<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, 1997
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 (I.R.S. Employer
incorporation 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 November 5, 1997, 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 $15.0 million (374,816 shares at $40.00 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 November 5, 1997 there were issued and outstanding 708,010 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, 1997 (the "Annual Report"). (Parts I and II)
2. Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
(PART III).
<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. 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 fifteen branch
offices in other South Carolina locations in Beaufort, Bishopville, Camden,
Columbia, Darlington, Elgin, Irmo, Kershaw, Lancaster, Lexington, Lugoff,
Manning, Pageland and Pontiac.
2
<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.
Consolidated Financial Condition Data
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $372,948 $344,547 $323,183 $278,056 $226,370
Loans, net 252,336 227,209 198,373 163,649 158,551
Cash and investment securities (a) 74,030 70,519 71,807 72,826 34,232
Mortgage-backed securities 32,367 33,010 39,410 31,159 25,466
Deposits 320,769 288,157 267,313 225,417 189,334
Federal Home Loan Bank advances 27,233 32,550 33,367 31,000 17,000
Stockholders' equity, substantially
restricted 22,855 20,208 19,345 17,804 16,429
</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.
Consolidated Summary of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $27,902 $26,016 $22,794 $16,890 $15,497
Interest expense 15,025 14,186 12,483 8,213 7,376
------- ------- ------- ------- -------
Net interest income 12,877 11,830 10,311 8,677 8,121
Provision for loan losses 1,428 885 482 523 720
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 11,449 10,945 9,829 8,154 7,401
Other income 2,636 2,255 1,934 1,651 1,466
Other expense 8,846 9,993 8,105 6,597 5,958
Income tax expenses 1,909 1,195 1,300 1,184 1,137
Cumulative effect of change
in accounting principle - - - 243 -
------- ------- ------- ------- -------
Net income $ 3,330 $ 2,012 $ 2,358 $ 2,267 $ 1,772
======= ======= ======= ======= =======
Net income per share $ 4.80 $ 2.90 $ 3.40 $ 3.36 $ 2.65
======= ======= ======= ======= =======
Book value per share $ 32.28 $ 29.16 $ 27.90 $ 25.68 $ 24.51
======= ======= ======= ======= =======
Dividends per share $ 1.90 $ 1.60 $ 1.40 $ 1.25 $ 1.10
======= ======= ======= ======= =======
</TABLE>
3
<PAGE>
Financial Ratios
<TABLE>
<CAPTION>
For the year ended September 30,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Return on average assets (net income
divided by average total assets) .93% .61% .78%
Return on average equity (net income
divided by average equity) 15.68% 10.33% 13.17%
Dividend payout ratio (dividends declared
divided by net income) 40% 55% 41%
Average equity-to-average assets ratio (average
equity divided by average total assets) 6.00% 5.87% 5.90%
</TABLE>
LENDING ACTIVITIES
General. First Palmetto offers residential, construction, commercial real
-------
estate, installment and commercial business loans.
4
<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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
1-4 Family $129,244 51.2% $123,155 54.2% $106,264 53.6% $ 98,649 60.2% $ 98,602 62.2%
Commercial 78,147 31.0 62,043 27.3 56,489 28.4 43,347 26.6 39,688 25.0
Construction loans 8,462 3.4 8,695 3.8 5,431 2.7 6,716 4.1 4,891 3.1
Commercial business loans 13,525 5.4 12,578 5.5 10,055 5.1 5,906 3.6 3,970 2.5
Installment loans 29,131 11.5 27,847 12.3 24,376 12.3 14,064 8.6 14,847 9.4
Less:
Undisbursed loan proceeds 2,891 1.2 4,461 2.0 2,240 1.1 3,145 1.9 1,677 1.1
Deferred loan fees 273 .1 284 .1 202 .1 233 .2 290 .2
Allowance for loan losses 3,009 1.2 2,364 1.0 1,800 .9 1,655 1.0 1,480 .9
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $252,336 100.0% $227,209 100.0% $198,373 100.0% $163,649 100.0% $158,551 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
Large Loans. At September 30, 1997, First Palmetto's five largest loans
-----------
ranged from $660,000 to $1.0 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, 1997, 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 Due two
during the through five Due after five
year ending years after years after
September 30, September 30, September 30,
1998 1997 1997 Total
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Real Estate $ 109,183 $ 83,999 $ 15,679 $ 208,861
Commercial Business 7,495 4,453 370 12,318
Installment 18,951 15,119 369 34,439
------------- ------------- ------------- -------------
Total $ 135,629 $ 103,571 $ 16,418 $ 255,618
============= ============= ============= =============
</TABLE>
The following table sets forth, as of September 30, 1997, 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 $ 96,817 $ 2,861 $ 99,678
Commercial 4,733 90 4,823
Installment 15,488 - 15,488
------------- ------------- -------------
Total $ 117,038 $ 2,951 $ 119,989
============= ============= =============
</TABLE>
Residential Loans. Residential loans, which comprised 51.2% of the loan
-----------------
portfolio or $129.2 million at September 30, 1997, are generally underwritten to
the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. Charge-offs
for these type loans totaled $272,000 for the fiscal year ended September 30,
1997 and $63,000 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 $8.5 million or less
------------------
than 3.4% of the loan portfolio at September 30, 1997.
During fiscal 1997, First Palmetto originated $12.4 million of construction
loans, which represented 8.4% of its total loans originated during the period.
Substantially all of First Palmetto's construction loan portfolio at September
30, 1997 consisted of loans secured by single-family dwellings.
6
<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 construction 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 $78.1
million, or 31.0% of First Palmetto's net loan portfolio at September 30, 1997.
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, 1997 was
approximately $1.0 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 $1.3 million or 4.6% to
-----------------
$29.1 million at September 30, 1997. The increase during 1997 was consistent
with management's goal of increasing the consumer loan portfolio as a percentage
of total loans. In originating consumer loans, First Palmetto focuses 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 $182,000 and $220,000 for the fiscal years ended September 30, 1997 and
1996, 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 $12.6
-------------------------
million at September 30, 1996 to $13.5 million at September 30, 1997. As with
commercial real estate loans, these type loans generally 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, may be 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 $463,000
and $284,000 for the fiscal years ended September 30, 1997 and 1996,
respectively.
First Palmetto originates commercial business loans on a limited basis.
7
<PAGE>
The following table sets forth loans and loan participations, purchased and
sold by First Palmetto during the periods indicated
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
Residential $ 64,476 $ 71,530 $ 39,039 $ 71,653 $ 93,164
Residential construction 12,396 14,747 9,079 11,909 9,560
Commercial real estate,
including construction 50,960 35,235 43,248 35,977 16,711
Consumer 19,935 19,456 19,838 13,387 10,154
-------- -------- -------- -------- --------
Total loans originated $147,767 $140,948 $111,204 $132,926 $129,589
======== ======== ======== ======== ========
Loans purchased $ - $ - $ - $ - $ 101
======== ======== ======== ======== ========
Loans sold $ 11,764 $ 16,210 $ 9,227 $ 36,176 $ 41,933
======== ======== ======== ======== ========
</TABLE>
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 $981,000
at September 30, 1997 that would have been recorded if the loans had been
current and in accordance with their original terms, amounted to $60,274 at
September 30, 1997. Interest income recognized on non-accrual loans for the
year ended September 30, 1997 amounted to $37,792.
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 cost or fair value less estimated costs
to sell. At September 30, 1997, real estate owned in the amount of $323,000 was
secured by single family dwellings or land and $9,000 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, 1997, the allowance for loan losses totaled $3.0
million compared to $2.4 million at September 30, 1996. The allowance for loan
losses as a percentage of loans was 1.18% and 1.03% at September 30, 1997 and
1996, respectively. Asset quality has improved for the comparative years with
the ratio of non-performing assets to total assets decreasing to .35% at
September 30, 1997 from .43% and .57% at September 30, 1996 and 1995,
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 1998 will
approximate charge-offs for 1997.
8
<PAGE>
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, 1997, 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,
1997 which may be so classified in the near future because known information
about possible credit problems of borrowers causes management to have doubts as
to the ability of the borrowers to comply with the present loan repayment terms.
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,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,364 $ 1,800 $ 1,655 $ 1,480 $ 1,381
Loans charged off:
Residential 272 63 16 15 199
Consumer 182 220 200 220 80
Commercial 463 284 180 167 379
--------- --------- --------- --------- ---------
Total charge-offs 917 567 396 402 658
--------- --------- --------- --------- ---------
Recoveries
Residential - - 2 2 11
Consumer 54 52 30 30 4
Commercial 80 194 27 22 22
--------- --------- --------- --------- ---------
Total recoveries 134 246 59 54 37
--------- --------- --------- --------- ---------
Provision for loan losses 1,428 885 482 523 720
--------- --------- --------- --------- ---------
Balance at end of period $ 3,009 $ 2,364 $ 1,800 $ 1,655 $ 1,480
========= ========= ========= ========= =========
Ratio of net charge-offs to the
allowance for loan losses 26.0% 13.6% 18.7% 21.0% 42.0%
========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans outstanding during the period .33% .15% .19% .22% .38%
========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
The following table sets forth information regarding First Palmetto's non-
performing assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
Percentage Percentage Percentage
of of of
Total Total Total
Amount Assets Amount Assets Amount Assets
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans $ 981 .26% $ 984 .29% $ 823 .25%
Accruing loans 90 days or more past due - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Total 981 .26 984 .29 823 .25
---------- ---------- ---------- ---------- ---------- ----------
Other non-performing assets (a) 332 .09 480 .14 1,031 .32
---------- ---------- ---------- ---------- ---------- ----------
Troubled debt restructurings - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Total non-performing assets $ 1,313 .35% $ 1,464 .43% $ 1,854 .57%
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
1994 1993
------------------------ ------------------------
Percentage Percentage
of of
Total Total
Amount Assets Amount Assets
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-accrual loans $ 722 .26% $ 2,355 1.04%
Accruing loans 90 days or more past due - - - -
---------- ---------- ---------- ----------
Total 722 .26 2,355 1.04
---------- ---------- ---------- ----------
Other non-performing assets (a) 1,134 .41 850 .37
---------- ---------- ---------- ----------
Troubled debt restructurings - - 852 .38
---------- ---------- ---------- ----------
Total non-performing assets $ 1,856 .67% $ 4,057 1.79%
========== ========== ========== ==========
</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.
10
<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 20.7%, 23.1% and 27.6% of the total interest and
other revenues of First Palmetto in fiscal years 1997, 1996 and 1995,
respectively. At September 30, 1997, investments, mortgage-backed securities,
Federal Home Loan Bank ("FHLB") of Atlanta stock and interest-bearing deposits
in other banks totaled $101.7 million or 27.2% 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, 1997 was composed of adjustable rate mortgage (ARM) MBS of $7.5
million and fixed rate MBS of $24.9 million. The ARM MBS have weighted average
adjustment dates in the period from December, 1997 to June, 1998. 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 management discussion and
analysis in the annual report "ASSET and LIABILITY MANAGEMENT and INTEREST RATE
SENSITIVITY" for a discussion of First Palmetto's interest rate sensitivity risk
and the associated prepayment risk.
First Palmetto's MBS portfolio is classified as held to maturity and is
therefore carried at amortized cost. 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 carrying value at September 30, 1997.
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, 1997, 1996 and 1995.
The market values of First Palmetto's interest-bearing deposits, available-for-
sale securities, investment securities and mortgage-backed securities at
September 30, 1997 were $18.1 million, $907,000, $48.4 million and $32.7
million, respectively.
11
<PAGE>
The following table sets forth the carrying value of First Palmetto's
investments:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Interest-bearing deposits $ 18,484 $ 14,048 $ 3,184
========= ========= =========
Investment securities
U.S. Government and agency securities $ 47,918 $ 46,607 $ 57,389
Available-for-sale investments 907 997 1,039
--------- --------- ---------
Total investments $ 48,825 $ 47,604 $ 58,428
========= ========= =========
Mortgage-backed securities
FHLMC and FNMA $ 32,241 $ 32,842 $ 39,254
Other 126 168 156
--------- --------- ---------
$ 32,367 $ 33,010 $ 39,410
========= ========= =========
FHLB of Atlanta stock $ 2,030 $ 2,122 $ 2,122
========= ========= =========
</TABLE>
The following table sets forth the amount and maturities of First
Palmetto's investments at September 30, 1997:
<TABLE>
<CAPTION>
Due after Due after
Due in one year five years Due
one year through through after
or less five years ten years ten years Total
---------- ---------- ---------- ---------- ----------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C>
Available-for-sale investments $ 907 $ - $ - $ - $ 907
Investment securities 15,909 32,009 - - 47,918
Mortgage-backed securities - - - 32,367 32,367
---------- ---------- ---------- ---------- ----------
Total $ 16,816 $ 32,009 $ 0 $ 32,367 $ 81,192
========== ========== ========== ========== ==========
Weighted average yield 6.49% 6.70% 0% 6.70% 6.66%
========== ========== ========== ========== ==========
</TABLE>
12
<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, 1997, First Palmetto had $32.7 million of fixed-rate
certificates with remaining terms of one year or longer, or 10.2% of total
deposits. Substantially all time deposits renew at maturity. As of September 30,
1997, 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, 1997, First Palmetto had no brokered deposits.
Deposit Flow. The following table sets forth the changes in dollar
------------
amounts of deposits in the types of accounts offered by First Palmetto between
the dated indicated.
<TABLE>
<CAPTION>
Balance at Percent Balance at Percent Balance at Percent
September of September of Increase September of Increase
30, 1997 Deposits 30, 1996 Deposits (Decrease) 30, 1995 Deposits (Decrease)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW checking
and noninterest
bearing
checking $ 59,981 18.6% $ 45,447 15.8% $ 14,534 $ 45,226 16.9% $ 221
Money market
deposit 19,786 6.2 26,539 9.2 (6,753) 18,534 6.9 8,005
Savings 22,038 6.9 22,057 7.7 (19) 23,920 8.9 (1,863)
Certificates
of deposit 218,964 68.3 194,114 67.3 24,850 179,633 67.3 14,481
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 320,769 100.0% $ 288,157 100.0% $ 32,612 $ 267,313 100.0% $ 20,844
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
13
<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,
1997 1996 1995
----------------------- ----------------------- -----------------------
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 $ 56,923 2.61% $ 54,503 2.53% $ 45,956 2.68%
Savings deposits 22,151 2.54 23,181 2.53 22,939 2.79
Time deposits 203,052 5.60 183,357 5.65 165,717 5.13
---------- ---------- ---------- ---------- ---------- ----------
$ 282,126 4.76% $ 261,041 4.72% $ 234,612 4.42%
========== ========== ========== ========== ========== ==========
</TABLE>
The following table sets forth First Palmetto's time deposits classified
by rates as of dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Less than 3.00% $ 21 $ 33 $ 65
3.00% - 4.99% 4,547 14,974 17,715
5.00% - 6.99% 212,678 176,152 152,994
7.00% - 9.99% 1,718 2,955 8,859
---------- ---------- ----------
$ 218,964 $ 194,114 $ 179,633
========== ========== ==========
</TABLE>
The following table sets forth the amount and maturities of First
Palmetto's time deposits at September 30, 1997.
<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 $ 9 $ 11 $ - $ 21 2.78%
3.00% - 4.99% 4,436 52 2 57 4,547 4.65
5.00% - 6.99% 180,314 26,459 5,905 - 212,678 5.71
7.00% - 9.99% 1,529 4 30 155 1,718 7.25
---------- ---------- ----------- ----------- ---------- ----------
$ 186,280 $ 26,524 $ 5,948 $ 212 $ 218,964 5.65%
========== ========== =========== =========== ========== ==========
</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, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity of deposit
- - -------- ------------
(In thousands)
<S> <C>
Three months or less $ 7,056
Over three through six months 11,842
Over six through twelve months 10,543
Over twelve months 5,147
------------
Total $ 34,588
============
</TABLE>
14
<PAGE>
In the year ended September 30, 1997, First Palmetto had new deposits of
$1.2 billion, withdrawals of $1.2 billion and interest credited to the deposit
accounts of $10.8 million resulting in a net increase of $32.6 million. New
deposits volume includes rollovers of existing accounts.
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, 1997, the Bank had $27.2 million outstanding in FHLB
advances of which $21.2 million had fixed interest rates and $6.0 million had
variable interest rates. The advances are to mature as follows:
<TABLE>
<CAPTION>
Weight
Average
Interest
----------
(Dollars in thousands)
<S> <C> <C>
Maturing in the year ended September 30, 1998 $ 4,900 5.47%
Maturing in the year ended September 30, 1999 12,333 5.56%
Maturing in the year ended September 30, 2000 1,000 6.02%
Maturing in the year ended September 30, 2001 2,000 5.69%
Maturing in the year ended September 30, 2004 7,000 6.49%
---------- ----------
$ 27,233 5.81%
========== ==========
</TABLE>
The following table sets forth certain information regarding First
Palmetto's FHLB advances:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances
Balance at
September 30, $ 27,233 5.81% $ 32,550 5.55% $ 33,367 5.73%
Average during year 28,906 5.56 33,202 5.59 37,314 5.64
Maximum month-end
balance during year 32,550 - 36,867 - 64,500 -
</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."
15
<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, 1997, the net book value of the Bank's investments in stock, unsecured loans
and conforming loans in its service corporation was $181,000.
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 1997, PSSC had a net loss of $20,064. At September
30, 1997, First Palmetto had $500,000 invested in PSSC's common stock, and
negative retained earnings in PSSC amounting to $318,883. 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 124 full time employees at
September 30, 1997. 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.
16
<PAGE>
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.
Pending Legislation. Legislation currently pending before the United
-------------------
States Congress would, if enacted, require all federal savings institutions,
such as the Bank, to convert to a national or state bank or savings bank
charger. In addition, the proposed legislation would cause First Palmetto to be
regulated not as a savings and loan holding company, but rather as a bank
holding company or as a "financial services" holding company (a new regulatory
classification that would be created by the legislation). If the pending
legislation were adopted in its current form, it would eliminate certain
advantages now enjoyed by federal savings associations, such as unrestricted
interstate branching. First Palmetto cannot predict whether, or in what form,
the proposed legislation will be enacted. However, based on the provisions of
the currently pending bill, First Palmetto does not believe that the enactment
of such legislation would have a material adverse effect on its business.
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.
At September 30, 1997, First Palmetto's tangible capital ratio was
5.15%, its core capital ratio was 5.32% and its risk-based capital ratio was
10.39%. At that date, First Palmetto had $2.0 million of qualifying intangible
assets and $181,000 of investments in and extensions of credit to subsidiaries
engaged in activities not permissible for national banks.
17
<PAGE>
The following table reconciles the Bank's stockholders' equity under
generally accepted accounting principles at September 30, 1997 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 $ 21,302
Less:
Unrealized gain on certain available-for-sale securities
Deductible investments in and extensions of credit to subsidiary 181
Deductible intangible assets 2,044
Disallowed servicing assets and deferred tax assets 11
----------
Tangible capital 19,066
Add:
Grandfathered core deposit intangible 670
----------
Core capital 19,736
Add:
Allowances for loan losses 2,698
----------
Total capital $ 22,434
==========
Tangible capital as a percentage of adjusted total assets 5.15%
==========
Core capital as a percentage of adjusted total assets 5.32%
==========
Total capital as a percentage of risk-weighted assets 10.39%
==========
</TABLE>
The following table sets forth First Palmetto's capital position
relative to its various minimum regulatory capital requirements at September 30,
1997.
<TABLE>
<CAPTION>
Percent of
Amount Assets (a)
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $ 19,066 5.15%
Tangible capital requirement 5,556 1.50
---------- ----------
Excess $ 13,510 3.65%
========== ==========
Core capital $ 19,736 5.32%
Core capital requirement 11,132 3.00
---------- ----------
Excess $ 8,604 2.32%
========== ==========
Total capital (i.e., Core and
supplementary capital) $ 22,434 10.39%
Risk-based capital requirement 17,266 8.00
---------- ----------
Excess $ 5,168 2.39%
========== ==========
</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.
18
<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, 1997 of $2.0 million. As of September
30, 1997, First Palmetto had outstanding advances of $27.2 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) qualifying mortgage-related securities and mortgage loans,
equal to the monthly average of not less than a specified percentage (currently
4%) of their net withdrawable short-term savings deposits plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. At September 30, 1997, First Palmetto exceeds the required
liquidity percentage.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA")
----------------------------
requires all savings institutions to meet one of two Qualified Thrift Lender
("QTL") tests or suffer a number of sanctions, including restrictions on
activities. To qualify as a QTL, a savings institution must either (i) be deemed
a "domestic building and loan association" under the Internal Revenue Code (the
("Code") by maintaining at least 60% of its total assets in specified types of
assets, including cash, certain government securities, loans secured by and
other assets related to residential real property, educational loans and
investments in premises of the institution or (ii) satisfy the statutory QTL
test set forth in the HOLA by maintaining at least 65% of its "portfolio assets"
in certain "Qualified Thrift Investments." For purposes of the HOLA QTL test,
portfolio assets are defined as total assets less the sum of intangibles,
property used in the business of the savings institution and liquidity
investments in an amount not exceeding 20% of total assets. Qualified Thrift
Investments consist of 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 (iii) loans to small businesses, student loans and
credit card loans and (iv) subject to a 20% of portfolio assets limit, of an
institution's investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small business in "credit needy" areas.
19
<PAGE>
A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months. An initial failure to qualify as
a QTL results in a number of sanctions, including the imposition of certain
operating restrictions and a restriction on obtaining additional advances from
its FHLB. If a savings institution does not requalify as a QTL within the three-
year period after it fails the QTL test, it would be required to terminate any
activity not permissible for a national bank and repay as promptly as possible
any outstanding advances from its FHLB. In addition, the holding company of such
an institution would be required to register as a bank holding company with the
Federal Reserve Board. At September 30, 1997, the Bank qualified as a QTL.
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, 1997, First Palmetto's loans-to-one borrower limit was
$3.4 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 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
20
<PAGE>
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 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.
As a result of the recapitalization of the SAIF by the 1996 Act, the
FDIC reduced the insurance assessment rate for SAIF-assessable deposits for
periods following October 1, 1996. For calendar 1997, the FDIC set the effective
insurance assessment rates for SAIF-insured institutions, such as First
Palmetto, at zero to 27 basis points. In addition, SAIF-insured institutions
will be required, until December 31, 1999, to pay assessments to the FDIC at an
annual rate of between 6.0 and 6.5 basis points to help fund interest payments
on bonds issued by the FICO. During such period, BIF member banks will be
assessed for payment of the FICO obligations at one-fifth the annual rate
applicable to SAIF-member institutions. After December 31, 1999, BIF and SAIF
members will be assessed at the same rate (currently estimated at approximately
2.4 basis points) to service the FICO obligations.
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.
21
<PAGE>
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 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
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
22
<PAGE>
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.
The table below presents First Palmetto's capital position, which is
considered to be "well capitalized", at September 30, 1997, 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 $ 19,066 5.15%
Tangible equity requirement 7,408 2.00
---------- ----------
Excess $ 11,658 3.15%
========== ==========
Tier 1 or leverage capital $ 19,736 5.32%
Tier 1 or leverage capital requirement 14,816 4.00
---------- ----------
Excess $ 4,920 1.32%
========== ==========
Tier 1 risk-based capital $ 22,434 10.39%
Tier 1 risk-based capital requirement 8,633 4.00
---------- ----------
Excess $ 13,801 6.39%
========== ==========
Risk-based capital $ 22,434 10.39%
Risk-based capital requirement 17,266 8.00
---------- ----------
Excess $ 5,168 2.39%
========== ==========
</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 $4.4 million of transaction accounts,
and reserves equal to 3% must be maintained on the next $49.3 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.
23
<PAGE>
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 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, 1997, 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 provided that the Bank continues to
satisfy the QTL test. Legislation currently pending in the United Stated
Congress would, if enacted, restrict the business activities of unitary savings
and loan holding companies; however, the legislation in its current form would
grandfather the current absence of restrictions on business activities for
unitary savings and loan holding companies, like First Palmetto, that are in
existence on the bill's date of enactment.
24
<PAGE>
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.
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, Section 22(h) requires that loans to
directors, executive
25
<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
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, prior to enactment of recent legislation under the Small Business Job
Protection Act of 1996 ("SBJPA-96") savings institutions such as the Bank which
met certain definitional tests and other conditions prescribed by the Code may
have benefited 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 were separated into "qualifying real
property loans," which generally were 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 was based on actual loss
experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans was 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 years
ended September 30, 1996 and 1995, First Palmetto 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 was 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 was subject to
certain limitations. First, the amount added to the reserve for losses on
qualifying real property loans would not exceed the amount necessary to increase
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 could not 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 exceeded the sum of surplus,
undivided profits and reserves at the beginning of the
26
<PAGE>
year. Finally, the percentage bad debt deduction under the percentage of taxable
income method was reduced by the deduction for losses on nonqualifying loans.
Under SBJPA-96 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 available
to institutions with total assets of less than $500 million. Under the recent
legislation, the Bank will also be required to recapture into income its
"applicable excess reserve", 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 recapture may be deferred for
the 1996 and 1997 tax years provided that the Bank meets the "residential loan
requirement" for both tax years. The Bank has met this requirement tax for the
1996 tax year, deferring recapture of the "applicable excess reserve" for the
1996 tax year. 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 recapture as a result of a savings association conversion to a commercial
bank charter or acquisition.
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. Earnings per Share. In February, 1997, the Financial
------------------
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS 128 applies to entities
with publicly traded common stock or potential common stock and is effective for
financial statements for periods ending after December 15, 1997, including
interim periods. SFAS 128 simplifies the standards for computing earnings per
share ("EPA") previously found in APB Opinion 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all companies with complex capital structures and requires
a reconciliation of the numerator and denominator of basic EPS computation to
the numerator and denominator of the diluted EPS computation. The Bank's present
computation of diluted EPS under APB Opinion 15 is applied against a materiality
test of 3 percent. For financial statements issued by the Bank after December
15, 1997, the materiality test will no longer apply and the Bank will report
basic and diluted EPS for each period presented as well as the further
reconciliations required by SFAS 128. Although earlier application is not
permitted, SFAS 128 will require restatement of all prior-period EPS data
presented.
Disclosure of Information about Capital Structure. In February, 1997,
the FASB also issued SFAS No. 129, "Disclosure of Information about Capital
Structure." The requirements for ease requirements for companies, such as the
Bank, that were subject to the previously existing requirements. It applies to
all entities and is effective for financial statements issued for periods ending
after December 15, 1997.
Reporting Comprehensive Income. In June, 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." The purpose of SFAS 130 is to address
concerns over the practice of reporting elements of comprehensive income
directly in equity. This SFAS requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial
27
<PAGE>
statement that is displayed in equal prominence with the other financial
statements. This statement is effective for periods beginning after December 15,
1997, and is not expected to have a material impact on the Bank. Comparative
financial statements are required to be reclassified to reflect the provisions
of this statement. The Bank will adopt the provisions of this statement. The
Bank will adopt the provisions of this SFAS for fiscal year 1998.
Disclosures about Segments of an Enterprise and Related Information. In
June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement applies to all public
entities. The provisions of SFAS 131 require certain disclosures regarding
material industry segments within an entity. This statement is effective for
periods beginning after December 15, 1997. SFAS 131 is not expected to have a
material impact on the Bank.
28
<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, 1997.
<TABLE>
<CAPTION>
Year Leased Approximate
Facility or Square Net Book
Office Location Operations Owned Footage Value
- - --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Main Office
407 DeKalb Street 1963 Owned 10,337 $ 559,699
Camden, S.C. 29020
Beaufort Branch Office
921 Bay Street 1995 Leased 2,300 $ 20,890
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 $ 298,845
Camden, S.C. 29020
Camden Operations Center
1050 Broad Street 1997 Owned 6,400 $ 320,679
Camden, S.C. 29020
Columbia Branch Offices
3932 Forest Drive 1988 Owned 4,950 $ 580,117
Columbia, S.C. 29206
9221 Two Notch Road 1980 Leased 2,200 $ -
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 $ 22,033
Camden, S.C. 29020 (Expires 2002,
with ten year
renewal option)
Elgin Branch Office
Highway #1 1986 Leased 1,200 $ 50,431
Elgin, S.C. 29045 (Expires 1996,
with ten year
renewal option)
Irmo Branch Office
7327 St. Andrews Road 1996 Owned 2,200 $ 518,947
Irmo, S.C. 29063
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Year Leased Approximate
Facility 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 $ 380,928
Kershaw, S.C. 29067
Lancaster Branch Office
977 North Main Street 1973 Leased 3,040 $ -
Lancaster, S.C. 29721 (Expires 1998,
with two year
renewal option)
Lexington Branch Office
5321 Sunset Boulevard 1997 Owned 2,950 $ 606,496
Lexington, S.C. 29072
Lugoff Branch Office
Highway #1 South 1969 Owned 3,900 $ 953,633
Lugoff, S.C. 29078
Manning Branch Office
111 N. Brooks Street 1995 Owned 4,000 $ 208,952
Manning, SC 29102
Pageland Branch Office
201 N. Pearl Street 1994 Owned 1,300 $ 343,395
Pageland, S.C. 29728
Pontiac Branch Office
10540 Two Notch Road 1989 Leased 1,300 $ 79,250
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 1997.
30
<PAGE>
PART II
Item 5. Market for 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.
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, 1997 and 1996, Consolidated Statements of Income for the three
years ended September 30, 1997, Consolidated Statements of Stockholders' Equity
for the three years ended September 30, 1997, and Consolidated Statements of
Cash Flows for the three years ended September 30, 1997, 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.
31
<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 1998 Annual
Meeting of Stockholders (the "Proxy Statement") 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 section 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.
32
<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, 1997 and 1996
3. Consolidated Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995
4. Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1997 1996 and 1995
5. Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995
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)
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 1997 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)
33
<PAGE>
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.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of December 15,
1997.
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 15, 1997.
<TABLE>
<S> <C>
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
</TABLE>
35
<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
36
<PAGE>
EXHIBIT 13
Annual Report
<PAGE>
ANNUAL REPORT
September 30, 1997
FIRST PALMETTO FINANCIAL CORPORATION
<PAGE>
TABLE of CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter to Stockholders 1
FIRST PALMETTO FINANCIAL CORPORATION
- - ------------------------------------
The Company 2
Selected Consolidated Financial and Other Data 2-3
Management's Discussion and Analysis of Financial Condition and Results of Operations 4-15
Consolidated Financial Statements
Consolidated Statements of Financial Condition 16
Consolidated Statements of Income 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19-20
Notes to Consolidated Financial Statements 21-41
Independent Auditors' Report 42
Board of Directors and Executive Officers 43
Corporate Information 44
Common Stock Information 45
</TABLE>
<PAGE>
Dear First Palmetto Stockholder:
We are happy to report to you that First Palmetto again had a very successful
year. Our earnings were a record $3.33 million or $4.80 per share. This is
compared to our previous year's earnings of $2 million or $2.90 per share. You
may recall from the previous year's report, however, that those earnings were
impacted by a one-time recapitalization fee charged by the F.D.I.C. that had an
$813,000 negative effect on earnings.
Financial highlights for fiscal 1997 were:
Assets increased to $372.9 million from $344.5 million, an increase of
8.2%.
Loans increased to $252.3 million from $227.2 million, an increase of 11%.
Our dividend paid was $1.90 per share up from $1.60 per share paid in the
previous year.
We have continued our ongoing process of looking for opportunities for growth
and during the fiscal 1997, we opened our new office in Lexington. We also
acquired a new office location in North Myrtle Beach which was opened December
1, 1997.
We have continued our commitment to staying in the forefront technologically and
we completed and opened our new operations center at the corner of Broad and
DeKalb streets in Camden. These new quarters will give us the space and ability
to continue to fulfill our intention to insure your institution is ready to meet
the technological challenges of the next century.
We have been able to maintain high quality in our asset portfolio and our
nonperforming assets at September 30, 1997, were $1.31 million or .35% of total
assets compared to $1.46 million or .43% of total assets at September 30, 1996.
Our loan loss reserves were $3.0 million at September 30, 1997, compared to $2.4
million at September 30, 1996.
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 by staying
actively involved in the communities we serve.
Very truly yours,
Samuel R. Small, President and
Chief Executive Officer
1
<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 fifteen branch offices in other
South Carolina locations of Beaufort, Bishopville, Camden, Columbia, Darlington,
Elgin, Irmo, Kershaw, Lancaster, Lexington, 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,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $372,948 $344,547 $323,183 $278,056 $226,370
Loans, net 252,336 227,209 198,373 163,649 158,551
Cash and investment securities (a) 74,030 70,519 71,807 72,826 34,232
Mortgage-backed securities 32,367 33,010 39,410 31,159 25,466
Deposits 320,769 288,157 267,313 225,417 189,334
Federal Home Loan Bank
("FHLB") advances 27,233 32,550 33,367 31,000 17,000
Stockholders' equity, substantially
restricted 22,855 20,208 19,345 17,804 16,429
</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.
2
<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,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $27,902 $26,016 $22,794 $16,890 $15,497
Interest expense 15,025 14,186 12,483 8,213 7,376
------- ------- ------- ------- -------
Net interest income 12,877 11,830 10,311 8,677 8,121
Provision for loan losses 1,428 885 482 523 720
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 11,449 10,945 9,829 8,154 7,401
Other income 2,636 2,255 1,934 1,651 1,466
Other expense 8,846 9,993 8,105 6,597 5,958
------- ------- ------- ------- -------
Income before income taxes 5,239 3,207 3,658 3,208 2,909
Income taxes 1,909 1,195 1,300 1,184 1,137
Cumulative effect of change
in accounting principle - - - 243 -
------- ------- ------- ------- -------
Net income $ 3,330 $ 2,012 $ 2,358 $ 2,267 $ 1,772
======= ======= ======= ======= =======
Financial Ratios
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on assets (net income divided
by average total assets) .93% .61% .78% .90% .81%
Return on equity (net income divided
by average equity) 15.68% 10.33% 13.17% 13.25% 11.27%
Equity-to-assets ratio (average equity
divided by average total assets) 6.00% 5.87% 5.90% 6.79% 7.17%
Net income per share $ 4.80 $ 2.90 $ 3.40 $ 3.36 $ 2.65
Book value per share $ 32.28 $ 29.16 $ 27.90 $ 25.68 $ 24.51
Dividends per share $ 1.90 $ 1.60 $ 1.40 $ 1.25 $ 1.10
</TABLE>
3
<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, 1997, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1996
Net income for the fiscal year ended September 30, 1997, was $3.3 million as
compared to $2.0 million for the preceding fiscal year. Net income increased by
$1.3 million or 65.5%.
The primary reason for the increase in net income was a one-time special
assessment by the FDIC during the fiscal year ending September 30, 1996, in the
amount of $1.3 million ($813,000 net of income tax) to recapitalize the Savings
Association Insurance Fund (SAIF). This one-time charge resulted in total
insurance premiums for the 1996 fiscal year in the amount of $1.8 million as
compared to $289,000 for the current fiscal year.
Net interest income for fiscal 1997 equaled $12.9 million as compared to
$11.8 million for the fiscal year ended September 30, 1996. The increase of
8.9% amounted to $1.1 million. Other income for fiscal 1997 was $2.6 million as
compared to $2.3 million for fiscal 1996 while other expense for the respective
fiscal years were $8.8 million and $10.0 million. A more detailed discussion of
the comparative years follows.
Net interest income increased by $1.1 million or 8.9%. The primary reason
for the increase in net interest income was an increase in average interest-
earning assets for fiscal 1997 of approximately $23.7 million. The yield on
interest-earning assets was relatively constant, decreasing only .03%. Average
cost of funds increased during the year from 4.82% during the year ended
September 30, 1996 to 4.83% during the year ended September 30, 1997. Interest
rate spread decreased to 3.51% as compared to 3.55% for the previous year.
Total interest income for fiscal 1997 was $27.9 million, up $1.9 million or
7.2% from $26.0 million for fiscal 1996. 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 decreased slightly to 8.34% for
fiscal 1997 versus 8.37% for fiscal year 1996.
Total interest expense for fiscal 1997 was $15.0 million compared to $14.2
million for fiscal 1996. The increase of $839,000 represented a 5.9% 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 remained stable at 4.83% for the 1997 period as compared to 4.82% for the
1996 period. Average interest-bearing liabilities were $311.0 million at
September 30, 1997 as compared to $294.2 million at September 30, 1996.
4
<PAGE>
Average Balances, Interest and Average Yields
- - ---------------------------------------------
The following table sets forth certain information relating to First
Palmetto's average balance sheets and reflects 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, 1997. 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,
-----------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $240,224 $21,576 8.98% $212,955 $19,477 9.15% $178,475 $15,949 8.94%
Interest-earning deposits 15,411 1,000 6.49 9,619 694 7.21 7,856 485 6.17
Investment securities (2) 46,632 3,163 6.78 51,882 3,411 6.57 58,997 3,684 6.24
Mortgage-backed securities 32,249 2,163 6.71 36,365 2,434 6.69 39,604 2,676 6.76
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets 334,516 27,902 8.34 310,821 26,016 8.37 284,932 22,794 8.00
------- ---- ------- ---- ------- ----
Noninterest-earning assets 19,061 21,127 18,286
-------- -------- --------
Total assets $353,577 $331,948 $303,218
======== ======== ========
<CAPTION>
At September
1997
----------------------
Balance Rate
-------- ----
(Dollars in Thousands)
<S> <C> <C>
Interest-earning assets: $252,336 8.84%
18,484 5.39
Loans (1) 48,825 6.63
Interest-earning deposits 32,367 6.70
Investment securities (2) -------- ----
352,012 8.13
Mortgage-backed securities ----
Total interest-earning 20,936
assets --------
$372,948
Noninterest-earning assets ========
Total assets
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes available-for-sale securities.
5
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
liabilities:
Interest-bearing demand
deposits (1) $ 56,923 $ 1,487 2.61% $ 54,503 $ 1,378 2.53% $ 45,956 $ 1,233 2.68%
Savings deposits 22,151 562 2.54 23,181 586 2.53 22,939 641 2.79
Time deposits 203,052 11,369 5.60 183,357 10,365 5.65 165,717 8,505 5.13
FHLB borrowings 28,906 1,607 5.56 33,202 1,857 5.59 37,314 2,104 5.64
-------- ------- ---- -------- -------- ------- -------- -------- -------
Total interest-bearing
liabilities 311,032 15,025 4.83 294,243 14,186 4.82 271,926 12,483 4.59
-------- ------- ---- -------- -------- ------- -------- -------- -------
Noninterest-bearing
liabilities:
Noninterest demand
deposits 19,886 15,585 10,864 -
Other 2,149 2,645 2,524 -
-------- -------- --------
Total liabilities 333,067 312,473 285,314
Stockholders' equity 20,510 19,475 17,904
-------- -------- --------
Total liabilities and
stockholders' equity $353,577 $331,948 $303,218
======== ======== ========
Net interest income $12,877 $11,830 $10,311
======= ======== ========
Interest rate spread 3.51% 3.55% 3.41%
==== ======= =======
Net yield on average
interest-earning
assets 3.85% 3.81% 3.62%
==== ======= =======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 1.08% 1.06% 1.05%
==== ======= =======
At September
1997
---------------------
Balance Rate
------- ----
(Dollars in thousands)
<S> <C> <C>
Interest-bearing
liabilities:
Interest-bearing demand
deposits (1) $ 57,222 2.72%
Savings deposits 22,038 2.54
Time deposits 218,964 5.65
FHLB borrowings 27,233 5.81
-------- ----
Total interest-bearing
liabilities 325,457 4.92
-------- ----
Noninterest-bearing
liabilities:
Noninterest demand
deposits 22,545
Other 1,882
--------
Total liabilities 349,884
Stockholders' equity 23,064
--------
Total liabilities and
stockholders' equity $372,948
========
Net interest income
Interest rate spread 3.21%
====
Net yield on average
interest-earning
assets
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities
</TABLE>
(1) Includes NOW's and MMDA
6
<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,
----------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------ --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------ --------------------------------
Volume Rate Total Volume Rate Total
--------- ---------- ------- ------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $2,472 $(373) $2,099 $3,119 $409 $3,528
Investment securities (350) 102 (248) (457) 184 (273)
Mortgage-backed securities (275) 4 (271) (218) (24) (242)
Other 397 (91) 306 118 91 209
------ ----- ------ ------ ---- ------
Total interest-earning assets 2,244 (358) 1,886 2,562 660 3,222
------ ----- ------ ------ ---- ------
Interest expense:
Deposits 999 90 1,089 1,286 664 1,950
FHLB advances (239) (11) (250) (230) (17) (247)
------ ----- ------ ------ ---- ------
Total interest-bearing liabilities 760 79 839 1,056 647 1,703
------ ----- ------ ------ ---- ------
Net interest income $1,484 $(437) $1,047 $1,506 $ 13 $1,519
====== ===== ====== ====== ==== ======
</TABLE>
7
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The provision for loan losses for fiscal 1997 was $1.4 million compared to
$885,000 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
$783,000 during the fiscal year ended September 30, 1997, as compared to
$321,000 for the year ended September 30, 1996. The balance in the allowance
for loan losses at September 30, 1997 was $3.0 million compared to $2.4 million
at September 30, 1996. The allowance for loan losses as a percentage of loans
was 1.18% and 1.04% at September 30, 1997 and 1996, 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, history of charge-offs, general
economic conditions that may affect borrowers ability to repay and the value of
collateral.
Other income for fiscal 1997 was $2.6 million as compared to $2.3 million for
fiscal 1996. Other income remained relatively stable with the increase being
primarily attributable to gain on sale of investments in the amount of $254,000.
Other expenses for fiscal 1997 was $8.8 million compared to $10.0 million for
fiscal 1996, a decrease of $1.2 million or 11.5%. The primary decrease was in
federal insurance premiums. During the year ended September 30, 1996, 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. Deposit insurance
premiums during the 1997 year were lower as a result of the recapitalization of
the SAIF. Insurance, telephone, postage, supplies and other increased primarily
due to increased expenses as a result of the opening of the Lexington branch in
fiscal 1997. Tabular comparisons of broad expense categories for fiscal 1997
compared to fiscal 1996 are as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------------
1997 1996
----------- ------
(In thousands)
<S> <C> <C>
Compensation and related benefits $3,979 $3,658
Occupancy and data processing fees 2,130 1,848
Federal deposit and other insurance premiums 367 1,877
Amortization of intangible assets 579 769
Telephone, postage, supplies and other 1,791 1,841
------ ------
Totals $8,846 $9,993
====== ======
</TABLE>
The effective tax rate was 36.4% for the year ended September 30, 1997 as
compared to 37.3% for the year ended September 30, 1996. See Note 12 to the
Notes to Consolidated Financial Statements.
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 one-time special assessment by
the FDIC in the amount of $1.3 million ($813,000 net of income tax). 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.
8
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
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 each of the respective years
was $2.3 million as compared to $1.9 million while other expense for the
respective fiscal years was $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 was an increase in average interest-
earning assets for fiscal 1996 by approximately $26.0 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. The 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 for fiscal 1996 as
compared to $271.9 million for fiscal 1995.
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.
9
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Other expense 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, 1996 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 expense categories for fiscal 1996 compared to fiscal 1995 were
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
Insurance, 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.
FINANCIAL CONDITION
Total assets at September 30, 1997, were $372.9 million as compared to $344.5
million at September 30, 1996, an increase of $28.2 million or 8.19%.
Loans receivable at September 30, 1997, increased by $25.1 million to $252.3
million as compared to $227.2 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 $32.6 million to $320.8 million at September 30, 1997,
compared to $288.2 million at the previous year end as First Palmetto targeted
several markets for growth by offering highly competitive rates.
Stockholders' equity increased to $22.9 million at September 30, 1997
compared to $20.2 million at September 30, 1996. Increases were $3.3 million
from net income, the sale of common stock for $600,000 and an increase in
unrealized gains on available-for-sale securities in the amount of $33,000.
Decreases were cash dividends of approximately $1.3 million.
10
<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 equal to at least 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 qualifying 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. 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, 1997, the Bank's tangible capital ratio was 5.15%, core
capital ratio was 5.32% and its risk-based capital ratio was 10.39%. At that
date, the Bank had $670,000 of qualifying intangibles and $181,000 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.
First Palmetto's liability sensitive cumulative gap position for one year at
September 30, 1997 was (5.96%). 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.
11
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The following table presents First Palmetto's asset/liability gap ratios as of
September 30, 1997.
<TABLE>
<CAPTION>
Six months
At September 30, 1997 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) $111,584 $60,292 $66,309 $28,404 $21,123 $287,712
Investment securities (2) 7,885 8,930 23,965 8,045 - 48,825
Other interest-earning assets (3) 18,484 - - - - 18,484
-------- -------- ------- ------- ------- --------
Total interest-earning assets 137,953 69,222 90,274 36,449 21,123 355,021
-------- -------- ------- ------- ------- --------
Interest-bearing liabilities
Interest-bearing deposits 137,880 78,895 54,483 8,597 18,369 298,224
Borrowings 5,200 6,367 9,666 6,000 - 27,233
-------- -------- ------- ------- ------- --------
Total interest-bearing liabilities 143,080 85,262 64,149 14,597 18,369 325,457
-------- -------- ------- ------- ------- --------
Sensitivity gap
Period $(5,127) $(16,040) $26,125 $21,852 $2,754 $29,564
======== ======== ======= ======= ======= ========
Cumulative $ (5,127) $(21,167) $ 4,958 $26,810 $29,564 $29,564
======== ======== ======= ======= ======= ========
Gap as a percentage of
interest-earning assets
Period (1.44)% (4.52)% 7.36% 6.16% 0.78% 8.34%
======== ======== ======= ======= ======= ========
Cumulative (1.44)% (5.96)% 1.40% 7.56% 8.34% 8.34%
======== ======== ======= ======= ======= ========
</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.
12
<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 amortizing 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, and selling them 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 lives of liabilities through the use of Federal Home Loan Bank
advances or other extended maturity obligations.
(6) Offer premium rates on certificates of deposit with matures greater than
twelve months.
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.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Bank manages
other risks, as in credit quality and liquidity risk, in the normal course of
business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the Bank's
financial condition and results of operations. Other types of market risks,
such as foreign currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Bank's business activities.
The Bank's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase in
interest rates may adversely impact the Bank's earnings to the extent that the
interest rates on interest-earning assets and interest-bearing liabilities do
not change at the same speed, to the same extent or on the same basis. The Bank
monitors the impact of changes in interest rates on its net interest income
using several tools. One measure of the Bank's exposure to differential changes
in interest rates between assets and liabilities is shown in the Bank's
asset/liability gap ratio table. Another measure, required to be performed by
OTS-regulated institutions, is the test specified by OTS Thrift Bulletin No. 13,
"Interest Rate Risk Management" ("TB-13"). This test measures the impact on net
interest income and net portfolio value on an immediate change in interest rates
in 100 basis point increments. Net portfolio value is defined as the net
present value of assets, liabilities and off-balance sheet contracts. At
September 30, 1997, the Bank's TB-13 calculations, based on the information and
assumptions produced for the analysis, suggested that a 200 basis point increase
in rates would reduce net interest income over a twelve-month period by $1.1
million and reduce net portfolio value by 6% while a 200 basis point decline in
rates would increase net interest income over a twelve-month period by $860,000
and would have no effect on net portfolio value.
13
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Bank could undertake in response to changes in interest rates.
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, 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.
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 $32.6 million, the sale of loans on the secondary market in the
amount of $11.8 million, from the maturities of investment securities in the
amount of $20.0 million, and from principal collections of mortgage-backed
securities of $5.2 million. These funds were used to fund net loans of $38.8
million, repay FHLB advances $12.3 million and to purchase investment securities
in the amount of $21.1 million.
These and other factors resulted in cash and cash equivalents increasing $2.3
million during the year ended September 30, 1997.
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, 1997 is in excess of regulatory
requirements of 5% and will remain so in the upcoming fiscal year.
NEW ACCOUNTING STANDARDS
Earnings per Share. In February, 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS 128 applies to entities with publicly traded
common stock or potential common stock and is effective for financial statements
for periods ending after December 15, 1997, including interim periods. SFAS 128
simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion 15, "Earnings Per Share." It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic
14
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
and diluted EPS on the face of the income statement for all companies with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Bank's present computation of diluted EPS under
APB Opinion 15 is applied against a materiality test of 3 percent. For
financial statements issued by the Bank after December 15, 1997, the materiality
test will no longer apply and the Bank will report basic and diluted EPS for
each period presented as well as the further reconciliations required by SFAS
128. Although earlier application is not permitted, SFAS 128 will require
restatement of all prior-period EPS data presented.
Disclosure of Information about Capital Structure. In February, 1997, the
FASB also issued SFAS No. 129, "Disclosure of Information about Capital
Structure." The purpose of SFAS 129 is to consolidate existing disclosure
requirements for ease of retrieval. SFAS 129 contains no change in disclosure
requirements for companies, such as the Bank, that were subject to the
previously existing requirements. It applies to all entities and is effective
for financial statements issued for periods ending after December 15, 1997.
Reporting Comprehensive Income. In June, 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." The purpose of SFAS 130 is to address
concerns over the practice of reporting elements of comprehensive income
directly in equity. This SFAS requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with the
other financial statements. This statement is effective for periods beginning
after December 15, 1997, and is not expected to have a material impact on the
Bank. Comparative financial statements are required to be reclassified to
reflect the provisions of this statement. The Bank will adopt the provisions of
this SFAS for fiscal year 1998.
Disclosures about Segments of an Enterprise and Related Information. In
June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement applies to all public
entities. The provisions of SFAS 131 require certain disclosures regarding
material industry segments within an entity. This statement is effective for
periods beginning after December 15, 1997. SFAS 131 is not expected to have a
material impact on the Bank.
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If uncorrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
The Bank uses an outside service bureau to process customer service records
and monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations. Based on
conversations with the service bureau, the Bank does not expect that the cost of
addressing any Year 2000 issue will be a material event or uncertainty that
would cause its reported financial information not to be necessarily indicative
of future operating results or future financial condition, or that the costs or
consequences of incomplete or untimely resolution of any Year 2000 issue
represent a known material event or uncertainty that is reasonably likely to
affect its future financial results, or cause its reported financial information
not to be necessarily indicative of future operating results or future financial
condition.
15
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Cash and due from banks $ 6,721 $ 8,867
Interest-bearing deposits in other banks 18,085 13,649
Certificates of deposit in other banks 399 399
Available-for-sale securities (cost of $422 and $595 at
September 30, 1997 and 1996, respectively) 907 997
Investment securities (market value of $48,430 and
$47,096 at September 30, 1997 and 1996, respectively) 47,918 46,607
Mortgage-backed securities held for investment
(market value of $32,693 and $32,788 at
September 30, 1997 and 1996, respectively) 32,367 33,010
Loans, net of allowance for loan losses of
$3,009 in 1997 and $2,364 in 1996 252,336 227,209
Accrued interest receivable 2,726 2,380
Real estate acquired in settlement of loans 332 480
Stock in the Federal Home Loan Bank (FHLB) 2,030 2,122
Premises and equipment 6,071 5,117
Intangible assets 2,044 2,623
Prepaid expenses and other assets 1,012 1,087
-------- --------
Total assets $372,948 $344,547
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $320,769 $288,157
FHLB advances 27,233 32,550
Accrued expenses and other liabilities 2,091 3,632
-------- --------
Total liabilities 350,093 324,339
-------- --------
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, 748,014 shares issued 7 7
Additional paid-in capital 6,680 6,080
Retained earnings, substantially restricted 16,488 14,474
Unrealized gain on available-for-sale securities 305 272
Treasury stock, at cost (40,004 shares in 1997 and 1996) (625) (625)
-------- --------
Total stockholders' equity 22,855 20,208
-------- --------
Commitments
Total liabilities and stockholders' equity $372,948 $344,547
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ----------------
Interest income: (Dollars in thousands, except earnings per share data)
<S> <C> <C> <C>
Loans $21,576 $19,477 $15,949
Investment securities 3,163 3,411 3,684
Mortgage-backed securities 2,163 2,434 2,676
Other 1,000 694 485
------- ------- -------
Total interest income 27,902 26,016 22,794
------- ------- -------
Interest expense:
Deposits 13,418 12,329 10,379
FHLB advances 1,607 1,857 2,104
------- ------- -------
Total interest expense 15,025 14,186 12,483
------- ------- -------
Net interest income 12,877 11,830 10,311
Provision for loan losses 1,428 885 482
------- ------- -------
Net interest income after provision for loan losses 11,449 10,945 9,829
------- ------- -------
Other income:
Service charges 1,205 1,167 948
Loan servicing 524 513 555
Gain on sales of loans 173 103 39
Gain on sale of investments 254 - -
Gain on sale of fixed assets - - 203
Miscellaneous 480 472 189
------- ------- -------
Total other income 2,636 2,255 1,934
------- ------- -------
Other expense:
Compensation and related benefits 3,979 3,658 3,544
Net occupancy 1,233 1,027 898
Data processing fees 897 821 782
Federal deposit and other insurance premiums 367 1,877 689
Telephone, postage, and supplies 709 655 582
Amortization of intangible assets 579 769 441
Miscellaneous 1,082 1,186 1,169
------- ------- -------
Total other expense 8,846 9,993 8,105
------- ------- -------
Income before income taxes 5,239 3,207 3,658
Income taxes 1,909 1,195 1,300
------- ------- -------
Net income $ 3,330 $ 2,012 $ 2,358
======= ======= =======
Earnings per share:
Net income $ 4.80 $ 2.90 $ 3.40
======= ======= =======
Weighted average number of shares outstanding 693,174 693,044 693,378
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statments
17
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 1997, 1996, and 1995
<TABLE>
<CAPTION>
Unrealized
gain on
Additional available- Total
Common paid-in Retained for-sale Treasury stockholders'
stock capital earnings securities, net stock equity
------ ---------- -------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at (Dollars in thousands)
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,
net - - - 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,
net - - - (37) - (37)
------ ---------- -------- --------------- -------- -------
Balance at
September 30, 1996 7 6,080 14,474 272 (625) 20,208
------ ---------- -------- --------------- -------- -------
Sale of common stock - 600 - - - 600
Net income - - 3,330 - - 3,330
Cash dividends ($1.90 per
share) - - (1,316) - - (1,316)
Change in unrealized gain on
available-for-sale securities,
net - - - 33 - 33
------ ---------- -------- --------------- -------- -------
Balance at
September 30, 1997 $ 7 $ 6,680 $ 16,488 $ 305 $ (625) $22,855
====== ========== ======== =============== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,330 $ 2,012 $ 2,358
Adjustments to reconcile net income to net cash
provided by operating activities
Decrease in deferred loan fees, net (10) (27) (30)
Accretion and amortization of discounts and
premiums, net (250) (203) (196)
Provision for loan losses 1,428 885 482
Gain on sale of available-for-sale securities (254) - -
Gain on sale of real estate acquired in settlement
of loans, net (15) (74) (2)
Gain on sale of premises and equipment - - (203)
Depreciation 468 353 288
Amortization of intangible assets 579 769 441
Proceeds from sale of loans 11,764 16,210 9,227
Originations and principal repayments of loans
held for sale, net (11,591) (16,107) (9,110)
(Increase) decrease in accrued interest receivable (346) 158 (744)
(Increase) decrease in prepaid expenses and other assets 69 (755) 8
Increase (decrease) in accrued expenses and other
liabilities (1,573) 581 (852)
-------- -------- --------
Net cash provided by operating activities 3,599 3,802 1,667
-------- -------- --------
Cash flows from investing activities:
Net decrease in certificates of deposit in other banks - - 300
Proceeds from maturities of investment securities 20,000 12,995 9,002
Purchases of investment securities (21,079) (2,000) (6,882)
Proceeds from sale of available-for-sale securities 426 - -
Purchases of mortgage-backed securities (4,563) - (13,542)
Principal collected on mortgage-backed securities 5,206 6,379 5,273
Net increase in loans (27,226) (30,405) (35,734)
Proceeds from sale of real estate acquired in
settlement of loans 671 1,233 656
Improvements made to real estate held for
development and sale - - (5)
</TABLE>
(Continued)
19
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------------- --------
Cash flows from investing activities, continued: (In thousands)
<S> <C> <C> <C>
Proceeds from sale of FHLB stock 93 - 1,103
Purchases of FHLB stock - - (1,103)
Proceeds from sale of premises and equipment - - 283
Capital expenditure for premises and equipment (1,497) (1,489) (805)
Retirements of premises and equipment 82 107 -
Purchase of financial institution - - 29,000
-------- -------- --------
Net cash used in investing activities (27,887) (13,180) (12,454)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 32,611 20,844 10,321
Proceeds from FHLB advances 7,000 21,000 63,000
Repayment of FHLB advances (12,317) (21,817) (60,633)
Sale (purchase) of common stock 600 (4) (6)
Cash dividends (1,316) (1,108) (970)
-------- -------- --------
Net cash provided by financing activities 26,578 18,915 11,712
-------- -------- --------
Net increase in cash and cash equivalents 2,290 9,537 925
Cash and cash equivalents at beginning of year 22,516 12,979 12,054
-------- -------- --------
Cash and cash equivalents at end of year $ 24,806 $ 22,516 $ 12,979
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 14,829 $ 14,009 $ 12,222
Income taxes 2,231 1,744 1,198
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to real estate acquired in
settlement loans 508 607 551
Increase in unrealized gain on available-for-sale
Securities, net 33 (37) 160
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997, 1996, and 1995
(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, 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997 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).
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.
(Continued)
21
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1997) of deposit accounts (net of loans
on deposit accounts) plus short-term borrowings. First Palmetto was in
compliance with such regulation at September 30, 1997.
(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.
(f) Provision for Loan Losses
-------------------------
The allowance for loan losses is the amount considered adequate for
inherent 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, history of charge-
offs 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.
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.
(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 and subsequently
reduced for estimated selling costs. Costs relating to the development
and improvement of the property are capitalized, whereas, those relating
to holding the property are charged to expense.
(Continued)
22
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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.
(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. If the delinquent payments are made, the loan to accrual
status. Interest income on impaired loans is recognized on a cash basis.
(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
------------
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.
(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.
(Continued)
23
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
(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) Earnings Per Share
------------------
Earnings 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
------------------------
As of October 1, 1996, the Bank adopted the provisions of 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.
Currently, the Bank is capitalizing 1% of loans sold with servicing
rights retained and is amortizing this asset over five years using the
straight-line method. The remaining balance is included in other assets.
As of October 1, 1996, the Bank adopted the provisions of 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)
24
<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 Bank has elected to continue
to use the intrinsic value method in APB 25 for financial statement
purposes. No additional disclosure under SFAS No. 123 is required for
the Bank at this time because no stock options have been granted (See
Footnote 15).
As of January 1, 1997, the Bank adopted the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement applies prospectively to
transactions occurring after December 31, 1996, and establishes new
standards that focus on control whereby after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities
when extinguished. In December, 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." SFAS No. 127 defers for one year the effective date of
portions of SFAS No. 125 that address secured borrowings and collateral
for all transactions. Additionally, SFAS No. 127 defers for one year the
effective date of transfers of financial assets that are part of
repurchase agreements, securities lending and similar transactions. The
adoption of SFAS No. 125 as amended by SFAS No. 127 did not have a
material impact on the Bank's results of operations or financial
positions.
(2) Available-for-Sale Securities
-----------------------------
Available-for-sale securities consist of the following:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized Market
Cost Gains Value
------------------- -------------- ------
September 30, 1997: (In thousands)
<S> <C> <C> <C>
Equity securities $422 $485 $907
=================== ============= ======
September 30, 1996:
Equity securities $595 $402 $997
=================== ============= ======
</TABLE>
During the year ended September 30, 1997, gross proceeds from the sale of
available-for-sale securities was $426,000 which resulted in a gain of
$254,000.
(Continued)
25
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment Securities
---------------------
Investment securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- -------------- ----------- -------
September 30, 1997: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations due:
Within 12 months $15,909 $ 62 $ - $15,971
Beyond 12 months but
within 5 years 32,009 450 - 32,459
------- ---- ---------- -------
$47,918 $512 $ - $48,430
======= ==== ========== =======
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
======= ==== ========== =======
</TABLE>
During 1997, 1996 and 1995, investment securities with total amortized cost
of $16.0 million, $13.0 million and $9.0 million, respectively, matured or
were sold within 90 days of maturity. Proceeds from these maturities and
sales were $20.0 million, $13.0 million and $9.0 million which resulted in
gross realized losses of $5,156 and $30,555 for 1996 and 1995,
respectively.
At September 30, 1997, investment securities with amortized cost of $27.0
million were pledged to secure public deposits and deposits of individuals.
(4) Mortgage-Backed Securities
--------------------------
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1997: Cost Gains Losses Value
--------- ---------- ----------- -------
FHLMC participation certificates (In thousands)
<S> <C> <C> <C> <C>
(6% - 11%, due 2008 through 2023) $29,305 $287 $(85) $29,507
FNMA mortgage-backed securities
(6.50% - 7.80%, due 2003 through
2022) 2,936 120 - 3,056
GNMA mortgage-backed securities 126 4 - 130
------- ---- ---------- -------
(8%, due 2001 through 2002) $32,367 $411 $(85) $32,693
======= ==== ========== =======
</TABLE>
(Continued)
26
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1996: Cost Gains Losses Value
--------- -------------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C>
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
======= ==== ========== =======
</TABLE>
There were no sales of mortgage-backed securities during 1997, 1996 or
1995.
(5) Loans
-----
<TABLE>
<CAPTION>
Loans consist of the following:
September 30,
-------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Real estate mortgage (principally single
family dwellings, 1-4 units) $128,602 $122,759
Commercial real estate 78,147 62,043
Real estate construction 8,462 8,695
Commercial 13,525 12,578
Installment 29,131 27,847
Loans held for sale 642 396
Undisbursed proceeds on real estate construction (2,891) (4,461)
Deferred loan fees, net (273) (284)
Allowance for loan losses (3,009) (2,364)
-------- --------
$252,336 $227,209
======== ========
</TABLE>
Loans serviced for others approximated $128.9 million, $136.5 million, and
$140.1 million at September 30, 1997, 1996, and 1995, respectively.
The following summarizes the changes in the allowance for loan losses for
the years ended September 30, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $2,364 $1,800 $1,655
Provision for loan losses 1,428 885 482
Loan charge-offs (917) (567) (396)
Recoveries 134 246 59
------ ------ ------
Balance at end of year $3,009 $2,364 $1,800
====== ====== ======
(Continued)
</TABLE>
(Continued)
27
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
At September 30, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $1,545,000 and $478,000, respectively. There
was no specific allowance for credit losses related to the impaired loans as
of September 30, 1997 and 1996. The average recorded investment in impaired
loans during the years ended September 30, 1997 and 1996 was $396,000 and
$493,000, respectively. Interest income recognized on impaired loans
amounted to $27,000 and zero for the years ended September 30, 1997 and 1996,
respectively. 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 $981,000, $984,000, and
$823,000, at September 30, 1997, 1996, and 1995, respectively. Foregone
interest income related to nonaccrual loans for the years ended September 30,
1997, 1996 and 1995 amounted to $60,274, $94,868 and $58,622, respectively.
Interest income recognized on nonaccrual loans for the years ended September
30, 1997, 1996 and 1995 amounted to $37,792, $52,032 and $45,747,
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. The
following summarizes the activity of loans to the officers, directors and
employees at September 30, 1997. (In thousands)
<TABLE>
<CAPTION>
<S> <C>
Loan balances, September 30, 1996 $2,550
New loans originated 1,163
Loan repayment (930)
------
Loan balances, September 30, 1997 $2,783
======
</TABLE>
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.
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,
1997 and 1996, preapproved but unused lines of credit for loans totaled
approximately $18.0 million and $18.4 million, standby letters of credit
approximated $2.7 million and $2.5 million, and outstanding loan commitments
aggregated $1.9 million and $945,000, respectively. Of these loan
commitments, $916,000 and $247,000 are at variable rates and $948,000 and
$698,400 are at fixed rates at September 30, 1997 and 1996, respectively.
The interest rates for these commitments at September 30, 1997 range from
6.50% to 9.50%. These commitments, including undisbursed proceeds on
construction loans, represent no more than the normal lending risk that First
Palmetto commits to its borrowers. 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.
(Continued)
28
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1997, 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 the current real estate
market and general economic conditions.
(6) Accrued Interest
----------------
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
(In thousands)
Loans $1,661 $1,527
Investment securities 853 634
Mortgage-backed securities 212 219
------ ------
$2,726 $2,380
====== ======
</TABLE>
At September 30, 1997 and 1996, the allowance for uncollected interest
amounted to $17,696 and $31,779, respectively.
(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)
1997 1996
------ -----
<S> <C> <C>
Undeveloped land $ 48 $ 70
Single family residences 275 162
Commercial property 9 248
----- -----
$ 332 $ 480
===== =====
</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, its historical
cost basis, subject to certain limitations set by the FHLB.
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation. Federal deposit insurance expense amounted to
approximately $288,000, $1.8 million and $618,000 for the years ended
September 30, 1997, 1996, and 1995, 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.
(Continued)
29
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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, 1997:
Land and improvements $2,612 $ - $2,612
Office buildings and improvements 3,995 1,233 2,762
Leasehold improvements 850 676 174
Furniture, fixtures and equipment 886 411 475
Automobiles 76 28 48
------ ------ ------
$8,419 $2,348 $6,071
====== ====== ======
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
====== ====== ======
</TABLE>
First Palmetto leases various equipment and real estate 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>
1998 $131
1999 72
2000 46
2001 28
2002 25
Later years 122
----
$424
====
</TABLE>
Rent expense was $133,002, $143,443, and $121,267 for the years ended
September 30, 1997, 1996, and 1995, respectively.
(Continued)
30
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) Deposits
--------
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
September 30,
------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Noninterest bearing checking $ 22,545 $ 15,627
NOWs (1.75% in 1997 and 1996) 37,436 29,820
MMDAs (3.00% in 1997 and 1996) 19,786 26,539
Savings (2.50% in 1997 and 1996) 22,038 22,057
-------- --------
101,805 94,043
-------- --------
Time:
Less than 3.00% 21 33
3.00% to 4.99% 4,547 14,974
5.00% to 6.99% 212,678 176,152
7.00% to 9.99% 1,718 2,955
-------- --------
218,964 194,114
-------- --------
$320,769 $288,157
======== ========
Weighted average cost of deposits
(as of dates indicated above) 4.76% 4.65%
======== ========
</TABLE>
A summary of time deposits by maturity as of September 30, 1997 follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
October 1, 1997 - September 30, 1998 $186,280
October 1, 1998 - September 30, 1999 26,524
After September 30, 1999 6,160
--------
Total time deposits $218,964
========
</TABLE>
At September 30, 1997 and 1996, the aggregate amount of time deposits of
$100,000 or more amounted to $34.6 million and $50.8 million, respectively.
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
NOWs and MMDAs $ 1,487 $ 1,378 $ 1,233
Savings 562 586 641
Time 11,369 10,365 8,505
------- ------- -------
$13,418 $12,329 $10,379
======= ======= =======
</TABLE>
At September 30, 1997, approximately $497,000 in interest-bearing balances
in other banks and $27.0 million in investment securities were pledged to
secure public deposits and deposits of individuals.
(Continued)
31
<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 1997 1996
-------- -------- ------- -------
(In thousands)
<S> <C> <C> <C>
February 24, 1997 5.40% $ - $ 500
March 11, 1997 5.45% - 1,000
April 28, 1997 4.67% - 250
June 1, 1997 5.01% - 1,000
June 5, 1997 5.86% - 5,000
July 27, 1997 5.25% - 1,000
December 11, 1997 5.66% 2,500 5,000
January 29, 1998 5.32% 2,000 2,000
March 31, 1998 5.03% 200 400
April 28, 1998 4.98% 200 400
January 8, 1999 5.57% 10,000 10,000
February 25, 1999 5.30% 1,000 1,500
April 28, 1999 5.23% 333 500
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 2,000
July 4, 2004 6.49% 7,000 -
------- -------
$27,233 $32,550
======= =======
</TABLE>
At September 30, 1997, 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.
(12) Income Taxes
------------
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $1,629 $1,725 $1,295
State 42 76 -
------ ------ ------
1,671 1,801 1,295
------ ------ ------
Deferred:
Federal 211 (516) 3
State 27 (90) 2
------ ------ ------
238 (606) 5
------ ------ ------
$1,909 $1,195 $1,300
====== ====== ======
</TABLE>
(Continued)
32
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The income tax expense of First Palmetto for the years ended September 30,
1997, 1996, and 1995 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,
--------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Income tax expense at federal rate $1,781 $1,091 $1,244
Increase in income taxes resulting from:
Other, net 128 104 56
------ ------ ------
$1,909 $1,195 $1,300
====== ====== ======
Effective tax rate 36.4% 37.3% 35.5%
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at September
30, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
September 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets: (In thousands)
Provision for loan losses $1,116 $ 872
Net fees deferred for financial reporting 94 114
Accrued vacation pay 26 28
Special FDIC assessment - 472
Other 21 12
------ ------
Total gross deferred tax assets 1,257 1,498
------ ------
Deferred tax liabilities:
Tax bad debts in excess of base year 447 447
FHLB stock basis over tax basis 315 315
Depreciation 29 32
Unrealized gains on securities 179 159
------ ------
Total gross deferred tax liability 970 953
------ ------
Net deferred tax asset $ 287 $ 545
====== ======
</TABLE>
A portion of the change in the net deferred tax asset relates to the
unrealized gains on securities available-for-sale. Under SFAS No. 115 the
related deferred tax expense of $20,000 has been recorded directly to
shareholders' equity. The balance of the change in the deferred tax asset
results from the current period deferred tax expense of $238,000.
No valuation allowance for deferred tax assets was required at September
30, 1997 and 1996. 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.
(Continued)
33
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Prior to recent legislation enacted by Small Business Job Protection Act
of 1996, the Bank was 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 permitted the Bank 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 1995 and 1996, the percentage of taxable income method was
used. For tax years beginning after fiscal 1996, this method has been
repealed. In 1997, First Palmetto used 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 or the Bank fails
to meet the tax definition of a Bank.
Income tax returns for 1993 and subsequent years are subject to
examination by the taxing authorities.
(13) Regulatory Capital Requirements
-------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject
to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to total assets (as defined), and of risk-based capital (as defined) to
risk-based assets (as defined). Management believes, as of September 30,
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1997, the Bank was categorized as well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well as the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I core ("leverage") ratios as set forth in the
table. There are no conditions or events since that date that management
believes have changed the Bank's category.
(Continued)
34
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To be well
Capitalized under
For capital adequacy prompt corrective
Actual purposes action provisions
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of September 30,
1997:
Tangible capital
(to total assets) $19,066 5.15% $ 5,556 1.50%
Core capital
(to total assets) 19,736 5.32 11,132 3.00 $18,553 5.00%
Tier I capital
(to risk-based assets) 22,434 10.39 - - 12,955 6.00
Risk-based capital
(to risk-based assets 22,434 10.39 17,266 8.00 21,583 10.00
As of September 30,
1996:
Tangible capital
(to total assets) $16,222 4.80% $ 5,106 1.50%
Core capital
(to total assets) 17,070 5.00 10,237 3.00 $17,070 5.00%
Tier I capital
(to risk-based assets) 19,484 10.10 - - 11,545 6.00
Risk-based capital
(to risk-based assets 19,434 10.10 15,377 8.00 19,242 10.00
</TABLE>
Under the framework, the Bank's capital levels allow the Bank to accept
brokered deposits without prior approval from regulators.
OTS capital distributions specify the conditions relative to an
institution's ability to pay dividends. The new regulations permit
institutions meeting fully phased-in capital requirements and subject only
to normal supervision to pay out 100 percent of net income to date over
the calendar year and 50 percent of surplus capital existing at the
beginning of the calendar year without supervisory approval. The
regulations state that an institution subject to more stringent
restrictions may make request through OTS to be subject to the new
regulations. The Bank has received approval from the OTS to be subject to
the requirements of the new regulations.
The Bank may not declare or pay a cash dividend on, or purchase , any of
its common stock, if the effect thereof would cause the capital of the
Bank to be reduced below the minimum regulatory capital requirements.
(Continued)
35
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(14) Pension Plan
------------
First Palmetto has a noncontributory defined contribution 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 $330,000, $300,000, and $325,000
for the years ended September 30, 1997, 1996, and 1995, respectively.
(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, 1997, no options had been granted under this
plan.
(16) Fair Value of Financial Instruments
-----------------------------------
Fair value estimates, methods, and assumptions as of September 30, 1997
and 1996 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)
36
<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 with 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, 1997:
Financial assets:
Cash and due from banks $ 6,721 $ 6,721
Interest-bearing accounts in other banks 18,085 18,085
Certificates of deposit in other banks 399 399
Available-for-sale securities 907 907
Investment securities 47,918 48,430
Mortgage-backed securities 32,367 32,693
Loans 252,336 255,524
Accrued interest receivable 2,726 2,726
FHLB stock 2,030 2,030
Financial liabilities:
Deposits 320,769 321,019
FHLB advances 27,233 26,964
</TABLE>
(Continued)
37
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<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)
38
<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, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Three months ended
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Interest income $6,746 $6,771 $7,051 $7,334
Interest expense 3,650 3,633 3,734 4,008
------ ------ ------ ------
Net interest income 3,096 3,138 3,317 3,326
Provision for loan losses 125 365 225 713
------ ------ ------ ------
Net interest income after
provision for loan losses 2,971 2,773 3,092 2,613
Other income 736 793 527 580
Other expense 2,366 2,238 2,253 1,989
------ ------ ------ ------
Income before income taxes 1,341 1,328 1,366 1,204
Income taxes 510 468 509 422
------ ------ ------ ------
Net income $ 831 $ 860 $ 857 $ 782
====== ====== ====== ======
Per share data
Net income $ 1.20 $ 1.24 $ 1.24 $ 1.12
====== ====== ====== ======
<CAPTION>
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)
====== ====== ====== ======
</TABLE>
(Continued)
39
<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, 1997, the Bank had available
undivided profits of approximately $4.8 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,
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Assets
- - --------
Cash on deposit with subsidiary $ 920 $ 296
Available-for-sale securities 907 997
Investment in subsidiary 21,301 19,064
------- -------
Total assets $23,128 $20,357
======= =======
Liabilities
- - -----------
Taxes payable $ 94 $ -
Deferred taxes 179 149
------- -------
Total liabilities 273 149
------- -------
Stockholders' equity
- - --------------------
Common stock 7 7
Additional paid-in capital 6,680 6,080
Retained earnings, substantially restricted 16,488 14,474
Unrealized gain on available-for-sale securities 305 272
Treasury stock, at cost (625) (625)
------- -------
Total stockholders' equity 22,855 20,208
------- -------
Total liabilities and stockholders' equity $23,128 $20,357
======= =======
</TABLE>
Statements of Income
--------------------
<TABLE>
<CAPTION>
Years ended September 30,
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Dividends from subsidiary $ 900 $1,100 $ 950
Equity in undistributed net income of subsidiary 2,256 889 1,392
Other income 285 35 36
------ ------ ------
Total income 3,441 2,024 2,378
Expenses 111 12 20
------ ------ ------
Net income $3,330 $2,012 $2,358
====== ====== ======
</TABLE>
(Continued)
40
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
Years ended September 30,
1997 1996 1995
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,330 $ 2,012 $ 2,358
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of available-for-sale securities (254) - -
Equity in undistributed net income of subsidiary (2,256) (889) (1,392)
Increase in taxes payable 94 - -
------- ------- -------
Net cash provided by operating activities 914 1,123 966
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 426 - -
------- ------- -------
Net cash provided by investing activities 426 -0- -0-
------- ------- -------
Cash flows from financing activities:
Purchase of common stock - (4) (7)
Sale of common stock 600 - -
Dividends paid to stockholders (1,316) (1,108) (970)
------- ------- -------
Net cash used in financing activities (716) (1,112) (977)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 624 11 (11)
Cash and cash equivalents at beginning of year 296 285 296
------- ------- -------
Cash and cash equivalents at end of year $ 920 $ 296 $ 285
======= ======= =======
Supplemental schedule of noncash financing activities:
Decrease in unrealized gain on available-for-sale
securities of subsidiary $ (18) $ - $ -
Unrealized gain on available-for-sale securities
of parent company (net of tax effect of $20) 51 (37) 172
</TABLE>
(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, 1997
was $1,052,000.
41
<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, 1997 and 1996, 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, 1997. 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 30,1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
November 26, 1997
42
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
BOARD of DIRECTORS and EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
DIRECTORS EXECUTIVE OFFICERS
<S> <C>
H. Davis Green, Jr. H. Davis Green, Jr.
Chairman of the Board, 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 Treasurer
First Palmetto Savings Bank, F.S.B.
Camden, South Carolina
Pierce W. Cantey, Jr. Darlene H. Love
Managing Partner, Secretary
Carswell, Cantey, Burch and Associates, LLP
Camden, South Carolina DIRECTORS EMERITUS
William R. Clyburn H. B. Marshall, Jr.
President, Bill Clyburn Realty, Inc. Agent, New York Life Insurance Company
Kershaw, South Carolina Camden, South Carolina
James L. Creed Austin M. Sheheen, Sr.
Timber Company Executive (Retired), Business Executive (Retired), Sheheen
Texaco Camden, South Carolina
D.J. Creed and Son, Inc.
Camden, South Carolina William F. Tripp, Jr.
Plant Manager (Retired), E.I. DuPont
Frank Goodale Camden, South Carolina
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
President, Tucker Down East Resources, Inc.
Camden, South Carolina
</TABLE>
43
<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 600
One Insignia Financial Plaza
Greenville, South Carolina 29603
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
5321 Sunset Boulevard, Lexington, South Carolina 29072
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, 1997 First Palmetto employed 124 persons.
44
<PAGE>
COMMON STOCK INFORMATION
- - ------------------------
At September 30, 1997, First Palmetto had 708,010 shares of common stock
outstanding held by approximately 391 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, 1996 to October 1, 1995 to
Stock Data-Per Share September 30, 1997 September 30,1996
- - -------------------- ------------------ ------------------
<S> <C> <C>
Sales Price (Estimated)
High $40.00 $33.00
Low $33.00 $28.00
Book Value at September 30 $32.28 $29.16
Annual Cash Dividend $ 1.90 $ 1.60
</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.
45
<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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 6,721
<INT-BEARING-DEPOSITS> 18,484
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 907
<INVESTMENTS-CARRYING> 80,285
<INVESTMENTS-MARKET> 81,123
<LOANS> 255,345
<ALLOWANCE> 3,009
<TOTAL-ASSETS> 372,948
<DEPOSITS> 320,769
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,091
<LONG-TERM> 27,233
0
0
<COMMON> 7
<OTHER-SE> 22,848
<TOTAL-LIABILITIES-AND-EQUITY> 372,948
<INTEREST-LOAN> 21,576
<INTEREST-INVEST> 3,163
<INTEREST-OTHER> 3,163
<INTEREST-TOTAL> 27,902
<INTEREST-DEPOSIT> 13,418
<INTEREST-EXPENSE> 15,025
<INTEREST-INCOME-NET> 12,877
<LOAN-LOSSES> 1,428
<SECURITIES-GAINS> 254
<EXPENSE-OTHER> 8,846
<INCOME-PRETAX> 5,239
<INCOME-PRE-EXTRAORDINARY> 3,330
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,330
<EPS-PRIMARY> 4.80
<EPS-DILUTED> 4.80
<YIELD-ACTUAL> 3.21
<LOANS-NON> 981
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,364
<CHARGE-OFFS> 917
<RECOVERIES> 134
<ALLOWANCE-CLOSE> 3,009
<ALLOWANCE-DOMESTIC> 3,009
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
