation increase materially could affect First
Palmetto's operations, however, in the past First Palmetto has generally been
able to increase net yields and other items of income sufficient to meet
negative impacts of increasing costs.
IMPACT OF CHANGING PRICES
First Palmetto provides financial and related services and its assets and
liabilities are monetary in nature, therefore First Palmetto is not directly
subject to impact from changes in prices of production materials. Interest
rates, which have a more significant impact on financial institutions
performance, do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services, which would be more directly
affected by inflation.
15
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
LIQUIDITY
First Palmetto's primary sources of liquidity are deposits and loan
principal and interest repayments. Additionally, First Palmetto has
historically generated funds through the sale in the secondary market of
mortgage loans. During the current year funds were made available primarily
from the increase of deposits of $20.9 million, the sale of loans on the
secondary market in the amount of $16.2 million, from the maturities of
certificates of deposit in other banks and investment securities in the amount
of $13.0 million, and from principal collection of mortgage-backed securities of
$6.4 million. These funds were used to fund net loans of $46.5 million and to
purchase investment securities and investments in the amount of $2.0 million.
These and other factors resulted in cash and cash equivalents increasing
$9.5 million during the year ended September 30, 1996.
The Bank, as a member of the Federal Home Loan Bank System, is required by
regulation to maintain a daily average balance of liquid assets equal to a
certain percentage of net withdrawable savings and current borrowings. The
Bank's liquidity ratio at September 30, 1996 is in excess of regulatory
requirements of 5% and will remain so in the upcoming fiscal year.
ACCOUNTING CHANGES
See Note 1 in Notes to Consolidated Financial Statements.
New Accounting Standards
- ------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards "SFAS" No. 122, "Accounting for Certain Mortgage
Banking Activities," which requires that a mortgage banking enterprise recognize
as separate assets the rights to service mortgage loans for others, however
those servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values if it is practicable to estimate those fair values.
If it is not practicable to estimate the fair values of the mortgage servicing
rights and the mortgage loans (without the mortgage servicing rights), the
entire cost of purchasing or originating the loans should be allocated only to
the mortgage loans without the mortgage servicing rights. Additionally, this
standard requires that a mortgage banking enterprise periodically assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. This statement is effective for years beginning after December
15, 1995. Management has not determined the impact that adoption of SFAS No.
122 will have on the financial statements.
16
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The FASB has also issued SFAS No. 123 "Accounting for Stock - Based
Compensation." SFAS No. 123 established a fair value-based method of accounting
for stock options and other equity instruments. It requires the use of that
method for transactions with other than employees and encourages its use for
transactions with employees. It permits entities to continue to use the
intrinsic value method included in APB 25 "Accounting for Stock Issued to
Employees", but regardless of the method used to account for the compensation
cost associated with stock option and similar plans, it requires employers to
disclose information in accordance with SFAS No. 123.
The general principle underlying SFAS No. 123 is that equity instruments are
recognized at the fair value of the consideration received for them. If the
fair value of the consideration received cannot be reasonably determined, the
fair value of the equity instrument itself may be used. The fair value method
of accounting for stock options and other instruments applies this general
principle, measuring compensation cost for employers as the excess of the fair
value of the equity instrument over the amount paid by the employee.
The FASB has also issued SFAS No 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets.
Liabilities and derivatives incurred or obtained by transferors in
conjunction with the transfer of financial assets are required to be measured at
fair value, if practicable. Servicing assets and other retained interests in
transferred assets are required to be measured by allocating the previous
carrying amount between the assets sold, if any, and the interest that is
retained, if any, based on the relative fair values of the assets at the date of
the transfer. Servicing assets retained are subsequently subject to
amortization and assessment for impairment.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. It is to
be applied prospectively; earlier or retroactive application is not permitted.
Management does not expect that adoption of SFAS No. 125 will have a material
impact on the consolidated financial statements of First Palmetto.
17
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Cash and due from banks $ 8,867 $ 10,194
Interest-bearing deposits in other banks 13,649 2,785
Certificates of deposit in other banks 399 399
Available-for-sale securities (cost of
$595 at September 30, 1996 and 1995) 997 1,039
Investment securities (market value of
$47,096 and $58,259 at September 30,
1996 and 1995, respectively) 46,607 57,389
Mortgage-backed securities held for investment
(market value of $32,788 and $39,420 at
September 30, 1996 and 1995, respectively) 33,010 39,410
Loans, net of allowance for loan losses of
$2,364 in 1996 and $1,800 in 1995 227,209 198,373
Accrued interest receivable 2,380 2,538
Real estate acquired in settlement of loans 480 1,031
Stock in the Federal Home Loan Bank (FHLB) 2,122 2,122
Premises and equipment 5,117 4,083
Intangible assets 2,623 3,393
Prepaid expenses and other assets 1,087 427
-------- --------
Total assets $344,547 $323,183
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $288,157 $267,313
FHLB advances 32,550 33,367
Accrued expenses and other liabilities 3,632 3,158
-------- --------
Total liabilities 324,339 303,838
-------- --------
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value, 1,500,000 shares
authorized, 733,014 shares issued 7 7
Additional paid-in capital 6,080 6,080
Retained earnings, substantially restricted 14,474 13,570
Unrealized gain on available-for-sale securities 272 309
Treasury stock, at cost (40,004 shares in 1996
and 39,854 shares in 1995) (625) (621)
-------- --------
Total stockholders' equity 20,208 19,345
-------- --------
Commitments
Total liabilities and stockholders' equity $344,547 $323,183
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Dollars in thousands,
except earnings per share data)
<S> <C> <C> <C>
Interest income:
Loans $19,477 $15,949 $13,010
Investment securities 3,411 3,684 1,635
Mortgage-backed securities 2,434 2,676 1,859
Other 694 485 386
------- ------- -------
Total interest income 26,016 22,794 16,890
------- ------- -------
Interest expense:
Deposits 12,329 10,379 7,001
FHLB advances 1,857 2,104 1,212
------- ------- -------
Total interest expense 14,186 12,483 8,213
------- ------- -------
Net interest income 11,830 10,311 8,677
Provision for loan losses 885 482 522
------- ------- -------
Net interest income after
provision for loan losses 10,945 9,829 8,155
------- ------- -------
Other income:
Service charges 1,167 948 489
Loan servicing 513 555 597
Gain on sales of loans 103 39 279
Gain on sale of fixed assets - 203 -
Miscellaneous 472 189 285
------- ------- -------
Total other income 2,255 1,934 1,650
------- ------- -------
Other expense:
Compensation and related benefits 3,658 3,544 2,940
Net occupancy 1,027 898 710
Data processing fees 821 782 757
Federal deposit and other insurance
premiums 1,877 689 582
Telephone, postage, and supplies 655 582 314
Amortization of intangible assets 769 441 128
Miscellaneous 1,186 1,169 1,165
------- ------- -------
Total other expense 9,993 8,105 6,596
------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 3,207 3,658 3,209
Income taxes 1,195 1,300 1,185
------- ------- -------
Income before cumulative effect
of change in accounting principle 2,012 2,358 2,024
Cumulative effect of change in
accounting principle - - 243
------- ------- -------
Net income $ 2,012 $ 2,358 $ 2,267
======= ======= =======
Earnings per share:
Income before cumulative effect of
change in accounting principle $2.90 $3.40 $3.00
Cumulative effect of change in
accounting principle - - .36
------- ------- -------
Net income $ 2.90 $ 3.40 $ 3.36
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 1996, 1995, and 1994
<TABLE>
<CAPTION>
Unrealized
gain on
Additional available- Total
Common paid-in Retained for-sale Treasury stockholders'
stock capital earnings securities stock equity
------ ---------- -------- ---------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1993 $7 $5,889 $10,782 $ 363 $(612) $16,429
Proceeds from stock options
exercised - 191 - - - 191
Purchase of common stock - - - - (2) (2)
Net income - - 2,267 - - 2,267
Cash dividends ($1.25
per share) - - (867) - - (867)
Change in unrealized gain
on available-for-sale
securities - - - (214) - (214)
-- ------ ------- ----- ----- -------
Balance at
September 30, 1994 7 6,080 12,182 149 (614) 17,804
Purchase of common stock - - - - (7) (7)
Net income - - 2,358 - - 2,358
Cash dividends ($1.40 per
share) - - (970) - - (970)
Change in unrealized gain
on available-for-sale
securities - - - 160 - 160
-- ------ ------- ----- ----- -------
Balance at
September 30, 1995 7 6,080 13,570 309 (621) 19,345
-- ------ ------- ----- ----- -------
Purchase of common stock - - - - (4) (4)
Net income - - 2,012 - - 2,012
Cash dividends ($1.60 per
share) - - (1,108) - - (1,108)
Change in unrealized gain
on available-for-sale
securities - - - (37) - (37)
-- ------ ------- ----- ----- -------
Balance at
September 30, 1996 $7 $6,080 $14,474 $ 272 $(625) $20,208
== ====== ======= ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,012 $ 2,358 $ 2,267
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Gain on sale of available-
for-sale securities - - (4)
Accretion and amortization of
discounts and premiums, net (203) (196) 26
Provision for loan losses 885 482 522
Increase (decrease) in deferred
loan fees, net (27) (30) 57
Gain on sale of real estate
acquired in settlement of
loans, net (74) (2) (35)
Gain on sale of real estate
held for development and
sale - - (43)
FHLB stock dividends - - (52)
Depreciation 353 288 225
Gain on sale of premises and
equipment - (203) (1)
Amortization of intangible
assets 769 441 128
Proceeds from sale of loans 16,210 9,227 36,176
Originations and principal
repayments of loans held
for sale, net (16,107) (9,110) (41,804)
(Increase) decrease in
accrued interest receivable 158 (744) (736)
(Increase) decrease in prepaid
expenses and other assets (755) 8 65
Increase (decrease) in accrued
expenses and other
liabilities 581 (852) 450
-------- -------- --------
Net cash provided by (used
in) operating activities 3,802 1,667 (2,759)
-------- -------- --------
Cash flows from investing activities:
Net decrease in certificates of
deposit in other banks - 300 100
Proceeds from maturities of
investment securities 12,995 9,002 11,002
Purchases of investment
securities (2,000) (6,882) (50,260)
</TABLE>
(Continued)
21
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from investing activities,
continued:
Proceeds from sale of
available-for-sale securities - - 7,753
Purchases of available-for-sale securities - - (435)
Purchases of mortgage-backed securities - (13,542) (6,061)
Principal collected on mortgage-
backed securities 6,379 5,273 2,541
Net increase in loans (30,405) (35,734) (11,983)
Proceeds from sale of real estate
acquired in settlement of loans 1,233 656 1,571
Improvements made to real estate
held for development and sale - (5) -
Proceeds from sale of real estate
held for development and sale - - 66
Proceeds from sale of FHLB stock - 1,103 378
Purchases of FHLB stock - (1,103) (378)
Proceeds from sale of premises
and equipment - 283 21
Capital expenditure for premises
and equipment (1,489) (805) (134)
Retirements of premises and equipment 107 - -
Purchase of financial institution - 29,000 28,095
-------- -------- --------
Net cash used in investing
activities (13,180) (12,454) (17,724)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 20,844 10,321 6,029
Proceeds from FHLB advances 21,000 63,000 17,317
Repayment of FHLB advances (21,817) (60,633) (3,317)
Proceeds from stock options exercised - - 191
Purchase of common stock (4) (6) (3)
Cash dividends (1,108) (970) (867)
-------- -------- --------
Net cash provided by financing
activities 18,915 11,712 19,350
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 9,537 925 (1,133)
Cash and cash equivalents at
beginning of year 12,979 12,054 13,187
-------- -------- --------
Cash and cash equivalents at
end of year $ 22,516 $ 12,979 $ 12,054
======== ======== ========
</TABLE>
(Continued)
22
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
September 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $14,009 $12,222 $ 8,011
Income taxes 1,744 1,198 1,184
Supplemental schedule of noncash
investing and financing activities:
Loans transferred to real estate
acquired in settlement loans 607 551 1,820
Loans securitized as mortgage-backed
securities available-for-sale - - 10,431
Mortgage-backed securities
transferred from available-
for-sale to held-to-maturity - - 26,319
Real estate held for development
and sale transferred to premises
and equipment - - 428
Increase (decrease) in unrealized gain
on available-for-sale securities
(net of tax effect of $20) 37 172 (214)
</TABLE>
During 1995, First Palmetto acquired three branch facilities from First Union
National Bank of South Carolina. See Note 2 for transaction description
including a summary of assets acquired and liabilities assumed.
During 1994, First Palmetto acquired two branch facilities from Wachovia Bank of
South Carolina, N.A. See Note 2 for transaction description including a summary
of assets acquired and liabilities assumed.
See accompanying notes to consolidated financial statements
23
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1996, 1995, and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
The following is a description of the more significant accounting and
reporting policies which First Palmetto Financial Corporation and
subsidiary (First Palmetto) followed in preparing and presenting the
consolidated financial statements.
(a) Principles of Consolidation and Reporting
-----------------------------------------
The accompanying consolidated financial statements include the accounts
of First Palmetto Financial Corporation and its wholly owned subsidiary,
First Palmetto Savings Bank, F.S.B. (the "Bank") and its subsidiaries.
All significant intercompany balances have been eliminated.
(b) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent 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.
(c) Reclassifications
-----------------
Certain amounts in the September 30, 1995 and 1994 consolidated
financial statements have been reclassified to conform with the 1996
presentations. These reclassifications had no impact on the net income
or stockholders' equity as previously reported.
(d) Securities
----------
Statement of Financial Accounting Standards (SFAS) No. 115 addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and all investments in debt securities.
These investments are to be classified into three categories as follows:
- held-to-maturity securities - reported at amortized cost,
- trading securities - reported at fair value with unrealized gains and
losses included in earnings, or
- available-for-sale securities - reported at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity (net of tax effect).
(Continued)
24
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Certain investments in equity securities are classified as available-
for-sale. All other securities have been classified as held-to-maturity
securities because First Palmetto has the intent and the ability to hold
all such securities until maturity.
Gains and losses on sales of securities are recognized on a specific
identification basis. Premiums and discounts are amortized into
interest income using a level yield method.
Regulations require First Palmetto to maintain cash and U.S. Government
and other approved securities in an amount equal to a prescribed
percentage (5% at September 30, 1996) of deposit accounts (net of loans
on deposit accounts) plus short-term borrowings. First Palmetto was in
compliance with such regulation at September 30, 1996.
(e) Loans Held for Sale
-------------------
Loans held for sale are carried at the lower of cost or market as
determined by the outstanding commitments from investors to purchase
such loans or current investor yield requirements calculated on the
aggregate loan basis. Gains and losses are realized if at the time of
sale the average interest rate on the loans sold, adjusted for servicing
fees, differs from the agreed yield to the buyer. First Palmetto
originates and sells whole loans, generally retaining servicing on
conventional loans and releasing servicing on governmental loans.
Servicing fees range from .25% to .375% on conventional loans. Under
present accounting methods, loan servicing fees are recognized in the
year received.
(f) Provision for Loan Losses
-------------------------
The allowance for loan losses is the amount considered adequate for
potential losses in the portfolio. Management's evaluation of the
adequacy of the allowance is based on a review of such factors which
include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for
loan losses to outstanding loans, delinquency trends and economic
conditions.
While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if
conditions differ from the assumptions used in making the evaluations.
(Continued)
25
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the adequacy of First
Palmetto's allowance for loan losses. Such agencies may require First
Palmetto to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.
Effective October 1, 1995, the Bank adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114,
as amended by SFAS No. 118, requires that impaired loans be measured
based on the present value of expected future cash flows or the
underlying collateral values as defined in the pronouncement. The
adoption of SFAS No. 114 had no effect on the balance sheet or income
statements of the Bank. The Bank includes the provisions of SFAS No.
114, if any, in the allowance for loan losses.
(g) Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure or deed in lieu of foreclosure and is
initially recorded at the lower cost or fair value. Costs relating to
the development and improvement of the property are capitalized,
whereas, those relating to holding the property are charged to expense.
(h) Premises and Equipment
----------------------
Premises and equipment are recorded at cost and depreciation is provided
over the estimated useful lives of the related assets principally on a
straight-line basis. Estimated lives are ten to forty years for
buildings, building components and improvements and two to ten years for
furniture, fixtures and equipment.
Leasehold improvements are recorded at cost and amortization is provided
over the lesser of the related lease term or estimated useful life
principally on a straight-line basis.
Maintenance and repairs are charged to expense as incurred and
improvements are capitalized. The costs and accumulated depreciation
relating to premises and equipment retired or otherwise disposed of are
eliminated from the accounts and any resulting gains or losses are
credited or charged to operations.
(Continued)
26
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(i) Loan Interest Income
--------------------
When loans become more than 90 days past due, First Palmetto places such
loans on nonaccrual status or provides an allowance for uncollected
interest on accrued interest if, in the opinion of management,
collectibility of that accrued interest is doubtful. Any allowance is
netted against accrued interest receivable in the consolidated financial
statements. When payment for the loan is received in full, the system
automatically returns the loan to accrual status.
(j) Loan Origination Fees and Costs
-------------------------------
Loan origination fees and certain direct loan origination costs are
deferred and amortized over the contractual life, adjusted for
prepayments, of the related loan as an adjustment of the loan yield
using the level yield method. Direct costs of unsuccessful loans and
indirect costs are expensed as incurred.
(k) Income Taxes
------------
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of SFAS No.
109. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective October 1, 1993, First Palmetto adopted SFAS No. 109 and has
reported the cumulative effect of that change in the method of
accounting for income taxes in the 1994 consolidated statement of
income.
(l) Intangible Assets
-----------------
Goodwill, representing the excess cost of investment over the fair value
of net assets acquired, is being amortized by charges to operations
generally over twelve years, using the straight-line method.
Deposit-based premiums, representing the cost of acquiring deposits from
other financial institutions, are being amortized by charges to
operations over seven years, an estimate of the estimated life of the
existing deposit relationship, using the straight-line method.
(Continued)
27
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(m) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash and due from banks and interest-
bearing balances in other banks. Generally, cash and cash equivalents
are considered to have maturities of three months or less.
(n) Net Income Per Share
--------------------
Net income per share is computed by dividing consolidated net income by
the weighted average number of shares of common stock outstanding during
the year. The effect of common stock equivalent shares applicable to
stock option plans has not been included in the calculation of net
income per share because such effect is not materially dilutive.
(o) Other Accounting Changes
------------------------
The FASB has issued SFAS No. 122, "Accounting for Certain Mortgage
Banking Activities," which requires that a mortgage banking enterprise
recognize as separate assets the rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells or securitizes those
loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair
values if it is practicable to estimate those fair values. If it is not
practicable to estimate the fair values of the mortgage servicing rights
and the mortgage loans (without the mortgage servicing rights), the
entire cost of purchasing or originating the loans should be allocated
only to the mortgage loans without the mortgage servicing rights.
Additionally, this standard requires that a mortgage banking enterprise
periodically assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. This statement is
effective for years beginning after December 15, 1995. Management has
not determined the impact that adoption of SFAS No. 122 will have on the
financial statements.
The FASB has also issued SFAS No. 123 "Accounting for Stock - Based
Compensation." SFAS No. 123 established a fair value-based method of
accounting for stock options and other equity instruments. It requires
the use of that method for transactions with other than employees and
encourages its use for transactions with employees. It permits entities
to continue to use the intrinsic value method included in APB 25
(Accounting for Stock Issued to Employees), but regardless of the method
used to account for the compensation cost associated with stock option
and similar plans, it requires employers to disclose information in
accordance with SFAS No. 123.
(Continued)
28
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The general principle underlying SFAS No. 123 is that equity instruments
are recognized at the fair value of the consideration received for them.
If the fair value of the consideration received cannot be reasonably
determined, the fair value of the equity instrument itself may be used.
The fair value method of accounting for stock options and other
instruments applies this general principle, measuring compensation cost
for employers as the excess of the fair value of the equity instrument
over the amount paid by the employee.
The FASB has also issued SFAS No 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 125 established accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on the consistent application of the financial-components approach.
This approach requires the recognition of financial assets and servicing
assets that are controlled by the reporting entity, the derecognition of
financial assets when control is surrendered, and the derecognition of
liabilities when they are extinguished. Specific criteria are
established for determining when control has been surrendered in the
transfer of financial assets.
Liabilities and derivatives incurred or obtained by transferors in
conjunction with the transfer of financial assets are required to be
measured at fair value, if practicable. Servicing assets and other
retained interests in transferred assets are required to be measured by
allocating the previous carrying amount between the assets sold, if any,
and the interest that is retained, if any, based on the relative fair
values of the assets at the date of the transfer. Servicing assets
retained are subsequently subject to amortization and assessment for
impairment.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31,
1996. It is to be applied prospectively; earlier or retroactive
application is not permitted. Management does not expect that adoption
of SFAS No. 125 will have a material impact on the consolidated
financial statements of First Palmetto.
(Continued)
29
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Acquisitions
------------
In February, 1995, the Bank acquired certain assets and assumed deposit
liabilities from three branch offices of First Union National Bank of South
Carolina located in Lugoff, Beaufort and Manning, South Carolina. The
following summarizes the fair value of assets acquired, liabilities assumed
and cash received in the transaction.:
<TABLE>
<CAPTION>
Assets acquired: (In thousands)
---------------- --------------
<S> <C>
Loans $ 110
Premises and equipment 357
Deposit base premium 2,152
Other 29
-------
2,648
-------
Liabilities assumed:
--------------------
Deposits 31,574
Other 74
-------
Total 31,648
-------
Net cash received $29,000
=======
</TABLE>
In July 1994, the Bank acquired from Wachovia Bank of South Carolina, N.A.
certain assets and assumed deposit liabilities for branch facilities in
Pageland and Bishopville, South Carolina. The following summarizes the fair
value of assets acquired, liabilities assumed, and cash received in the
transaction:
<TABLE>
<CAPTION>
Assets acquired: (In thousands)
---------------- --------------
<S> <C>
Loans $ 318
Premises and equipment 392
Deposit base premium 1,250
-------
1,960
-------
Liabilities assumed:
--------------------
Deposits $30,055
-------
Net Cash received $28,095
=======
</TABLE>
(3) Available-for-Sale Securities
-----------------------------
Available-for-sale securities consist of the following:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized Market
Cost Gains Value
--------- ---------- ------
(In thousands)
<S> <C> <C> <C>
September 30, 1996:
Equity securities $595 $402 $ 997
==== ==== ======
September 30, 1995:
Equity securities $595 $444 $1,039
==== ==== ======
</TABLE>
(Continued)
30
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Investment Securities
---------------------
Investment securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
U.S. Government obligations due:
Within 12 months $16,953 $100 $ - $17,053
Beyond 12 months but
within 5 years 29,654 399 (10) 30,043
------- ---- ---- -------
$46,607 $499 $(10) $47,096
======= ==== ==== =======
September 30, 1995:
U.S. Government obligations due:
Within 12 months $13,002 $ 11 $(15) $12,998
Beyond 12 months but
within 5 years 44,387 888 (14) 45,261
------- ---- ---- -------
$57,389 $899 $(29) $58,259
======= ==== ==== =======
</TABLE>
During 1996, 1995 and 1994, thirteen investment securities, nine investment
securities and four investment securities with total amortized cost of $13.0
million, $9.0 million and $4.0 million, respectively, matured or were sold
within 90 days of maturity as permissible under SFAS No. 115. Proceeds from
these maturities and sales were $13.0 million, $9.0 million and $4.0 million
which resulted in gross realized losses of $5,156, $30,555 and $4,694.
At September 30, 1996, investment securities with amortized cost of $25.5
million were pledged to secure public deposits and deposits of individuals.
(5) Mortgage-Backed Securities
--------------------------
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
FHLMC participation
certificates (6% - 11%,
due 2005 through 2023) $30,332 $157 $(496) $29,993
FNMA mortgage-backed
securities (7.75% - 8.11%,
due 2022) 2,509 113 - 2,622
GNMA mortgage-backed
securities (8%, due 2001
through 2002) 169 4 - 173
--------- ---------- ---------- -------
$33,010 $274 $(496) $32,788
========= ========== ========== =======
(Continued)
</TABLE>
31
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
FHLMC participation
certificates (6% - 11%,
due 2005 through 2023) $36,186 $ 289 $ (405) $ 36,070
FNMA mortgage-backed
securities (7.75% - 8.11%,
due 2022) 3,068 126 - 3,194
GNMA mortgage-backed
securities (8%, due 2001
through 2002) 156 - - 156
--------- ---------- ---------- --------
$39,410 $ 415 $ (405) $ 39,420
========= ========== ========== ========
</TABLE>
There were no sales of mortgage-backed securities during 1996, 1995 or 1994.
(6) Loans
-----
Loans consist of the following:
<TABLE>
<CAPTION>
September 30,
---------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Real estate mortgage (principally single
family dwellings, 1-4 units) $122,759 $105,367
Commercial real estate 62,043 56,489
Real estate construction 8,695 5,431
Commercial 12,578 10,055
Installment 27,847 24,376
Loans held for sale 396 897
Undisbursed proceeds on real estate
construction (4,461) (2,240)
Deferred loan fees, net (284) (202)
Allowance for loan losses (2,364) (1,800)
-------- --------
$227,209 $198,373
======== ========
Accrued interest receivable at September 30, 1996 and 1995 consisted of
the following:
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Loans $ 1,527 $ 1,278
Investment securities 634 984
Mortgage-backed securities 219 276
------- --------
$ 2,380 $ 2,538
======= ========
</TABLE>
At September 30, 1996 and 1995, the allowance for uncollected interest
amounted to $31,779 and $22,520, respectively.
Loans serviced for others approximated $136.5 million, $140.1 million, and
$145.6 million at September 30, 1996, 1995, and 1994, respectively.
(Continued)
32
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following summarizes the changes in the allowance for loan losses for
the years ended September 30, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,800 $1,655 $1,480
Provision for loan losses 885 482 523
Loan chargeoffs (567) (396) (402)
Recoveries 246 59 54
------ ------ ------
Balance at end of year $2,364 $1,800 $1,655
====== ====== ======
</TABLE>
At September 30, 1996 and 1995, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $478,000 and $0,
respectively. There was no specific allowance for credit losses related to
the impaired loans as of September 30, 1996. The average recorded
investment in impaired loans during the year ended September 30, 1996 was
$493,236. The $478,000 impaired balance consists of only one loan and is
considered impaired because the borrower declared bankruptcy. Because the
loan was not deemed impaired until the end of the year, no interest income
has been recognized since the loan became impaired. Large groups of
smaller-balance homogenous loans such as residential mortgages and consumer
installment loans are not evaluated for impairment individually.
First Palmetto had nonaccrual loans of approximately $984,000, $823,000, and
$722,000, at September 30, 1996, 1995, and 1994, respectively. Foregone
interest income related to nonaccrual loans for the years ended September
30, 1996, 1995 and 1994 amounted to $94,868, $58,622 and $62,672,
respectively. Interest income recognized on nonaccrual loans for the years
ended September 30, 1996, 1995 and 1994 amounted to $52,032, $45,747 and
$21,603, respectively.
First Palmetto offers mortgage and consumer loans to its officers, directors
and employees for the financing of their personal residences and for other
personal purposes. These loans are currently made in the ordinary course of
business and are made on substantially the same terms, including interest
rates and collateral, prevailing at the time for comparable transactions
with other persons. Management does not believe these loans involve more
than the normal risk of collectibility or present other unfavorable
features.
First Palmetto is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position.
(Continued)
33
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
First Palmetto's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contract amount of those
instruments. First Palmetto uses the same credit policies in making
commitments as it does for on-balance-sheet instruments. At September 30,
1996 and 1995, preapproved but unused lines of credit for loans totaled
approximately $18.4 million and $16.3 million, standby letters of credit
approximated $2.5 million and $1.6 million, and outstanding loan commitments
aggregated $945,000 and $2.4 million, respectively. Of these loan
commitments, $247,000 and $236,000 are at variable rates and $698,400 and
$2.2 million at September 30, 1996 and 1995, respectively at fixed rates
ranging from 8.25% to 8.50%. These commitments, including undisbursed
proceeds on construction loans, represent no more than the normal lending
risk that First Palmetto commits to its borrowers. If these commitments are
drawn, First Palmetto will obtain collateral if it is deemed necessary based
on management's credit evaluation of the borrower. Management believes that
these commitments can be funded through normal operations. First Palmetto
is not involved with any other types of financial instruments with off-
balance sheet risk.
First Palmetto grants residential, residential construction, commercial, and
installment loans to customers throughout its market area. As reflected in
the summary of loans receivable at September 30, 1996, the largest component
of First Palmetto's loan portfolio consists of lower-risk single-family, 1-4
unit, residential loans. The higher risk components of the loan portfolio
consist of real estate construction, commercial, and installment loans for
which repayment is more dependent on current real estate market and general
economic conditions.
(7) Real Estate Acquired in Settlement of Loans
-------------------------------------------
A comparative summary of real estate acquired in settlement of loans
follows:
<TABLE>
<CAPTION>
September 30,
--------------
(In thousands)
1996 1995
----- ------
<S> <C> <C>
Undeveloped land $ 70 $ 93
Single family residences 162 213
Commercial property 248 725
----- ------
$ 480 $1,031
===== ======
</TABLE>
(8) Investments Required by Law
---------------------------
First Palmetto is required by law to invest in stock of a Federal Home Loan
Bank (FHLB). No ready market exists for the FHLB stock and it has no quoted
market value. This stock is redeemable at $100 per share subject to certain
limitations set by the FHLB.
(Continued)
34
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation. Federal deposit insurance expense amounted to
approximately $1.8 million, $618,000, and $521,000 for the years ended
September 30, 1996, 1995, and 1994, respectively. On September 30, 1996,
First Palmetto was assessed a one time assessment of approximately 65 basis
point for every $100 of domestic deposits. The one time assessment amounted
to $1.3 million.
(9) Premises and Equipment
----------------------
A comparative summary of premises and equipment follows:
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Depreciation Value
------ ------------ --------
(In thousands)
<S> <C> <C> <C>
September 30, 1996:
Land and improvements $2,066 $ 2 $2,064
Office buildings and
improvements 3,271 1,071 2,200
Leasehold improvements 856 571 285
Furniture, fixtures and
equipment 742 236 506
Automobiles 75 13 62
------ ------ ------
$7,010 $1,893 $5,117
====== ====== ======
September 30, 1995:
Land and improvements $1,532 $ 1 $1,531
Office buildings and
improvements 2,996 1,207 1,789
Leasehold improvements 947 594 353
Furniture, fixtures and
equipment 2,139 1,801 338
Automobiles 78 6 72
------ ------ ------
$7,692 $3,609 $4,083
====== ====== ======
</TABLE>
First Palmetto leases various equipment and land under operating leases
expiring on various dates through 2019. Minimum lease commitments under all
noncancelable leases are as follows:
<TABLE>
<CAPTION>
Years ending September 30, (In thousands)
--------------------------
<S> <C>
1997 $145
1998 143
1999 83
2000 47
2001 28
Later years 147
----
$593
====
</TABLE>
Rent expense was $143,443, $121,267, and $97,568 for the years ended
September 30, 1996, 1995, and 1994, respectively.
(Continued)
35
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Deposits
--------
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Noninterest bearing checking $ 15,627 $ 13,54
NOWs (1.75% in 1996 and 2.00% in 1995) 29,820 31,68
MMDAs (3.00% in 1996 and 3.10% in 1995) 26,539 18,53
Savings (2.50% in 1996 and 1995) 22,057 23,920
-------- --------
94,043 87,680
-------- --------
Time:
Less than 3.00% 33 65
3.00% to 4.99% 14,974 17,71
5.00% to 6.99% 176,152 152,99
7.00% to 9.99% 2,955 8,859
-------- --------
194,114 179,633
-------- --------
$288,157 $267,313
======== ========
Weighted average cost of deposits
(as of dates indicated above) 4.65% 4.56%
======== ========
</TABLE>
A summary of time deposits by maturity as of September 30, 1996 follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
October 1, 1996 - September 30, 1997 $166,684
October 1, 1997 - September 30, 1998 20,333
October 1, 1998 - September 30, 1999 6,210
After September 30, 1999 887
--------
Total time deposits $194,114
========
</TABLE>
At September 30, 1996 and 1995, the aggregate amount of time deposits of
$100,000 or more amounted to $50.8 million and $39.6 million respectively.
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------
1996 1995 1994
------- ------- ------
(In thousands)
<S> <C> <C> <C>
NOWs and MMDAs $ 1,378 $ 1,233 $ 679
Savings 586 641 491
Certificates of Deposit 10,365 8,505 5,831
------- ------- ------
$12,329 $10,379 $7,001
======= ======= ======
</TABLE>
At September 30, 1996, approximately $497,000 in interest-bearing balances
in other banks and $25.0 million in investment securities were pledged to
secure public deposits and deposits of individuals.
(Continued)
36
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) FHLB Advances
-------------
FHLB advances consist of the following:
<TABLE>
<CAPTION>
September 30,
Maturity Interest -----------------
Date Rate 1996 1995
-------- --------- ------- -------
(In thousands)
<S> <C> <C> <C>
January 7, 1996 5.88% $ - $10,000
January 28, 1996 5.97% - 2,000
March 31, 1996 4.42% - 667
April 28, 1996 4.37% - 333
September 19, 1996 6.75% - 2,000
September 21, 1996 6.75% - 1,500
February 24, 1997 5.40% 500 500
March 11, 1997 5.45% 1,000 2,000
April 28, 1997 4.67% 250 500
June 1, 1997 5.01% 1,000 2,000
June 5, 1997 5.86% 5,000 5,000
July 27, 1997 5.25% 1,000 1,000
December 11, 1997 5.66% 5,000 -
January 29, 1998 5.32% 2,000 -
March 31, 1998 5.03% 400 600
April 28, 1998 4.98% 400 600
January 8, 1999 5.27% 10,000 -
February 25, 1999 5.30% 1,500 2,000
April 28, 1999 5.23% 500 667
July 27, 1999 5.82% 1,000 1,000
July 27, 2000 6.02% 1,000 1,000
January 29, 2001 5.69% 2,000 -
------- -------
$32,550 $33,367
======= =======
</TABLE>
At September 30, 1996, all stock in the FHLB, and a blanket lien on certain
first mortgage loans secured by one to four unit single-family dwellings
were pledged as collateral to secure these advances.
(Continued)
37
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) Income Taxes
------------
As discussed in note 1(k), First Palmetto adopted SFAS No. 109 as of
October 1, 1993. The cumulative effect of this change in accounting for
income taxes of $243,270 was determined as of October 1, 1993 and is
reported separately in the consolidated statement of income for the year
ended September 30, 1994.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $1,725 $1,295 $1,112
State 76 - 77
------ ------ ------
1,801 1,295 1,189
------ ------ ------
Deferred:
Federal (516) 3 (4)
State (90) 2 -
------ ------ ------
(606) 5 (4)
------ ------ ------
$1,195 $1,300 $1,185
====== ====== ======
</TABLE>
The income tax expense of First Palmetto for the years ended September 30,
1996, 1995, and 1994 was different from the amount computed by applying the
federal income tax rate to income before income taxes because of the
following:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Income tax expense at
federal rate $1,091 $1,244 $1,091
Increase in income taxes
resulting from:
State income tax expense,
net of federal income tax
benefit - 1 51
Other, net 104 55 43
------ ------ ------
$1,195 $1,300 $1,185
====== ====== ======
Effective tax rate 37.3% 35.5% 36.9%
====== ====== ======
</TABLE>
(Continued)
38
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at September
30, 1996, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
September 30,
---------------------
1996 1995
------ -----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 425 $ 289
Net fees deferred for financial
reporting 114 127
Accrued vacation pay 28 56
Special FDIC assessment 472 -
Other 12 26
------ -----
Total gross deferred tax assets 1,051 498
------ -----
Deferred tax liabilities:
FHLB stock basis over tax basis 315 315
Depreciation 32 40
Unrealized gains on securities 159 181
Other - -
------ -----
Total gross deferred tax liability 506 536
------ -----
Net deferred tax asset (liability) $ 545 $ (38)
====== =====
</TABLE>
No valuation allowance for deferred tax assets was required at September
30, 1996, 1995 and 1994. A portion of the change in the net deferred tax
asset/(liability) relates to the unrealized gains and losses on securities
available-for-sale. Under SFAS No. 115 the related deferred tax expense of
$23,000 has been recorded directly to shareholders' equity. The balance of
the change in the deferred tax asset/(liability) results from the current
period deferred tax expense of $606,000. The realization of net deferred
tax assets may be based on utilization of carrybacks to prior taxable
periods, anticipation of future taxable income in certain periods, and the
utilization of tax-planning strategies. Management has determined that it
is more likely than not that the net deferred tax asset can be supported
based upon these criteria.
Under the Internal Revenue Code (the Code), the Bank is allowed a special
bad debt deduction related to additions to tax bad debt reserves
established for the purpose of absorbing losses. The provisions of the
Code permit First Palmetto to deduct from taxable income an allowance for
bad debts based on the greater of a percentage (8%) of taxable income
before such deduction or actual loss experience. For all three years, the
percentage of taxable income method was used. For tax years beginning
after 1995, this method has been repealed. In future years, First Palmetto
must use the "Bank" experience method or the specific charge-off method.
First Palmetto is required to recapture into taxable income the portion of
it's bad debt reserves that exceeds its base year reserves. The amount of
bad debt reserves subject to recapture over six years for the Bank is $1.2
million. The base year reserves of $4.6 million will not be subject to
recapture unless the bad debt reserves are used for purposes other than to
absorb bad debt losses.
(Continued)
39
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Income tax returns for 1993 and subsequent years are subject to examination
by the taxing authorities.
(13) Stockholders' Equity
--------------------
Federal regulations require savings institutions to have minimum regulatory
tangible capital equal to 1.5% of adjusted total assets, a minimum core
capital ratio equal to 3.0% of adjusted total assets, and risk-based
capital equal to 8.0% of risk-weighted assets. As of September 30, 1996,
First Palmetto has regulatory tangible capital equal to 4.8% of total
adjusted assets, regulatory core capital equal to 5.0% of total adjusted
assets, and risk-based capital equal to 10.1% of risk-weighted assets.
The following table sets forth the Bank's capital position relative to its
various minimum regulatory capital requirements at September 30, 1996:
<TABLE>
<CAPTION>
Percent of
Amount Assets (a)
------- ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital $16,222 4.8%
Tangible Capital Requirement 5,106 1.5
------- ----------
Excess $11,116 3.3%
======= ==========
Core Capital $17,070 5.0%
Core Capital Requirement 10,237 3.0
------- ----------
Excess $ 6,833 2.0%
======= ==========
Risk-Based Capital (i.e., Core and
Supplementary Capital) $19,434 10.1%
Risk-Based Capital Requirement 15,377 8.0
------- ----------
Excess $ 4,057 2.1%
======= ==========
</TABLE>
(a) Percent of adjusted total assets for the purposes of the tangible and
core capital requirements and risk-weighted assets for the purpose
of the risk-based requirement.
(14) Pension Plan
------------
First Palmetto has a noncontributory pension plan for substantially all
employees. Contributions are 8% of each active participant's compensation
for the year plus 5.7% of each active participant's compensation for the
year over $10,000. First Palmetto's expense related to the plan amounted
to $300,000, $325,000, and $312,000 for the years ended September 30, 1996,
1995, and 1994, respectively.
(Continued)
40
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(15) Stock Option Plan
-----------------
Options under the First Palmetto Financial Corporation's 1990 Stock Option
Plan (the 1990 Plan) may be granted to employees at an exercise price equal
to the fair market value of the stock on the date of the grant and shall be
exercisable within ten years from the date of the grant. In the case of an
employee who owns more than 10% of First Palmetto's outstanding common
stock at the time the option is granted, the option price may not be less
than 110% of the fair market value of the shares on the date of the grant,
and shall not be exercisable after the expiration of five years from the
date it is granted. Option shares may be paid for in cash, shares of common
stock, or a combination of both. An aggregate of 66,459 additional shares
of common stock have been reserved for issuance under this plan. At
September 30, 1996, no options had been granted under this plan.
(16) Fair Value of Financial Instruments
-----------------------------------
Fair value estimates, methods, and assumptions as of September 30, 1996 and
1995 for First Palmetto are set forth below and are subject to the
following limitations.
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 no reflect any premium or discount that could result
from offering for sale at one time First Palmetto's entire holdings of a
particular financial instrument. Because no market exists for a portion of
First Palmetto's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, 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 assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business. The value of assets and liabilities that are
not considered financial assets or liabilities including the mortgage
banking operation, 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.
(Continued)
41
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
First Palmetto's fair value methods and assumptions are as follows:
- Cash and due from banks, interest-bearing balances in other banks,
certificates of deposit in other banks, accrued interest receivable,
and FHLB stock - the carrying value is a reasonable estimate of fair
value.
- Available-for-sale securities, investment securities, and mortgage-backed
securities - fair value is based on available quoted market prices or
quoted market prices for similar securities if a quoted market price is
not available.
- Loans - fair value for fixed and adjustable rate loans is estimated based
upon discounted future cash flows using discount rates comparable to
rates currently offered for such loans.
- Deposits - the fair value of time deposits is estimated using rates
currently offered for deposits of similar remaining maturities. The
fair value of all other deposit account types is the amount payable on
demand at year-end.
- FHLB advances - fair value is estimated based on the current rates
offered to First Palmetto for debt of the same remaining maturities.
- Commitments to extend credit and standby letters of credit - First
Palmetto's variable rate credit commitments are subject to minimal
interest rate risk exposure since the rates periodically (generally one
year or less) adjust to market. Fixed rate loan commitments do not
represent significant interest rate risk exposure as these loans are
typically sold.
Based on the limitations, methods, and assumptions noted above, the
estimated fair values of First Palmetto's financial instruments are as
follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
(In thousands)
<S> <C> <C>
September 30, 1996:
Financial assets:
Cash and due from banks $ 8,867 $ 8,867
Interest-bearing accounts in other banks 13,649 13,649
Certificates of deposit in other banks 399 399
Available-for-sale securities 997 997
Investment securities 46,607 47,096
Mortgage-backed securities 33,010 32,788
Loans 227,209 229,849
Accrued interest receivable 2,380 2,380
FHLB stock 2,122 2,122
Financial liabilities:
Deposits 288,157 288,415
FHLB advances 32,550 32,176
</TABLE>
(Continued)
42
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
(In thousands)
<S> <C> <C>
September 30, 1995:
Financial assets:
Cash and due from banks $ 10,194 $ 10,194
Interest-bearing accounts in other banks 2,785 2,785
Certificates of deposit in other banks 399 399
Available-for-sale securities 1,039 1,039
Investment securities 57,389 58,259
Mortgage-backed securities 39,410 39,420
Loans 198,373 200,602
Accrued interest receivable 2,538 2,538
FHLB stock 2,122 2,122
Financial liabilities:
Deposits 267,313 267,771
FHLB advances 33,367 33,183
</TABLE>
(Continued)
43
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) Summary of Quarterly Income Statement Information (Unaudited)
-------------------------------------------------------------
A summary of quarterly income statement information for the years ended
September 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Year ended September 30, 1996
---------------------------------------------------------
Three months ended
---------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Interest income $6,357 $6,521 $6,510 $6,628
Interest expense 3,568 3,585 3,480 3,553
----------- -------- ------- ------------
Net interest income 2,789 2,936 3,030 3,075
Provision for loan losses 75 145 75 590
----------- -------- ------- ------------
Net interest income after
provision for loan losses 2,714 2,791 2,955 2,485
Other income 508 776 480 491
Other expense 2,086 2,107 2,282 3,518
----------- -------- ------- ------------
Income (loss) before income taxes 1,136 1,460 1,153 (542)
Income taxes (benefit) 400 514 407 (126)
----------- -------- ------- ------------
Net income (loss) $ 736 $ 946 $ 746 $ (416)
=========== ======== ======= ============
Per share data
Net income (loss) $1.06 $1.37 $1.08 $(.61)
=========== ======== ======= ============
<CAPTION>
(Dollars in thousands, except per share amounts)
Year ended September 30, 1995
---------------------------------------------------------
Three months ended
---------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Interest income $5,152 $5,506 $5,857 $6,280
Interest expense 2,611 3,038 3,316 3,518
----------- -------- ------- ------------
Net interest income 2,541 2,468 2,541 2,762
Provision for loan losses 95 75 100 212
----------- -------- ------- ------------
Net interest income after
provision for loan losses 2,446 2,393 2,441 2,550
Other income 449 407 629 479
Other expense 1,797 1,962 2,192 2,185
----------- -------- ------- ------------
Income before income taxes 1,098 838 878 844
Income taxes 388 292 309 311
----------- -------- ------- ------------
Net income $ 710 $ 546 $ 569 $ 533
=========== ======== ======= ============
Per share data
Net income $1.02 $.79 $.83 $.76
=========== ======== ======= ============
</TABLE>
(Continued)
44
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(18) Parent Company Financial Data
-----------------------------
The primary asset of First Palmetto (the Parent Company) is its investment
in the Bank and its principal sources of income are dividends from the Bank
and equity in undistributed net income of the Bank. Certain regulatory and
other requirements restrict the lending of funds by the Bank to the Parent
Company and the amount of dividends which can be paid to the Parent
Company. At September 30, 1996, the Bank had available undivided profits
of approximately $3.3 million for payments of dividends without obtaining
prior regulatory approval.
The following is a summary of selected financial information for the Parent
Company:
Statements of Financial Condition
---------------------------------
<TABLE>
<CAPTION>
September 30,
-----------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
Assets
------
Cash on deposit with subsidiary $ 297 $ 285
Available-for-sale securities 997 1,039
Investment in subsidiary 19,063 18,185
------- -------
Total assets $20,357 $19,509
======= =======
Liabilities
Deferred taxes $ 149 $ 164
------- -------
Total liabilities 149 164
------- -------
Stockholders' equity
--------------------
Common stock 7 7
Additional paid-in capital 6,080 6,080
Retained earnings, substantially restricted 14,474 13,570
Unrealized gain on available-for-sale
securities 272 309
Treasury stock, at cost (625) (621)
------- -------
Total stockholders' equity 20,208 19,345
------- -------
Total liabilities and stockholders'
equity $20,357 $19,509
======= =======
</TABLE>
Statements of Income
--------------------
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Dividends from subsidiary $1,100 $ 950 $1,300
Equity in undistributed
net income of subsidiary 889 1,392 964
Other income 35 36 17
------ ------ ------
Total income 2,024 2,378 2,281
Expenses 12 20 14
------ ------ ------
Net income $2,012 $2,358 $2,267
====== ====== ======
(Continued)
</TABLE>
45
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------
1996 1995 1994
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,012 $ 2,358 $2,267
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed net
income of subsidiary (889) (1,392) (964)
------- ------- ------
Net cash provided by operating
activities 1,123 966 1,303
------- ------- ------
Cash flows from investing
activities:
Purchase of available-for-sale
securities - - (435)
Proceeds from sale of available-
for-sale securities - - 13
------- ------- ------
Net cash used in investing
activities - - (422)
------- ------- ------
Cash flows from financing
activities:
Proceeds from stock options
exercised - - 191
Purchase of common stock (4) (7) (2)
Dividends paid to stockholders (1,108) (970) (867)
------- ------- ------
Net cash used in financing
activities (1,112) (977) (678)
------- ------- ------
Net increase (decrease) in cash
and cash equivalents 11 (11) 203
Cash and cash equivalents at
beginning of year 285 296 93
------- ------- ------
Cash and cash equivalents at
end of year $ 296 $ 285 $ 296
======= ======= ======
Supplemental schedule of noncash
financing activities:
Decrease in unrealized gain
on available-for-sale
securities of subsidiary $ - $ - $ 322
Unrealized gain on available-
for-sale securities of
parent company (net of tax
effect of $20) (37) 172 108
</TABLE>
(Continued)
46
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(19) Commitments and Contingencies
-----------------------------
First Palmetto is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of the matters will not have a material effect on
First Palmetto's financial position, results of operations or liquidity.
The average Federal Reserve balance requirement as of September 30, 1996
was $923,000.
47
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
First Palmetto Financial Corporation
Camden, South Carolina
We have audited the accompanying consolidated statements of financial condition
of First Palmetto Financial Corporation and subsidiary (First Palmetto) as of
September 30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996. These consolidated financial statements are
the responsibility of First Palmetto'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 generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Palmetto
Financial Corporation and subsidiary at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1(k) to the consolidated financial statements, First
Palmetto adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," on October 1, 1993.
/s/ KPMG Peat Marwick, LLP
November 22, 1996
48
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
BOARD of DIRECTORS and EXECUTIVE OFFICERS
DIRECTORS EXECUTIVE OFFICERS
H. Davis Green, Jr. H. Davis Green, Jr.
Chairman of the Board of First Palmetto Chairman of the Board
H. Davis Green, Jr. Appraisals
Camden, South Carolina
Samuel R. Small Samuel R. Small
Chief Executive Officer, President and Chief
First Palmetto Savings Bank, F.S.B. Executive Officer
Camden, South Carolina
Steve G. Williams, Jr. Steve G. Williams, Jr.
Senior Vice President and Treasurer, Senior Vice-President and
First Palmetto Savings Bank, F.S.B. Treasurer
Camden, South Carolina
Pierce W. Cantey, Jr. Darlene H. Love
Managing Partner, Secretary
Carswell, Cantey, Burch and Associates, LLP
Camden, South Carolina
William R. Clyburn
President, Bill Clyburn Realty, Inc.
Kershaw, South Carolina
James L. Creed
Timber Company Executive (Retired),
D.J. Creed and Son, Inc.
Camden, South Carolina
Frank Goodale
Merchant, F.D. Goodale, Jeweler
Camden, South Carolina
Donald H. Holland
Attorney, Holland, DuBose and Cushman
Camden, South Carolina
Charlie E. Nash
President, Charlie E. Nash Insurance Agency, Inc.
Camden, South Carolina
Glenn G. Tucker
Publisher, Camden Chronicle-Independent
Camden, South Carolina
49
<PAGE>
DIRECTOR EMERITUS
H. B. Marshall, Jr.
Agent, New York Life Insurance Company
Camden, South Carolina
Austin M. Sheheen, Sr.
Business Executive (Retired), Sheheen Texaco
Camden, South Carolina
William F. Tripp, Jr.
Plant Manager (Retired), E. I. DuPont
Camden, South Carolina
50
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
First Palmetto Financial Corporation
407 DeKalb Street
Camden, South Carolina 29020
Telephone (803) 432-1416
STOCK TRANSFER AGENT
First Palmetto Savings Bank, F.S.B.
407 DeKalb Street
Camden, South Carolina 29020
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick
Suite 2800
Two First Union Center
Charlotte, North Carolina 28282-8290
LEGAL COUNSEL
Holland, DuBose and Cushman
718 Lafayette Avenue
Camden, South Carolina 29020
Savage, Royall and Sheheen
1111 Church Street
Camden, South Carolina 29020
BRANCH OFFICES
921 Bay Street, Beaufort, South Carolina 29902
104 East Church Street, Bishopville, South Carolina 29010
2310 North Broad Street, Camden, South Carolina 29020
3932 Forest Drive, Columbia, South Carolina 29206
9221 Two Notch Road, Columbia, South Carolina 29223
266 Cashua Street, Darlington, South Carolina 29532
Highway #1, Elgin, South Carolina 29045
10540 Two Notch Road, Elgin, South Carolina 29045
7327 St. Andrews Road, Irmo, South Carolina 29063
301 Hampton Street, Kershaw, South Carolina 29067
977 North Main Street, Lancaster, South Carolina 29721
Highway #1, Lugoff, South Carolina 29078
111 North Brooks Street, Manning, South Carolina 29102
210 North Pearl Street, Pageland, South Carolina 29728
SUBSIDIARY
First Palmetto Savings Bank, F.S.B.
407 DeKalb Street
Camden, South Carolina 29020
EMPLOYEES
At September 30, 1996 First Palmetto employed 137 persons.
51
<PAGE>
COMMON STOCK INFORMATION
- ------------------------
At September 30, 1996, First Palmetto had 693,010 shares of common stock
outstanding held by approximately 396 shareholders.
At the present time, there is no established public trading market in which
shares of First Palmetto's common stock are regularly traded, nor are there any
uniformly quoted prices for such shares. The following is the known range of
high and low sales prices for the common stock for the two most recent years.
<TABLE>
<CAPTION>
October 1, 1995 to October 1, 1994 to
Stock Data-Per Share September 30, 1996 September 30, 1995
- -------------------- ------------------ ------------------
<S> <C> <C>
Sales Price (Estimated)
High $27.00 $28.00
Low $33.00 $27.00
Book Value at September 30 $29.16 $27.90
Cash Dividend $ 1.60 $ 1.40
</TABLE>
FORM 10-K INFORMATION
- ---------------------
A copy of Form 10-K, including financial statements and schedules, as filed
with the Securities and Exchange Commission will be furnished without charge to
stockholders as of the record date upon written request made to First Palmetto's
corporate headquarters, attention Darlene Love, Secretary.
52
<PAGE>
EXHIBIT 22
Subsidiaries
<PAGE>
Subsidiaries
First Palmetto Financial Corporation ("First Palmetto") owns 100% of the
common stock of First Palmetto Savings Bank, F.S.B., a federally chartered stock
savings bank ("the Bank"). The Bank owns 100% of the common stock of each of
Palmetto State Service Corporation, a South Carolina corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 8,867
<INT-BEARING-DEPOSITS> 14,048
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 997
<INVESTMENTS-CARRYING> 79,617
<INVESTMENTS-MARKET> 0
<LOANS> 229,573
<ALLOWANCE> 2,364
<TOTAL-ASSETS> 344,547
<DEPOSITS> 288,157
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,632
<LONG-TERM> 32,550
0
0
<COMMON> 7
<OTHER-SE> 20,201
<TOTAL-LIABILITIES-AND-EQUITY> 344,547
<INTEREST-LOAN> 19,477
<INTEREST-INVEST> 3,411
<INTEREST-OTHER> 3,128
<INTEREST-TOTAL> 26,016
<INTEREST-DEPOSIT> 12,329
<INTEREST-EXPENSE> 14,186
<INTEREST-INCOME-NET> 11,830
<LOAN-LOSSES> 885
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,993
<INCOME-PRETAX> 3,207
<INCOME-PRE-EXTRAORDINARY> 2,012
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,012
<EPS-PRIMARY> 2.90
<EPS-DILUTED> 2.90
<YIELD-ACTUAL> 3.40
<LOANS-NON> 984
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,800
<CHARGE-OFFS> 885
<RECOVERIES> 246
<ALLOWANCE-CLOSE> 2,364
<ALLOWANCE-DOMESTIC> 2,364
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
