SECURITIES and EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
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 Identification No.)
incorporation or organization)
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 4, 1999, 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 $30.0 million (399,860 shares at $75.00 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, 1999 there were issued and outstanding 712,010 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, 1999 (the "Annual Report"). (Parts I and II)
2. Portions of the Proxy Statement for the 1999 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 sixteen branch
offices in other South Carolina locations in Bishopville, Camden, Columbia,
Darlington, Elgin, Irmo, Kershaw, Lancaster, Lexington, Lugoff, Manning, Myrtle
Beach, North Myrtle Beach, Pageland and Pontiac.
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,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $ 475,751 $ 433,745 $ 372,948 $ 344,547 $ 323,183
Loans, net 317,012 263,989 252,336 227,209 198,373
Cash and investment securities (a) 80,023 56,944 74,030 70,519 71,807
Mortgage-backed securities 59,877 95,862 32,367 33,010 39,410
Deposits 361,764 343,947 320,769 288,157 267,313
Federal Home Loan Bank advances 83,000 60,667 27,233 32,550 33,367
Stockholders' equity, substantially
restricted 28,231 25,169 22,855 20,208 19,345
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
2
<PAGE>
Consolidated Summary of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $ 33,210 $ 31,026 $ 27,902 $ 26,016 $ 22,794
Interest expense 18,052 17,275 15,025 14,186 12,483
------------ ------------ ------------ ------------ ------------
Net interest income 15,158 13,751 12,877 11,830 10,311
Provision for loan losses 1,144 2,262 1,428 885 482
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 14,014 11,489 11,449 10,945 9,829
Other income 2,602 3,904 2,636 2,255 1,934
Other expense 9,432 8,861 8,846 9,993 8,105
Income taxes 2,581 2,354 1,909 1,195 1,300
------------ ------------ ------------ ------------ ------------
Net income $ 4,603 $ 4,178 $ 3,330 $ 2,012 $ 2,358
============ ============ ============ ============ ============
Net income per common share-basic $ 6.50 $ 5.90 $ 4.80 $ 2.90 $ 3.40
============ ============ ============ ============ ============
Book value per common share $ 39.65 $ 35.55 $ 32.28 $ 29.16 $ 27.90
============ ============ ============ ============ ============
Dividends per share $ 2.60 $ 2.20 $ 1.90 $ 1.60 $ 1.40
============ ============ ============ ============ ============
</TABLE>
Financial Ratios
<TABLE>
<CAPTION>
For the year ended September 30,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Return on average assets (net income
divided by average total assets) 1.03% 1.06% .94%
Return on average equity (net income
divided by average equity) 17.06% 18.21% 16.24%
Dividend payout ratio (dividends declared
divided by net income) 40% 37% 40%
Average equity-to-average assets ratio (average
equity divided by average total assets) 6.02% 5.84% 5.80%
</TABLE>
LENDING ACTIVITIES
General. First Palmetto offers residential, construction, commercial real
estate, installment and commercial business loans.
3
<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,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
1-4 Family $136,248 43.0% $119,947 45.4% $129,244 51.2% $123,155 54.2% $106,264 53.6%
Commercial 132,601 41.8 97,557 37.0 78,147 31.0 62,043 27.3 56,489 28.4
Construction 8,456 2.7 9,127 3.5 8,462 3.4 8,695 3.8 5,431 2.7
Commercial business 24,206 7.6 15,724 6.0 13,525 5.4 12,578 5.5 10,055 5.1
Installment loans 25,103 7.9 29,847 11.3 29,131 11.5 27,847 12.3 24,376 12.3
Less:
Undisbursed loan proceeds 3,938 1.2 3,325 1.3 2,891 1.2 4,461 2.0 2,240 1.1
Deferred loan fees 218 .1 239 .1 273 .1 284 .1 202 .1
Allowance for loan losses 5,446 1.7 4,649 1.8 3,009 1.2 2,364 1.0 1,800 .9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $317,012 100.0% $263,989 100.0% $252,336 100.0% $227,209 100.0% $198,373 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
4
<PAGE>
Large Loans. At September 30, 1999, First Palmetto's five largest loans
ranged from $1.5 to $2.5 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, 1999, 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,
2000 1999 1999 Total
------------- -------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Real Estate $ 92,412 $ 134,355 $ 50,538 $ 277,305
Commercial Business 16,131 7,713 362 24,206
Installment 19,113 5,571 419 25,103
------------- -------------- ------------- -------------
Total $ 127,656 $ 147,639 $ 51,319 $ 326,614
============= ============== ============= =============
</TABLE>
The following table sets forth, as of September 30, 1999, 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.
Floating or
Predetermined Adjustable
Rates Rates Total
------------- ------------ -------------
(In thousands)
Real Estate $ 173,719 $ 11,174 $ 184,893
Commercial 7,670 405 8,075
Installment 5,381 609 5,990
-------------- ------------- -------------
Total $ 186,770 $ 12,188 $ 198,958
============== ============= =============
Residential Loans. Residential loans, which comprised 43% of the loan
portfolio or $136.2 million at September 30, 1999, are generally underwritten to
the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. Charge-offs for
these type loans totaled $2,000 for the fiscal year ended September 30, 1999 and
$148,000 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 2.7%
of the loan portfolio at September 30, 1999.
During fiscal 1999, First Palmetto originated $13.4 million of construction
loans, which represented 4.7% of its total loans originated during the period.
Substantially all of First Palmetto's construction loan portfolio at September
30, 1999 consisted of loans secured by single-family dwellings.
5
<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 $132.6
million, or 41.8% of First Palmetto's net loan portfolio at September 30, 1999.
This was an increase of $35.0 million from the previous year. These loans are
typically secured by commercial real estate located in Horry, Kershaw, Lexington
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, 1999 was
approximately $2.5 million. Commercial properties are evaluated based on whether
the income produced would be sufficient to pay the scheduled payments.
Installment Loans. Installment loans decreased to $25.1 million at
September 30, 1999. 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 $134,000 and $394,000 for the fiscal years ended September 30, 1999 and
1998, 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 $15.7
million at September 30, 1998 to $24.2 million at September 30, 1999. As with
commercial real estate loans, these types of 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 $490,000
and $395,000 for the fiscal years ended September 30, 1999 and 1998,
respectively.
First Palmetto originates commercial business loans on a limited basis.
6
<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,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
Residential $ 106,101 $ 82,713 $ 64,476 $ 71,530 $ 39,039
Residential construction 13,350 12,922 12,396 14,747 9,079
Commercial real estate,
including construction 141,007 75,065 50,960 35,235 43,248
Consumer 22,520 22,391 19,935 19,456 19,838
------------ ------------ ------------ ------------ ------------
Total loans originated $ 282,978 $ 193,091 $ 147,767 $ 140,968 $ 111,204
============ ============ ============ ============ ============
Loans sold $ 43,422 $ 29,961 $ 11,764 $ 16,210 $ 9,227
============ ============ ============ ============ ============
</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, history
of charge-offs, 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.
At September 30, 1999 and 1998, the recorded investments in loans that were
considered to be impaired was $2.2 million and $851,000, respectively. There was
no specific allowance for credit losses related to the impaired loans as of
September 30, 1999 and 1998. The average recorded investment in impaired loans
during the years ended September 30, 1999 and 1998 was $1.1 million and
$923,000, respectively. Interest income recognized on the cash basis for
impaired loans amounted to $150,000 and $127,000 for the years ended September
30, 1999 and 1998, 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 $836,000, $636,000,
and $981,000, at September 30, 1999, 1998, and 1997, respectively. Foregone
interest income related to nonaccrual loans for the years ended September 30,
1999, 1998 and 1997 amounted to $56,000, $36,000 and $60,000, respectively.
Interest income recognized on nonaccrual loans for the years ended September 30,
1999, 1998 and 1997 amounted to $36,000, $25,000 and $38,000, respectively.
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 less
estimated costs to sell. Thereafter, such properties are carried at lower of
cost or fair value less estimated costs to sell. At September 30, 1999, real
estate owned in the amount of $78,000 was secured by single family dwellings or
land and $10,000 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.
7
<PAGE>
At September 30, 1999, the allowance for loan losses totaled $5.4 million
compared to $4.6 million at September 30, 1998. The allowance for loan losses as
a percentage of loans was 1.69% and 1.73% at September 30, 1999 and 1998,
respectively. Asset quality has improved for the comparative years with the
ratio of non-performing assets to total assets decreasing to .20% at September
30, 1999 from .26% and .35% at September 30, 1998 and 1997, respectively. All of
the allowance for loan losses has been allocated to general reserves.
Approximately $3.1 million has been allocated to commercial loans, $1.4 million
has been allocated to real estate mortgage, $500,000 has been allocated to
installment loans and the remainder of the allowance has been allocated to other
loans.
The provision for loan losses for fiscal 1999 was $1.1 million compared to
$2.3 million for the preceding year. In the previous year, the 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. Management decreased the amount it
provided for loan losses as compared to 1998 after considering the decline in
net charge-offs, the decline in non-performing assets and other factors. Net
charge-offs to the allowance for loan losses were $347,000 or .12% of average
loans during the fiscal year ended September 30, 1999, as compared to $622,000
or .25% of average loans during the fiscal year ended September 30, 1998.
Non-performing assets at September 30, 1999 totaled $924,000, a $212,000
reduction from the $1.1 million at September 30, 1998. 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.
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 adjust its allowance for loan
losses, thereby impacting First Palmetto's financial condition and earnings.
At September 30, 1999, 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, 1999
which may be so classified in the near future because known information about
possible credit problems of borrowers which causes management to have doubts as
to the ability of the borrowers to comply with the present loan repayment terms.
8
<PAGE>
The following table sets forth an analysis of First Palmetto's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 4,649 $ 3,009 $ 2,364 $ 1,800 $ 1,655
Loans charged off:
Residential 2 148 272 63 16
Consumer 134 394 182 220 200
Commercial 490 395 463 284 180
------------ ------------ ------------ ------------ ------------
Total charge-offs 626 937 917 567 396
------------ ------------ ------------ ------------ ------------
Recoveries
Residential 17 209 - - 2
Consumer 32 51 54 52 30
Commercial 230 55 80 194 27
------------ ------------ ------------ ------------ ------------
Total recoveries 279 315 134 246 59
------------ ------------ ------------ ------------ ------------
Provision for loan losses 1,144 2,262 1,428 885 482
------------ ------------ ------------ ------------ ------------
Balance at end of period $ 5,446 $ 4,649 $ 3,009 $ 2,364 $ 1,800
============ ============ ============ ============ ============
Ratio of net charge-offs to the
allowance for loan losses 6.37% 13.4% 26.0% 13.6% 18.7%
============ ============ ============ ============ ============
Ratio of net charge-offs to average
loans outstanding during the period .12% .25% .33% .15% .19%
============ ============ ============ ============ ============
</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,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------ ------------------ ---------------- -----------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Total Total Total Total Total
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans $ 836 .18% $ 636 .14% $ 981 .26% $ 984 .29% $ 823 .25%
Accruing loans 90 days
or more past due - - - - - - - - - -
----- -------- ------- -------- ------- ------- ------- ------- -------- ---------
Total 836 .18 636 .14 981 .26 984 .29 823 .25
----- -------- ------- -------- ------- ------- ------- ------- -------- ---------
Other non-performing
assets (a) 88 .02 500 .12 332 .09 480 .14 1,031 .32
----- -------- ------- -------- ------- ------- ------- ------- -------- ---------
Troubled debt restructurings - - - - - - - - - -
----- -------- ------- -------- ------- ------- ------- ------- -------- ---------
Total non-performing assets $ 924 .20% $ 1,136 .26% $ 1,313 .35% $ 1,464 .43% $ 1,854 .57%
===== ======== ======= ======== ======= ======= ======= ======= ======== =========
<FN>
(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 less estimated costs to sell or the cost of the related loan at time
of foreclosure.
</FN>
</TABLE>
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 23.2%, 22.9% and 20.7% of the total interest and
other revenues of First Palmetto in fiscal years 1999, 1998 and 1997,
respectively. At September 30, 1999, investment securities, mortgage-backed
securities, Federal Home Loan Bank ("FHLB") of Atlanta stock and
interest-bearing deposits in other banks totaled $133.0 million or 27.9% 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. In 1997, investments
available-for-sale were reported at fair value. In 1999, all investment
securities and mortgage-backed securities are held to maturity.
First Palmetto's mortgage-backed securities ("MBS") portfolio at September
30, 1999 was composed of adjustable rate mortgage ("ARM") MBS of $21.8 million
and fixed rate MBS of $38.1 million. The ARM MBS have weighted average
adjustment dates in the period from December, 1999 to June, 2000. 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 of the fixed rate MBS
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. Unlike fixed rate MBS,
the fully indexed ARM MBS maintain or increase in value as rates rise, but not
in the same magnitude, because the interest rate adjusts annually to market
rate. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- ASSET and LIABILITY MANAGEMENT and INTEREST RATE
SENSITIVITY" in the Annual Report to Stockholders (Exhibit 13) 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, 1999.
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-earning deposits, available-for-sale securities, investment
securities and mortgage-backed securities at September 30, 1999, 1998 and 1997.
The market values of First Palmetto's interest-earning deposits, investment
securities and mortgage-backed securities at September 30, 1999 were $8.7
million, $59.4 million and $59.5 million, respectively.
11
<PAGE>
The following table sets forth the book values of First Palmetto's
investments:
September 30,
---------------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
Interest-bearing deposits and certificates
of deposits in other banks $ 8,848 $ 11,992 $ 18,484
======== ======== ========
Investment securities
U.S. Government obligations $ 60,174 $ 37,969 $ 47,918
Available-for-sale investments - - 907
-------- -------- --------
Total investments $ 60,174 $ 37,969 $ 48,825
======== ======== ========
Mortgage-backed securities
FHLMC and FNMA $ 59,811 $ 95,777 $ 32,241
Other 66 85 126
-------- -------- --------
$ 59,877 $ 95,862 $ 32,367
======== ======== ========
FHLB of Atlanta stock $ 4,150 $ 3,333 $ 2,030
======== ======== ========
The following table sets forth the amounts and maturities of First
Palmetto's investments at September 30, 1999:
<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>
Investment securities $ 13,008 $ 46,166 $ 1,000 $ - $ 60,174
Mortgage-backed securities - 378 13,896 45,603 59,877
------------- ------------- ------------- -------------- -------------
Total $ 13,008 $ 46,544 $ 14,896 $ 45,603 $ 120,051
============= ============= ============= ============== =============
Weighted average yield 5.20% 5.80% 6.61% 6.40% 6.06%
============= ============= ============= ============== =============
</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,
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, 1999, First Palmetto had $22.2 million of fixed-rate
certificates with remaining terms of one year or longer, or 6.14% of total
deposits. Substantially all time deposits renew at maturity. As of September 30,
1999, 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, 1999, 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 dates
indicated.
<TABLE>
<CAPTION>
Percent Percent Percent
September of September of Increase September of
30,1999 Deposits Increase 30, 1998 Deposits (Decrease) 30, 1997 Deposits
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW checking
and noninterest
bearing
checking $ 71,152 19.7% $ 10,886 $ 60,266 17.5% $ 285 $ 59,981 18.6%
Money market
deposit 21,731 6.0 2,220 19,511 5.7 (275) 19,786 6.2
Savings 22,805 6.3 323 22,482 6.5 444 22,038 6.9
Certificates
of deposit 246,076 68.0 4,388 241,688 70.3 22,724 218,964 68.3
----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------
$ 361,764 100.0% $ 17,817 $ 343,947 100.0% $ 23,178 $ 320,769 100.0%
=========== =========== =========== =========== ========== =========== =========== ==========
</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,
1999 1998 1997
--------------------------- -------------------------- -----------------------
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 checking $ 61,069 2.10% $ 57,075 2.63% $ 56,923 2.61%
Savings deposits 22,639 2.03 21,994 2.38 22,151 2.54
Time deposits 243,318 5.25 229,975 5.71 203,052 5.60
------------- ------------- -----------
$ 327,026 4.44% $ 309,044 4.90% $ 282,126 4.76%
============= ============= ===========
</TABLE>
The following table sets forth First Palmetto's time deposits classified
by rates as of dates indicated.
At September 30,
1999 1998 1997
-------------- ------------- -------------
(In thousands)
Less than 3.00% $ 10 $ 16 $ 21
3.00% - 4.99% 110,277 20,117 4,547
5.00% - 6.99% 135,671 221,357 212,678
7.00% - 9.99% 118 198 1,718
-------------- ------------- -------------
$ 246,076 $ 241,688 $ 218,964
============== ============= =============
The following table sets forth the amount and maturities of First
Palmetto's time deposits at September 30, 1999.
<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% $ 9 $ 1 $ - $ - $ 10 2.78%
3.00% - 4.99% 93,070 14,816 2,355 36 110,277 4.58
5.00% - 6.99% 130,778 4,386 400 107 135,671 5.42
7.00% - 9.99% 32 19 - 67 118 9.05
---------- ----------- ---------- ---------- ----------
$ 223,889 $ 19,222 $ 2,755 $ 210 $ 246,076 5.06%
========== =========== ========== ========== ==========
</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, 1999.
Certificates
Maturity of deposit
- -------- ----------
(In thousands)
Three months or less $ 19,096
Over three through six months 18,044
Over six through twelve months 17,005
Over twelve months 9,140
-------------
Total $ 63,285
=============
14
<PAGE>
In the year ended September 30, 1999, First Palmetto had new deposits of
$1.7 billion, withdrawals of $1.7 billion and interest credited to the deposit
accounts of $12.3 million resulting in a net increase of $17.8 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, selected mortgage-backed securities and a specific lien
on certain first mortgages secured by one to four family dwellings. At September
30, 1999, the Bank had $83.0 million outstanding in FHLB advances, of which 74.0
million are fixed and 9.0 million are variable. Advances in the amount of $67
million include call provisions. The advances are to mature as follows:
Weighted
Average
Interest Rate
-------------
(In thousands)
Maturing in the year ended September 30, 2000 $ 9,000 Variable
Maturing in the year ended September 30, 2001 2,000 5.69%
Maturing in the year ended September 30, 2004 2,000 5.72%
Maturing in the year ended September 30, 2008 45,000 5.33%
Maturing in the year ended September 30, 2009 25,000 4.92%
--------- ---------
$ 83,000 5.21%
========= =========
The following table sets forth certain information regarding First
Palmetto's FHLB advances:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------------- -------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances
Balance at
September 30 $83,000 5.39% $60,667 5.50% $27,233 5.81%
Average during year 64,501 5.47 33,572 6.27 28,906 5.56
Maximum month-end
balance during year 83,000 - 61,767 - 32,550 -
</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, 1999, the net book value of the Bank's investments in stock, unsecured loans
and conforming loans in its service corporation was $890,000.
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 1999, PSSC had a net income of $27,000. At
September 30, 1999, First Palmetto had $500,000 invested in PSSC's common stock,
and negative retained earnings in PSSC amounting to $323,000. PSSC is engaged in
activities not permissible to national banks. For a discussion of the effect of
this investment on First Palmetto's regulatory capital requirements, see
"Regulation -- Savings Association Regulation -- Regulatory Capital
Requirements."
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 services.
EMPLOYEES
First Palmetto and its subsidiaries had 128 full time employees at
September 30, 1999. 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.
Recent Legislation. On November 12, 1999, President Clinton signed into law
the Gramm-Leach-Bliley Act, which effected a sweeping reform of federal banking
laws. Among other major provisions, the Gramm-Leach-Bliley Act authorizes bank
holding companies to become "financial holding companies" and, as such, to
affiliate with insurance companies and securities underwriters.
Despite its profound impact on the structure of the nation's financial
services industry, the Gramm-Leach-Bliley Act will have few direct effects on
the operations or powers of most savings associations and savings and loan
holding companies. As discussed further below, the Gramm-Leach-Bliley Act
terminates the so-called "unitary thrift holding company" exemption on a
prospective basis; however, the authority of currently existing unitary savings
and loan holding companies, such as First Palmetto, to engage in essentially any
business activity is unaffected by the statute. See "Savings and Loan Holding
Company Regulation - Activities Restrictions."
The Gramm-Leach-Bliley Act imposes significant new financial privacy
obligations and reporting requirements on all financial institutions, including
federal savings associations. Specifically, the statute, among other things,
will require financial institutions (a) to establish privacy policies and
disclose them to customers both at the commencement of a customer relationship
and on an annual basis and (b) to permit customers to opt out of a financial
institution's disclosure of financial information to nonaffiliated third
parties. The Gramm-Leach-Bliley Act requires the federal financial regulators to
promulgate regulations implementing these provisions within six months of
enactment, and the statute's privacy requirements will take effect one year
after enactment.
Regulatory Capital Requirements. Under OTS regulations, savings
associations must maintain Tier 1 (core) capital equal to 4.0% of adjusted total
assets, Tier 1 (core) capital equal to 4.0% of "risk-weighted" 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. Core and tangible capital are further reduced by the amount of
a savings association's debt and equity investments in subsidiaries engaged in
activities not permissible for national banks.
At September 30, 1999, First Palmetto's Tier 1 capital ratio to total
assets was 5.68%, its Tier 1 capital ratio to risk-weighted assets was 9.20% and
its total capital ratio to risk-weighted assets was 10.46%. At that date, First
Palmetto had $313,000 of qualifying intangible assets and $890,000 of
investments in and extensions
17
<PAGE>
of credit to subsidiaries engaged in activities not permissible for national
banks. As of September 30,1999, the Bank was categorized as well-capitalized
under the regulatory framework for prompt corrective action.
The following table reconciles the Bank's stockholder's equity under
generally accepted accounting principles at September 30, 1999 to its Tier 1
capital and total regulatory capital.
(Dollars in thousands)
----------------------
Stockholder's equity under generally
accepted accounting principles $ 28,254
Less:
Deductible investments in and extensions of
credit to subsidiary 890
Deductible intangible assets 649
Disallowed servicing assets and deferred tax assets 63
Add:
Qualifying intangible assets 313
-------------
Tier 1 (core) capital 26,965
Add:
Allowances for loan losses 3,686
-------------
Total capital $ 30,651
=============
Tier 1 (core) capital as a percentage of adjusted total assets 5.68%
=============
Tier 1 (core) capital as a percentage of risk-weighted assets 9.20%
=============
Total capital as a percentage of risk-weighted assets 10.46%
=============
The following table sets forth First Palmetto's capital position relative
to its various minimum regulatory capital requirements at September 30, 1999.
Percent of
Amount Assets
---------- -----------
(Dollars in thousands)
Tier 1 capital (to total assets) $ 26,965 5.68%
Tier 1 capital requirement 19,003 4.00
---------- ---------
Excess $ 7,962 1.68%
========== =========
Tier 1 capital (to risk-weighted assets) $ 26,965 9.20%
Tier 1 capital requirement 11,723 4.00
---------- ---------
Excess $ 15,242 5.20%
========== =========
Total capital (i.e., core and supplementary capital)
(to risk-weighted assets) $ 30,651 10.46%
Risk-based capital requirement 23,447 8.00
---------- ---------
Excess $ 7,204 2.46%
========== =========
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 postponed indefinitely the date on which this
interest rate risk component must be deducted from an institution's total
capital.
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, 1999 of $4.2 million. As of September 30, 1999,
First Palmetto had outstanding advances of $83.0 million from the FHLB of
Atlanta.
Liquidity Requirements. Savings associations are required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, qualifying
mortgage-related securities and mortgage loans, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 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, 1999, 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, 1999, 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, 1999, First Palmetto's loans-to-one borrower limit was
$4.2 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.
The FDIC has adopted a risk-based insurance system for determining the
deposit insurance assessments to be paid by insured depository institutions. 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, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and on of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information that the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. Assessment rates for SAIF-member
institutions like the Bank depend on the capital category and supervisory
category to which they are assigned and currently range from 0 basis point to 27
basis points. The Bank's assessment rate for the year ended September 30, 1999
was .046% of assessable deposits.
20
<PAGE>
In addition, SAIF-insured institutions like the Bank are required, until
December 31, 1999, to pay assessments to the FDIC at an annual rate of
approximately .058% of insured deposits to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize the predecessor to the SAIF.
During this period, Bank Insurance Fund ("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 (estimated at approximately .0216% of insured deposits
for the year 2000) to service the FICO obligations. These assessments, which may
be revised based on the level of FDIC-insured deposits, will continue until the
FICO bonds mature in 2017.
Standards for Safety and Soundness. The FDI Act requires the federal
banking agencies, including the OTS, to prescribe for all insured depository
institutions standards relating to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, asset quality and compensation, fees
and benefits and such other operational and managerial standards as the agencies
deem appropriate. The federal banking agencies have adopted final regulations
and Interagency Guidelines Establishing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards pursuant to the
statute. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth;
asset quality; earnings; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization.
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.
21
<PAGE>
The table below presents First Palmetto's capital position, which is
considered to be "well capitalized", at September 30, 1999, relative to the
various minimum regulatory capital requirements under the prompt corrective
action regulations.
Percent of
Amount Assets (1)
-------------- ------------
(Dollars in thousands)
Tier 1 or leverage capital $ 26,965 5.68%
Tier 1 or leverage capital requirement 23,754 5.00
-------------- ------------
Excess $ 3,211 .68%
============== ============
Tier 1 risk-based capital $ 26,965 9.20%
Tier 1 risk-based capital requirement 17,586 6.00
-------------- ------------
Excess $ 9,379 3.20%
============== ============
Risk-based capital $ 30,651 10.46%
Risk-based capital requirement 29,309 10.00
-------------- ------------
Excess $ 1,342 .46%
============== ============
(1) Based upon adjusted total assets for purposes of Tier 1 capital 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 $5.0 million of transaction accounts,
and reserves equal to 3% must be maintained on the next $44.3 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.
Limitations on Capital Distributions. OTS regulations impose limitations
upon capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. Under the OTS capital distribution regulations, a savings
institution that qualifies for expedited treatment of applications by
maintaining specified supervisory examination ratings and that is not otherwise
restricted in making capital distributions may, without prior approval by the
OTS, make capital distributions during a calendar year equal to its net income
for such year plus its retained net income for the preceding two years. Capital
distributions in excess of such amount are subject to prior OTS approval. In
addition, even if a proposed capital distribution is less than the above limit,
a savings institution must give notice to the OTS at least 30 days before
declaration of a capital distribution to its holding company.
Under the OTS's prompt corrective action regulations, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "--Prompt Corrective Regulatory
Action." Further, earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of
dividends or other distributions to the Bank without payment of taxes at the
then current tax rate by the Bank on the amount of earnings removed from the
reserves for such distributions.
22
<PAGE>
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, however, the OTS may permit an
undercapitalized 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 HOLA. 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. As the owner of a single savings association,
First Palmetto is a unitary savings and loan holding company. Under the HOLA,
there are generally no restrictions on the business activities of First
Palmetto, as a unitary savings and loan holding company, provided that the Bank
continues to satisfy the QTL test. The Board of Directors of First Palmetto
presently intends to continue to operate First Palmetto as a unitary savings and
loan holding company. The Gramm-Leach-Bliley Act terminated the "unitary thrift
holding company exemption" for all companies that apply to acquire savings
associations after May 4, 1999. Since First Palmetto is grandfathered under this
provision of the Gramm-Leach-Bliley Act, its unitary holding company powers and
authorities were not affected. However, if First Palmetto were in the future to
sell control of the Bank to any other company, such company would not succeed to
First Palmetto's grandfathered status under the Gramm-Leach-Bliley Act and would
be subject to restrictions on its business activities.
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 Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended and the total assets attributable to all branches of the
association in the state would qualify if 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
23
<PAGE>
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 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.
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 could 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
24
<PAGE>
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 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 1997 and 1998 tax years provided that the Bank meets the "residential loan
requirement" for both tax years. The Bank has met this requirement tax for the
1997 and 1998 tax year, deferring recapture of the "applicable excess reserve"
for the 1997 and 1998 tax year. In 1999, the Bank recognized and paid taxes on
$303,000 of the $1.2 million bad debt reserves subject to recapture. 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's 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 PRONOUNCEMENTS
First Palmetto prepares its financial statements and related disclosures in
conformity with standards established by, among others, the financial Accounting
Standards Board (the "FASB"). Because the information needed by users of
financial reports is dynamic, the FASB frequently has new rules and proposed new
rules for companies to apply in reporting their activities. The following
discussion addresses such changes as of June 30, 1999 that will affect First
Palmetto's future reporting.
In June, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - and
amendment of FASB No. 133" delayed the effective date of this statement for one
year. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. First Palmetto plans to adopt SFAS 133 in fiscal
year 2001 without any impact on its consolidated financial statements as First
Palmetto does not have any derivative financial instruments and is not involved
in any hedging activities.
25
<PAGE>
In October, 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," establishes accounting and reporting standards for certain mortgage
banking activities. It also conforms the subsequent accounting for securities
retained after the securitization of other types of assets. This statement is
effective for financial statements for fiscal years beginning after December 15,
1998. First Palmetto adopted SFAS 134 in fiscal year 1999 without any impact on
its consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgements of First Palmetto and its management about future events. Factors
that could influence the accuracy of such forward-looking statements include,
but are not limited to the financial success or changing strategies of First
Palmetto's customers actions of government regulators, the level of market
interest rates, and general economic conditions.
26
<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, 1999.
<TABLE>
<CAPTION>
Year Facility Leased Approximate
Began or Square Net Book
Office Location Operations Owned Footage Value
- --------------- ---------- ----- ------- -----
<S> <C> <C> <C> <C>
Main Office
407 DeKalb Street 1963 Owned 10,337 $ 519,046
Camden, S.C. 29020
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 $ 256,100
Camden, S.C. 29020
Camden Operations Center
1050 Broad Street 1997 Owned 6,400 $ 321,062
Camden, S.C. 29020
Columbia Branch Offices
3932 Forest Drive 1988 Owned 4,950 $ 525,658
Columbia, S.C. 29206
8921 Two Notch Road 1980 Leased 2,200 $ 103,675
Columbia, S.C. 29223 (Expires 2008,
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 $ -
Camden, S.C. 29020 (Expires 2002,
with ten year
renewal option)
Elgin Branch Office
Highway #1 1986 Leased 1,200 $ 36,339
Elgin, S.C. 29045 (Expires 2006,
with ten year
renewal option)
Irmo Branch Office
7327 St. Andrews Road 1996 Owned 2,200 $ 498,154
Irmo, S.C. 29063
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Year Facility Leased Approximate
Began 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 $ 367,469
Kershaw, S.C. 29067
Lancaster Branch Office
509 North Main Street 1973 Owned 3,040 $ 711,710
Lancaster, S.C. 29721
Lexington Branch Office
5321 Sunset Boulevard 1997 Owned 2,950 $ 601,283
Lexington, S.C. 29072
Lugoff Branch Office
Highway #1 South 1969 Owned 3,900 $ 860,941
Lugoff, S.C. 29078
Manning Branch Office
111 N. Brooks Street 1995 Owned 4,000 $ 200,667
Manning, SC 29102
Myrtle Beach Branch Office
10207 North Kings Highway 1997 Owned 3,240 $ 630,540
Myrtle Beach, S.C.
501 Highway 17 South 1998 Leased $ 390,725
North Myrtle Beach, S. C. (Expires 2002)
Pageland Branch Office
201 N. Pearl Street 1994 Owned 1,300 $ 332,304
Pageland, S.C. 29728
Pontiac Branch Office
10540 Two Notch Road 1989 Leased 1,300 $ 72,229
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 1999.
28
<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 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
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, 1999 and 1998, Consolidated Statements of Income for the three
years ended September 30, 1999, Consolidated Statements of Stockholders' Equity
for the three years ended September 30, 1999, and Consolidated Statements of
Cash Flows for the three years ended September 30, 1999, together with the
related notes and report of KPMG 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.
29
<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 1999 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 sections captioned "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the Proxy
Statement.
30
<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 Accountants' Report
2. Consolidated Statements of Financial Condition at September 30, 1999
and 1998
3. Consolidated Statements of Income for the Years Ended September 30,
1999, 1998 and 1997
4. Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999 1998 and 1997
5. Consolidated Statements of Cash Flows for the Years Ended September
30, 1999, 1998 and 1997
6. Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules - All financial statement schedules
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 1999 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)
31
<PAGE>
Exhibit No. 22 Subsidiaries
Exhibit No. 27 Financial Data Schedules (SEC use only)
(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.
32
<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 28,
1999.
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 28, 1999.
<TABLE>
<CAPTION>
<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/ Frank D. Goodale, Jr.
--------------------------------------------- -------------------------------------------------
William R. Clyburn Frank D. Goodale, Jr.
Director Director
By:/s/ Donald H. Holland By:/s/ Charlie E. Nash
--------------------------------------------- -------------------------------------------------
Donald H. Holland Charlie E. Nash
Director Director
By:/s/ Glenn G. Tucker
---------------------------------------------
Glenn G. Tucker
Director
</TABLE>
33
<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 1999 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
27 Financial Data Schedules (SEC use only)
34
EXHIBIT 13
Annual Report
<PAGE>
ANNUAL REPORT
September 30, 1999
FIRST PALMETTO FINANCIAL CORPORATION
<PAGE>
TABLE of CONTENTS
FIRST PALMETTO FINANCIAL CORPORATION
- ------------------------------------
The Company 1
Selected Consolidated Financial and Other Data 1-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-14
Consolidated Financial Statements
Consolidated Statements of Financial Condition 15
Consolidated Statements of Income 16
Consolidated Statements of Stockholders' Equity 17-18
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
<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 sixteen branch offices in other
South Carolina locations of Bishopville, Camden, Columbia, Darlington, Elgin,
Irmo, Kershaw, Lancaster, Lexington, Lugoff, Manning, Myrtle Beach, North Myrtle
Beach, 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, loan servicing fees and gain
on sale of loans.
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,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $ 475,751 $ 433,745 $ 372,948 $ 344,547 $ 323,183
Loans, net 317,012 263,989 252,336 227,209 198,373
Cash and investment securities (a) 80,023 56,944 74,030 70,519 71,807
Mortgage-backed securities 59,877 95,862 32,367 33,010 39,410
Deposits 361,764 343,947 320,769 288,157 267,313
Federal Home Loan Bank
("FHLB") advances 83,000 60,667 27,233 32,550 33,367
Stockholders' equity, substantially
restricted 28,231 25,169 22,855 20,208 19,345
<FN>
(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.
</FN>
</TABLE>
1
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Summary of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 33,210 $ 31,026 $ 27,902 $ 26,016 $ 22,794
Interest expense 18,052 17,275 15,025 14,186 12,483
------------ ------------ ------------ ------------ ------------
Net interest income 15,158 13,751 12,877 11,830 10,311
Provision for loan losses 1,144 2,262 1,428 885 482
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 14,014 11,489 11,449 10,945 9,829
Other income 2,602 3,904 2,636 2,255 1,934
Other expense 9,432 8,861 8,846 9,993 8,105
------------ ------------ ------------ ------------ ------------
Income before income taxes 7,184 6,532 5,239 3,207 3,658
Income taxes 2,581 2,354 1,909 1,195 1,300
------------ ------------ ------------ ------------ ------------
Net income $ 4,603 $ 4,178 $ 3,330 $ 2,012 $ 2,358
============ ============ ============ ============ ============
</TABLE>
Financial Ratios
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets) 1.03% 1.06% .94% .61% .78%
Return on average equity (net income
divided by average equity) 17.06% 18.21% 16.24% 10.33% 13.17%
Average equity-to-assets ratio (average
equity divided by average total assets) 6.02% 5.84% 5.80% 5.87% 5.90%
Net income per common share-basic $ 6.50 $ 5.90 $ 4.80 $ 2.90 $ 3.40
Book value per common share $ 39.65 $ 35.55 $ 32.28 $ 29.16 $ 27.90
Dividends per common share $ 2.60 $ 2.20 $ 1.90 $ 1.60 $ 1.40
</TABLE>
2
<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, 1999, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1998
Net income for the fiscal year ended September 30, 1999, was $4.6 million
as compared to $4.2 million for the preceding fiscal year. Net income increased
by $425,000 or 10.2%.
Net interest income for fiscal 1999 equaled $15.2 million as compared to
$13.8 million for the fiscal year ended September 30, 1998. The increase of
10.2% amounted to $1.4 million. Other income for fiscal 1999 was $2.6 million as
compared to $3.9 million for fiscal 1998 while other expense for the respective
fiscal years was $9.4 million and $8.9 million. A more detailed discussion of
the comparative years follows.
Net interest income increased by $1.4 million or 10.2%. The primary reason
for the increase in net interest income was an increase in average
interest-earning assets for fiscal 1999 of approximately $53.6 million. The
yield on interest-earning assets was relatively constant, decreasing only .54%.
Average cost of funds decreased during the year from 5.04% during the year ended
September 30, 1998 to 4.61% during the year ended September 30, 1999. Interest
rate spread decreased to 3.17% as compared to 3.28% for the previous year.
Total interest income for fiscal 1999 was $33.2 million, up $2.2 million or
7.0% from $31.0 million for fiscal 1998. The primary reason for the increase was
an increase in average interest-earning assets due to the increase in loan
demand primarily in commercial real estate loans. The average yield on interest
earning assets decreased to 7.78% for fiscal 1999 versus 8.32% for fiscal year
1998.
Total interest expense for fiscal 1999 was $18.1 million compared to $17.3
million for fiscal 1998. The increase of $777,000 represented a 4.5% increase in
interest expense. The increase in interest expense was primarily due to the
increase in average interest-bearing liabilities as a result of borrowing from
the Federal Home Loan Bank at attractive interest rates and through deposits
received by offering highly competitive rates in targeted markets. The increase
in interest-bearing liabilities was necessary to fund the growth in
interest-earning assets. Cost of funds decreased to 4.61% for the 1999 period as
compared to 5.04% for the 1998 period. Average interest-bearing liabilities were
$391.5 million at September 30, 1999 as compared to $342.6 million at September
30, 1998.
3
<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, 1999. 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,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $ 285,721 $ 24,892 8.71% $ 253,003 $ 23,011 9.10%
Interest-earning deposits 18,904 1,209 6.40 22,820 1,414 6.20
Investment securities (2) 41,518 2,598 6.26 45,431 2,989 6.58
Mortgage-backed securities 80,547 4,511 5.60 51,803 3,612 6.97
----------- ----------- ---------- -----------
Total interest-earning assets 426,690 33,210 7.78 373,057 31,026 8.32
----------- -----------
Noninterest-earning assets 21,399 19,435
----------- ----------
Total assets $ 448,089 $ 392,492
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
TABLE (continued)
Years Ended September 30,
---------------------------------
1997
---------------------------------
Average At September 30, 1999
Average Yield/ ---------------------
Balance Interest Cost Balance Rate
------- -------- ---- ------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Loans (1) $ 240,224 $ 21,576 8.98% $ 317,012 8.35%
Interest-earning deposits 15,411 1,000 6.49 8,848 5.14
Investment securities (2) 46,632 3,163 6.78 60,174 5.94
Mortgage-backed securities 32,249 2,163 6.71 59,877 6.16
----------- --------- ----------
Total interest-earning assets 334,516 27,902 8.34 445,911 7.66
---------
Noninterest-earning assets 19,061 29,840
----------- ----------
Total assets $ 353,577 $ 475,751
=========== ==========
(1) Includes non-accrual loans.
(2) Includes available-for-sale securities.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-bearing liabilities:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing checking (1) $ 61,069 $ 1,285 2.10% $ 57,075 $ 1,502 2.63%
Savings deposits 22,639 460 2.03 21,994 524 2.38
Time deposits 243,318 12,778 5.25 229,975 13,143 5.71
FHLB borrowings 64,501 3,529 5.47 33,572 2,106 6.27
----------- ----------- ---------- -----------
Total interest-bearing liabilities 391,527 18,052 4.61 342,616 17,275 5.04
----------- -----------
Noninterest-bearing liabilities:
Noninterest checking 26,486 23,900
Other 3,090 3,036
----------- ----------
Total liabilities 421,103 369,552
Stockholders' equity 26,986 22,940
----------- ----------
Total liabilities and
stockholders' equity $ 448,089 $ 392,492
=========== ==========
Net interest income $ 15,158 $ 13,751
=========== ===========
Interest rate spread 3.17% 3.28%
===== =====
Net yield on average interest-earning assets 3.55% 3.69%
===== =====
Ratio of average interest-earning 1.09% 1.09%
assets to average interest-bearing liabilities ===== =====
</TABLE>
TABLE (continued)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1997
----------------------------------------
Average At September 30, 1999
Average Yield/ ---------------------
Balance Interest Cost Balance Rate
------- -------- ---- ------- ----
(Dollars in thousands)
Interest-bearing liabilities:
<S> <C> <C> <C> <C> <C>
Interest-bearing checking (1) $ 56,923 $ 1,487 2.61% $ 65,416 2.06%
Savings deposits 22,151 562 2.54 22,805 2.02
Time deposits 203,052 11,369 5.60 246,076 5.06
FHLB borrowings 28,906 1,607 5.56 83,000 5.39
----------- -------- ---------
Total interest-bearing liabilities 311,032 15,025 4.83 417,297 4.48
--------
Noninterest-bearing liabilities:
Noninterest checking 19,886 27,467
Other 2,149 2,756
----------- ----------
Total liabilities 333,067 447,520
Stockholders' equity 20,510 28,231
----------- ----------
Total liabilities and
stockholders' equity $ 353,577 $ 475,751
=========== ==========
Net interest income $ 12,877
=========
Interest rate spread 3.51% 3.18%
===== =====
Net yield on average interest-earning assets 3.85%
=====
Ratio of average interest-earning 1.08%
assets to average interest-bearing liabilities =====
</TABLE>
(1) Includes NOW's and MMDA
5
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
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,
-----------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------- ------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans $ 2,914 $ (1,033) $ 1,881 $ 1,155 $ 280 $ 1,435
Mortgage-backed securities 1,807 (908) 899 1,337 112 1,449
Investment securities (250) (141) (391) (80) (94) (174)
Other (248) 43 (205) 470 (56) 414
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 4,223 (2,039) 2,184 2,882 242 3,124
----------- ----------- ----------- ----------- ----------- -----------
Interest expense:
Deposits 693 (1,339) (646) 1,300 451 1,751
FHLB advances 1,816 (393) 1,423 274 225 499
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 2,509 (1,732) 777 1,574 676 2,250
----------- ----------- ----------- ----------- ----------- -----------
Net interest income $ 1,714 $ (307) $ 1,407 $ 1,308 $ (434) $ 874
=========== =========== =========== =========== =========== ===========
</TABLE>
The provision for loan losses for fiscal 1999 was $1.1 million compared to
$2.3 million for the preceding year. In the previous year, the provision for
loan losses increased as a result of 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. Management decreased the amount it
provided for loan losses as compared to 1998 after considering the decline in
net charge-offs, the decline in nonperforming assets and other factors. Net
charge-offs to the allowance for loan losses were $347,000 or .12% of average
loans during the fiscal year ended September 30, 1999, as compared to $622,000
or .25% of average loans for the year ended September 30, 1998. The balance in
the allowance for loan losses at September 30, 1999 was $5.4 million compared to
$4.6 million at September 30, 1998. Nonperforming assets at September 30, 1999
totaled $924,000, a $212,000 reduction from the $1.1 million at September 30,
1998. The allowance for loan losses as a percentage of loans was 1.69% and 1.73%
at September 30, 1999 and 1998, respectively. Management continually reviews the
adequacy of the allowance for loan losses, considering such factors as reviews
of delinquent loans and other problem loans, composition of the Bank's loan
portfolio, historical charge-offs, general economic conditions that may affect
borrowers' ability to repay and the value of collateral. The allowance for loan
losses is subject to adjustment by regulators.
Other income for fiscal 1999 was $2.6 million as compared to $3.9 million
for fiscal 1998. The other income decrease was primarily attributable to gain on
sale of investments in the amount of $632,000 and a gain on the sale of a branch
office in the amount of $784,000 in the 1998 period.
6
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Other expenses for fiscal 1999 were $9.4 million compared to $8.9 million
for fiscal 1998, an increase of $571,000 or 6.4%. Tabular comparisons of broad
expense categories for fiscal 1999 compared to fiscal 1998 are as follows:
Years Ended
September 30,
---------------------------
1999 1998
------------ ------------
(In thousands)
Compensation and related benefits $ 4,456 $ 4,153
Occupancy and data processing fees 1,919 1,939
Federal deposit and other insurance premiums 339 315
Amortization of intangible assets 318 349
Telephone, postage, supplies and other 2,400 2,105
------------ ------------
Total other expense $ 9,432 $ 8,861
============ ============
The effective tax rate was 35.9% for the year ended September 30, 1999 as
compared to 36.0% for the year ended September 30, 1998. See Note 11 to the
Notes to Consolidated Financial Statements.
RESULTS of OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1997
Net income for the fiscal year ended September 30, 1998, was $4.2 million
as compared to $3.3 million for the preceding fiscal year. Net income increased
by $848,000 or 25.5%.
Net interest income for fiscal 1998 equaled $13.8 million as compared to
$12.9 million for the fiscal year ended September 30, 1997. The increase of 6.8%
amounted to $874,000. Other income for fiscal 1998 was $3.9 million as compared
to $2.6 million for fiscal 1997 while other expense for the respective fiscal
years were $8.9 million and $8.8 million. A more detailed discussion of the
comparative years follows.
Net interest income increased by $874,000 or 6.8%. The primary reason for
the increase in net interest income was an increase in average interest-earning
assets for fiscal 1998 of approximately $38.5 million. The yield on
interest-earning assets was relatively constant, decreasing only .02%. Average
cost of funds increased during the year from 4.83% during the year ended
September 30, 1997 to 5.04% during the year ended September 30, 1998. Interest
rate spread decreased to 3.28% as compared to 3.51% for the previous year.
Total interest income for fiscal 1998 was $31.0 million, up $3.1 million or
11.2% from $27.9 million for fiscal 1997. The primary reason for the increase
was an increase in average interest-earning assets due to the acquisition of
mortgage-backed securities and an increase in loan demand primarily in
commercial real estate loans. The average yield on interest earning assets
decreased slightly to 8.32% for fiscal 1998 versus 8.34% for fiscal year 1997.
Total interest expense for fiscal 1998 was $17.3 million compared to $15.0
million for fiscal 1997. The increase of $2.2 million represented a 15.0%
increase in interest expense. The increase in interest expense was primarily due
to the increase in average interest-bearing liabilities as a result of deposits
received by offering highly competitive rates in targeted markets. Cost of funds
increased to 5.04% for the 1998 period as compared to 4.83% for the 1997 period.
Average interest-bearing liabilities were $342.6 million at September 30, 1998
as compared to $311.0 million at September 30, 1997.
7
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The provision for loan losses for fiscal 1998 was $2.3 million compared to
$1.4 million 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. Also during the year, management has emphasized increasing
loans with large balances as evidenced by six loans over $1.0 million at
September 30, 1998, compared to one loan over $1.0 million at September 30,
1997. Net charge-offs to the allowance for loan losses were $622,000 during the
fiscal year ended September 30, 1998, as compared to $783,000 for the year ended
September 30, 1997. The balance in the allowance for loan losses at September
30, 1998 was $4.6 million compared to $3.0 million at September 30, 1997. The
allowance for loan losses as a percentage of loans was 1.73% and 1.18% at
September 30, 1998 and 1997, respectively. Management continually reviews the
adequacy of the allowance for loan losses, considering such factors as reviews
of delinquent loans and other problem loans, composition of the Bank's loan
portfolio, historical charge-offs, general economic conditions that may affect
borrowers' ability to repay and the value of collateral.
Other income for fiscal 1998 was $3.9 million as compared to $2.6 million
for fiscal 1997. The other income increase was primarily attributable to gain on
sale of investments in the amount of $632,000 and a gain in the sale of a branch
office in the amount of $784,000.
Other expenses for fiscal 1998 were $8.9 million compared to $8.8 million
for fiscal 1997, a decrease of $15,000 or .17%. Tabular comparisons of broad
expense categories for fiscal year 1998 compared to fiscal 1997 are as follows:
Years Ended
September 30,
---------------------------
1998 1997
------------ ------------
(In thousands)
Compensation and related benefits $ 4,153 $ 3,979
Occupancy and data processing fees 1,939 2,130
Federal deposit and other insurance premiums 315 367
Amortization of intangible assets 349 579
Telephone, postage, supplies and other 2,105 1,791
------------ ------------
Total other expense $ 8,861 $ 8,846
============ ============
The effective tax rate was 36.0% for the year ended September 30, 1998 as
compared to 36.4% for the year ended September 30, 1997. See Note 11 to the
Notes to Consolidated Financial Statements.
8
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
FINANCIAL CONDITION
Total assets at September 30, 1999, were $475.8 million as compared to
$433.7 million at September 30, 1998, an increase of $42.0 million or 9.7%.
Loans receivable at September 30, 1999, increased by $53.0 million to
$317.0 million as compared to $264.0 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 additional loan production as a result of branching efforts into new
markets.
Mortgage-backed securities decreased $36.0 million from $95.9 million at
September 30, 1998 to $59.9 million at September 30, 1999 and investment
securities increased from $38.0 million to $60.2 million at September 30, 1999.
The significant loan growth contributed to the reduction in total capital to
risk-weighted assets from 11.10% in fiscal 1998 to 10.46% in fiscal 1999. Since
the bank's investments in U.S. Government obligations have no risk weighting and
are tax free for state purposes, a substantial portion of the repayments from
the mortgage-backed securities portfolio was reinvested in U.S. Government
obligations to enhance its risk-weighted returns.
Deposits increased $17.9 million to $361.8 million at September 30, 1999,
compared to $343.9 million at the previous year end as First Palmetto targeted
several markets for growth by offering highly competitive rates.
FHLB advances increased to $83.0 million at September 30, 1999 from $60.7
million at September 30, 1998 as First Palmetto sought to reduce interest rate
sensitivity by borrowing for longer terms at historically low rates and to fund
the growth in interest-earning assets.
Stockholders' equity increased to $28.2 million at September 30, 1999
compared to $25.2 million at September 30, 1998. Increases were $4.6 million
from net income and sale of common stock of $300,000. Decreases were the payment
of dividends of approximately $1.8 million.
CAPITAL RESOURCES
Regulatory Capital Requirements. Under OTS regulations savings associations
must maintain "Tier 1" capital equal to at least 4% of adjusted total assets,
"Tier 1" capital equal to at least 4% of "risk-weighted" assets and a "total
capital" equal to at least 8% of "risk-weighted" assets. For purposes of the
regulations, "Tier 1" 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. "Tier
1" 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. "Tier 1" 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, 1999, the Bank's "Tier 1" capital ratio to total assets
was 5.68%, "Tier 1" to risk-weighted assets ratio was 9.20% and its total
capital to risk-weighted assets ratio was 10.46%. At that date, the Bank had
$313,000 of qualifying intangibles and $890,000 of investments in and extensions
of credit to subsidiaries engaged in activities not permissible for national
banks.
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.
9
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
ASSET and LIABILITY MANAGEMENT, INTEREST RATE SENSITIVITY and 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. 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.
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 in interest rate movements.
Profitability is affected by fluctuations in interest rates. 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. As part of its effort to manage interest rate risk, the
Bank monitors its net portfolio value ("NPV"), a methodology adopted by the OTS
to assist the Bank in assessing interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the NPV which would result from the theoretical 200 basis point ("bp")
(1 basis point equals .01%) change in market rates. Both a 200 basis point
increase in market interest rates and a 200 basis point decrease in market
interest rates are considered.
The following table presents the Bank's NPV at September 30, 1999, as
calculated by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV Assets
In rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
+300 bp $ 43,353 $ -1,488 -3% 9.27% +3 bp
+200 bp 44,591 -250 -1% 9.41% +17 bp
+100 bp 45,155 314 +1% 9.41% +17 bp
0 bp 44,841 9.24%
-100 bp 43,511 -1,330 -3% 8.88% -36 bp
-200 bp 41,573 -3,268 -7% 8.40% -84 bp
-300 bp 39,407 -5,434 -12% 7.89% -135 bp
</TABLE>
Risk measures: 200 bp rate shock 9/30/99
-----------
Pre-shock NPV ratio: NPV as % of PV of assets 9.24%
Post-shock NPV ratio 8.40%
Sensitivity Measure: Decline in NPV ratio 84 bp
10
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
The 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. The computations do not contemplate
any actions the Bank could undertake in response to changes in interest rates.
Another 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, 1999, was (24.06%). 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.
The following table presents First Palmetto's asset/liability gap ratios as
of September 30, 1999.
<TABLE>
<CAPTION>
Six months
At September 30, 1999 Six months to one One to Three to Over five
or less year three years five years years Total
------- ---- ----------- ---------- ----- -----
Interest-earning assets (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and mortgage-backed
securities (1) $ 100,442 $ 27,258 $ 156,465 $ 72,340 $ 25,830 $ 382,335
Investment securities 7,004 6,004 26,385 19,781 1,000 60,174
Other interest-earning assets (2) 8,848 - - - - 8,848
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning
assets 116,294 33,262 182,850 92,121 26,830 451,357
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities
Interest-bearing deposits 96,955 152,188 58,452 9,795 16,907 334,297
Borrowings 9,000 - 2,000 2,000 70,000 83,000
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities 105,955 152,188 60,452 11,795 86,907 417,297
----------- ----------- ----------- ----------- ----------- -----------
Sensitivity gap
Period $ 10,339 $ (118,926) $ 122,398 $ 80,326 $ (60,077) $ 34,060
=========== =========== =========== =========== =========== ===========
Cumulative $ 10,339 $ (108,587) $ 13,811 $ 94,137 $ 34,060 $ 34,060
=========== =========== =========== =========== =========== ===========
Gap as a percentage of
interest-earning assets
Period 2.29% (26.35)% 27.12% 17.80% (13.31)% 7.55%
=========== =========== =========== =========== =========== ===========
Cumulative 2.29% (24.06)% 3.06% 20.86% 7.55% 7.55%
=========== =========== =========== =========== =========== ===========
</TABLE>
(1) Excludes the allowance for loan losses.
(2) Includes interest-earning deposits and certificates of deposit in other
banks.
11
<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 sell 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 maturities
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.
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.
12
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of First
Palmetto both at the holding company level as well as at the subsidiary level.
The holding company requires cash for various operating needs including general
operating expenses and payment of dividends to shareholders. Sources of
liquidity for the holding company include dividends from the Bank to the holding
company and existing cash reserves and earnings.
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 $17.9 million, FHLB advances of $54 million, the sale of loans on
the secondary market in the amount of $43.4 million, from the maturities of
investment securities in the amount of $25.9 million, and from principal
collections of mortgage-backed securities of $44.4 million. These funds were
used to purchase mortgage-backed securities of $8.7 million, fund net loans of
$97.8 million, repay FHLB advances of $31.7 million and to purchase investment
securities in the amount of $48.1 million.
These and other factors resulted in cash and cash equivalents increasing
$874,000 during the year ended September 30, 1999.
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, 1999 is in excess of regulatory
requirements of 4% and will remain so in the upcoming fiscal year.
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
programs could fail or create erroneous results by or at the Year 2000. The Year
2000 issue affects virtually all companies and organizations.
The business risks associated with Year 2000 are considerable. Some of the
risks include errors in accruing interest for loans and deposits, communication
devices may become inoperable, and basic utilities may cease to be provided.
Recognizing the risks of computer errors as the result of Year 2000, the Federal
Financial Institutions Examination Council ("FFIEC") issued an interagency
statement on May 5, 1997, providing an outline for institutions to effectively
manage the Year 2000 challenges. The guidance identified the following five
stages for Year 2000 management: awareness, assessment, renovation, testing and
implementation stages. First Palmetto has completed all five stages for Year
2000 management. A significant portion of First Palmetto's mission critical
products and services is provided by a third party service bureau. The service
bureau completed the renovation stage in November, 1998 and the Bank tested the
renovated software. The testing phase was concluded in January, 1999 at which
time the implementation phase commenced. Implementation was completed in all
material respects by the end of May, 1999. In March, 1999 the Bank finalized its
business resumption plan.
In fiscal 1999, First Palmetto paid the service bureau a $40,000 fee for
its Year 2000 efforts and $15,000 for various hardware and software upgrades. As
of September 30, 1999, First Palmetto had incurred approximately $79,000 in
direct compliance costs associated with the Year 2000 problem. First Palmetto
estimates that $82,000 will be the total direct compliance costs through the
Year 2000. The Bank has not estimated the salaries paid to employees whose
responsibilities include ensuring First Palmetto is Year 2000 ready.
13
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Although First Palmetto believes it will be fully compliant, the risk of
system failure cannot be eliminated. Also, First Palmetto cannot guarantee the
performance of third parties as to which it has mutual relationships.
ACCOUNTING PRONOUNCEMENTS
The Company prepares its financial statements and related disclosures in
conformity with standards established by, among others, the Financial Accounting
Standards Board (the "FASB"). Because the information needed by users of
financial reports is dynamic, the FASB frequently has new rules and proposed new
rules for companies to apply in reporting their activities. The following
discussion addresses such changes as of September 30, 1999 that will affect the
Company's future reporting.
In June, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - and
amendment of FASB No. 133" delayed the effective date of this statement for one
year. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS 133 in fiscal
year 2001 without any impact on its consolidated financial statements as the
Company does not have any derivative financial instruments and is not involved
in any hedging activities.
In October, 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," which establishes accounting and reporting standards for certain
mortgage banking activities. It also conforms the subsequent accounting for
securities retained after the securitization of other types of assets. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company adopted SFAS 134 in fiscal year 1999 without any
impact on its consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The forgoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgements of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to the financial success or changing strategies of the Company's
customers actions of government regulators, the level of market interest rates,
and general economic conditions.
14
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
September 30, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Cash and due from banks $ 11,001 $ 6,983
Interest-bearing deposits in other banks 8,748 11,892
Certificates of deposit in other banks 100 100
Investment securities held to maturity (market value of $59,449 and
$38,521 at September 30, 1999 and 1998, respectively) 60,174 37,969
Mortgage-backed securities held to maturity
(market value of $59,453 and $97,654 at
September 30, 1999 and 1998, respectively) 59,877 95,862
Loans, net of allowance for loan losses of
$5,446 in 1999 and $4,649 in 1998 317,012 263,989
Accrued interest receivable 3,150 3,126
Real estate acquired in settlement of loans 88 500
Stock in the Federal Home Loan Bank (FHLB) 4,150 3,333
Premises and equipment 7,500 6,664
Prepaid expenses and other assets 3,951 3,327
------------ ------------
Total assets $ 475,751 $ 433,745
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 361,764 $ 343,947
FHLB advances 83,000 60,667
Accrued expenses and other liabilities 2,756 3,962
------------ ------------
Total liabilities 447,520 408,576
------------ ------------
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, 752,014 and 748,014 shares issued
in 1999 and 1998, respectively 8 7
Additional paid-in capital 6,979 6,680
Retained earnings, substantially restricted 21,869 19,107
Treasury stock, at cost (40,004 shares in 1999 and 1998) (625) (625)
------------ ------------
Total stockholders' equity 28,231 25,169
------------ ------------
Commitments
Total liabilities and stockholders' equity $ 475,751 $ 433,745
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Statements of Income
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
Interest income: (Dollars in thousands, except net income per share data)
<S> <C> <C> <C>
Loans $ 24,892 $ 23,011 $ 21,576
Mortgage-backed securities 4,511 3,612 2,163
Investment securities 2,598 2,989 3,163
Other 1,209 1,414 1,000
------------- -------------- -------------
Total interest income 33,210 31,026 27,902
------------- -------------- -------------
Interest expense:
Deposits 14,523 15,169 13,418
FHLB advances 3,529 2,106 1,607
------------- -------------- -------------
Total interest expense 18,052 17,275 15,025
------------- -------------- -------------
Net interest income 15,158 13,751 12,877
Provision for loan losses 1,144 2,262 1,428
------------- -------------- -------------
Net interest income after provision for loan losses 14,014 11,489 11,449
------------- -------------- -------------
Other income:
Service charges 1,366 1,293 1,205
Loan servicing 296 451 524
Gain on sales of loans 664 515 173
Gain on sale of investments - 632 254
Gain on sale of branch - 784 -
Miscellaneous 276 229 480
------------- -------------- -------------
Total other income 2,602 3,904 2,636
------------- -------------- -------------
Other expense:
Compensation and related benefits 4,456 4,153 3,979
Net occupancy 1,057 1,133 1,233
Data processing fees 862 806 897
Telephone, postage, and supplies 745 612 709
Federal deposit and other insurance premiums 339 315 367
Amortization of intangible assets 318 349 579
Miscellaneous 1,655 1,493 1,082
------------- -------------- -------------
Total other expense 9,432 8,861 8,846
------------- -------------- -------------
Income before income taxes 7,184 6,532 5,239
Income taxes 2,581 2,354 1,909
------------- -------------- -------------
Net income $ 4,603 $ 4,178 $ 3,330
============= ============== =============
Net income per common share-basic $ 6.50 $ 5.90 $ 4.80
============= ============== =============
Average number of common shares outstanding-basic 708,021 708,010 693,174
============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
Years ended September 30 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive Treasury stockholders'
stock capital earnings income, net stock equity
----- ------- -------- ----------- ----- ------
Balance at (In thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1996 $ 7 $ 6,080 $ 14,474 $ 272 $ (625) $ 20,208
------------ ------------ ------------ ------------ ------------ ------------
Sale of common stock - 600 - - - 600
Cash dividends ($1.90 per
share) - - (1,316) - - (1,316)
Net income - - 3,330 - - 3,330
Other comprehensive income,
net of tax
Unrealized gains on securities
available for sale, net of tax
effect of $89 - - - - - 153
Less, reclassification
adjustment for gains
included in net income,
net of tax effect of $70 - - - - - (120)
------------ ------------ ------------ ------------ ------------ ------------
Other comprehensive income - - - 33 - 33
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income - - - - - 3,363
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 1997 7 6,680 16,488 305 (625) 22,855
------------ ------------ ------------ ------------ ------------ ------------
Cash dividends ($2.20 per
share) - - (1,559) - - (1,559)
Net income - - 4,178 - - 4,178
Other comprehensive income,
net of tax
Reclassification adjustment for
gains included in net income,
net of tax effect of $179 - - - - - (305)
------------ ------------ ------------ ------------ ------------ ------------
Other comprehensive income - - - (305) - (305)
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income - - - - - 3,873
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 1998 7 6,680 19,107 -0- (625) 25,169
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
Years ended September 30 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive Treasury stockholders'
stock capital earnings income, net stock equity
----- ------- -------- ----------- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income - - 4,603 - - 4,603
Cash dividends ($2.60 per
share) - - (1,841) - - (1,841)
Sale of common stock 1 299 - - - 300
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 1999 $ 8 $ 6,979 $ 21,869 $ -0- $ (625) $ 28,231
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
Cash flows from operating activities: (In thousands)
<S> <C> <C> <C>
Net income $ 4,603 $ 4,178 $ 3,330
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion and amortization of discounts and
premiums, net 246 (136) (250)
Decrease in deferred loan fees, net (21) (34) (10)
Provision for loan losses 1,144 2,262 1,428
Gain on sale of available-for-sale securities - (632) (254)
(Gain) loss on sale of real estate acquired in settlement
of loans, net 54 (28) (15)
Gain on sale of branch - (784) -
Depreciation 357 434 468
Amortization of intangible assets 318 349 579
Proceeds from sale of loans 43,422 29,961 11,764
Originations and principal repayments of loans
held for sale, net (43,101) (29,446) (11,591)
Increase in accrued interest receivable (24) (400) (346)
(Increase) decrease in prepaid expenses and other assets (734) (812) 69
Increase (decrease) in accrued expenses and other
liabilities (1,206) 1,871 (1,573)
------------- -------------- -------------
Net cash provided by operating activities 5,058 6,783 3,599
------------- -------------- -------------
Cash flows from investing activities:
Net decrease in certificates of deposit in other banks - 299 -
Proceeds from maturities of investment securities held
to maturity 25,879 30,480 20,000
Purchases of investment securities held to maturity (48,060) (20,623) (21,079)
Proceeds from sale of available-for-sale securities - 1,304 426
Purchases of mortgage-backed securities held to maturity (8,663) (80,433) (4,563)
Principal collected on mortgage-backed securities
held to maturity 44,378 16,918 5,206
Net increase in loans (54,671) (23,297) (27,226)
Proceeds from sale of real estate acquired in
settlement of loans 562 326 671
Improvements made to real estate held for
development and sale (208) (366) -
Proceeds from sale of FHLB stock 1,225 56 93
Purchases of FHLB stock (2,042) (1,359) -
Capital expenditure for premises and equipment (1,193) (1,317) (1,497)
Retirements of premises and equipment - 272 82
Sale of branch - (5,549) -
------------- -------------- -------------
Net cash used in investing activities (42,793) (83,289) (27,887)
------------- -------------- -------------
(Continued)
19
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998, and 1997
1999 1998 1997
------------- -------------- -------------
Cash flows from financing activities: (In thousands)
Net increase in deposits 17,817 38,701 32,611
Proceeds from FHLB advances 54,000 45,000 7,000
Repayment of FHLB advances (31,667) (11,567) (12,317)
Sale of common stock 300 - 600
Cash dividends (1,841) (1,559) (1,316)
------------- -------------- -------------
Net cash provided by financing activities 38,609 70,575 26,578
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 874 (5,931) 2,290
Cash and cash equivalents at beginning of year 18,875 24,806 22,516
------------- -------------- -------------
Cash and cash equivalents at end of year $ 19,749 $ 18,875 $ 24,806
============= ============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 18,083 $ 17,005 $ 14,829
Income taxes 4,143 1,654 2,231
Supplemental schedule of noncash investing and
financing activities:
Loans transferred to real estate acquired in
settlement loans 204 691 508
Increase (decrease) in unrealized gain on
available-for-sale securities, net - (305) 33
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(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 subsidiary, Palmetto State Service Corporation. 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, 1998 and 1997 consolidated
financial statements have been reclassified to conform with the
1999 presentations. These reclassifications had no impact on net
income or stockholders' equity as previously reported.
(d) Investment and Mortgage-Backed 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 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).
Investment and mortgage-backed securities have been classified as
held-to-maturity securities because First Palmetto has the intent
and the ability to hold all such securities until maturity.
Gains and losses on sales of securities are recognized on a
specific identification basis. Premiums and discounts are
amortized into interest income using a level yield method.
(Continued)
21
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
Regulations require First Palmetto to maintain cash and U.S.
Government and other approved securities in an amount equal to a
prescribed percentage (4% at September 30, 1999) of deposit
accounts (net of loans on deposit accounts) plus short-term
borrowings. First Palmetto was in compliance with such regulation
at September 30, 1999.
(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 at the time of sale to a third party. 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.
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.
(f) Provision for Loan Losses
-------------------------
The allowance for loan losses is the amount considered adequate to
absorb inherent losses in the loan 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,
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 adjustments to the allowance
based on their judgments about information available to them at
the time of their examination.
(Continued)
22
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(g) Impairment of Loans
-------------------
Loans are considered to be impaired when, in management's
judgement, the collection of all amounts of principal and interest
is not probable in accordance with the terms of the loan
agreement. The Company accounts for impaired loans in accordance
with SFAS 114, "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS 118 in the areas of disclosure requirements and
methods of recognizing income. SFAS 114 requires that impaired
loans be valued at fair value, which is determined based upon the
present value of expected cash flows discounted at the loan's
effective interest rate, the market price of the loan, if
available, or the value of the underlying collateral. All cash
receipts on impaired loans are applied to principal until such
time as the principal is brought current. After principal has been
satisfied, future cash receipts are applied to interest income, to
the extent that any interest has been foregone. As a practical
matter, the Bank determines which loans are impaired through a
loan review process.
(h) 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
recorded at the lower of cost or fair value less 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.
(i) 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 five 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.
(j) Loan Interest Income
--------------------
When loans become more than ninety 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 is returned to accrual status. Interest income on
impaired loans is recognized on a cash basis.
(Continued)
23
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(k) 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.
(l) 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. 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.
(m) Intangible Assets
-----------------
Goodwill, representing the excess of the purchase price of a
business combination over the fair value of net assets acquired,
is being amortized by charges to operations generally over twelve
years, using the straight-line method.
Deposit-based premiums, representing the cost of acquiring
deposits from other financial institutions, are being amortized by
charges to operations over seven years, an estimate of the life of
the existing deposit relationship, using the straight-line method.
The amount of goodwill and deposit based premiums at September 30,
1999 was $649,000 and at September 30, 1998 was $967,000. This was
included in other assets.
(n) Stock Based Compensation
------------------------
First Palmetto reports stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") 25, "Accounting for Stock Issued to Employees",
which measures compensation expense as the excess, if any, of the
quoted market price of First Palmetto stock at the date of the
grant over the amount an employee must pay to acquire the stock.
SFAS 123, "Accounting for Stock-Based Compensation", encourages
but does not require companies to record compensation cost for
stock-based compensation plans at fair value. No additional
disclosure under SFAS 123 is required for First Palmetto at this
time because no stock options have been granted. (See footnote
15.)
(o) 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.
(Continued)
24
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(p) Earnings Per Share
------------------
Basic earnings per share are computed by dividing net income
applicable to common shareholders by the weighted-average number
of common shares outstanding. Diluted earnings per share are
computed by dividing net income by the weighted-average number of
shares of common stock and common stock equivalents outstanding
during the period, with common stock equivalents calculated based
on the average market price. 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 no shares have
been granted.
(q) Business Segments
-----------------
Effective October 1, 1998, the Bank adopted SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS 131
requires that a public business enterprise report financial and
descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. SFAS 131 requires that
a public enterprise report a measure of segment profit or loss,
certain specific revenue and expense items, segment assets,
information about the way that the operating segments were
determined and other items. The Bank operates as one segment.
(r) Comprehensive Income
--------------------
In 1999, First Palmetto adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires that changes in the
amounts of comprehensive income items be shown in a primary
financial statement. Comprehensive income is defined by the
statement as " the change in equity (net assets) of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by
owners and distributions to owners." In accordance with SFAS No.
130, First Palmetto elected to disclose changes in comprehensive
income in its Consolidated Statements of Changes in Stockholders'
Equity.
(Continued)
25
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(2) Investment Securities
---------------------
Investment securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- -------------- -------------
September 30, 1999: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations due:
Within 12 months $ 13,008 $ 55 $ - $ 13,063
Beyond 12 months but
within 5 years 46,166 23 806 45,383
Over 5 years 1,000 3 - 1,003
------------- ------------- -------------- -------------
$ 60,174 $ 81 $ 806 $ 59,449
============= ============= ============== =============
September 30, 1998:
U.S. Government obligations due:
Within 12 months $ 14,991 $ 148 $ - $ 15,139
Beyond 12 months but
within 5 years 22,978 404 - 23,382
------------- ------------- -------------- -------------
$ 37,969 $ 552 $ -0- $ 38,521
============= ============= ============== =============
</TABLE>
During 1999, 1998 and 1997, investment securities with total amortized
cost of $25.9 million, $30.5 million and $20.0 million, respectively,
matured or were sold within ninety days of maturity. Proceeds from these
maturities and sales were $25.9 million, $30.5 million and $20.0 million.
At September 30, 1999, investment securities with an amortized cost of
$16.9 million were pledged to secure public deposits and deposits of
individuals.
(3) Mortgage-Backed Securities
--------------------------
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1999: Cost Gains Losses Value
------------- ------------- -------------- -------------
FHLMC participation certificates (In thousands)
<S> <C> <C> <C> <C>
(6.00% - 7.39%, due 2008 through
2028) $ 26,797 $ 134 $ 348 $ 26,583
FNMA mortgage-backed securities
(5.25% - 7.45%, due 2003 through
2028) 33,014 323 529 32,808
Various mortgage-backed securities 66 - 4 62
------------- ------------- -------------- -------------
$ 59,877 $ 457 $ 881 $ 59,453
============= ============= ============== =============
</TABLE>
(Continued)
26
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1998: Cost Gains Losses Value
------------- ------------- -------------- -------------
FHLMC participation certificates (In thousands)
<S> <C> <C> <C> <C>
(5.28% - 7.90%, due 2008 through
2028) $ 43,568 $ 617 $ - $ 44,185
FNMA mortgage-backed securities
(5.30% - 7.80%, due 2003 through
2028) 52,209 1,173 - 53,382
Various mortgage-backed securities 85 2 - 87
------------- ------------- -------------- -------------
$ 95,862 $ 1,792 $ -0- $ 97,654
============= ============= ============== =============
</TABLE>
There were no sales of mortgage-backed securities during 1999, 1998 or
1997. At September 30, 1999, mortgage-backed securities with an amortized
cost of $57.3 million were pledged to secure public deposits and deposits
of individuals.
(4) Loans
-----
Loans consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998
-------------- -------------
Real estate mortgage (principally single (In thousands)
<S> <C> <C>
family dwellings, 1-4 units) $ 134,550 $ 117,928
Commercial real estate 132,601 97,557
Real estate construction 8,456 9,127
Commercial 24,206 15,724
Installment 25,103 29,847
Loans held for sale 1,698 2,019
-------------- -------------
Sub-total 326,614 272,202
-------------- -------------
Undisbursed proceeds on real estate construction (3,938) (3,325)
Deferred loan fees, net (218) (239)
Allowance for loan losses (5,446) (4,649)
-------------- -------------
$ 317,012 $ 263,989
============== =============
</TABLE>
Loans serviced for others approximated $140.7 million, $130.4 million,
and $128.9 million at September 30, 1999, 1998, and 1997, respectively.
Mortgage servicing rights were immaterial for all periods reported.
The following summarizes the changes in the allowance for loan losses for
the years ended September 30, 1999, 1998, and 1997:
1999 1998 1997
---- ---- ----
(In thousands)
Balance at beginning of year $ 4,649 $ 3,009 $ 2,364
Provision for loan losses 1,144 2,262 1,428
Loan charge-offs (626) (937) (917)
Recoveries 279 315 134
--------- ---------- ---------
Balance at end of year $ 5,446 $ 4,649 $ 3,009
========= ========== =========
(Continued)
27
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
At September 30, 1999 and 1998, the recorded investment in loans that are
considered to be impaired was $2.2 million and $851,000, respectively.
There was no specific allowance for credit losses related to the impaired
loans as of September 30, 1999 and 1998. The average recorded investment
in impaired loans during the years ended September 30, 1999 and 1998 was
$1.1 million and $923,000, respectively. Interest income recognized on
the cash basis for impaired loans amounted to $150,000 and $127,000 for
the years ended September 30, 1999 and 1998, 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 $836,000, $636,000,
and $981,000, at September 30, 1999, 1998, and 1997, respectively.
Foregone interest income related to nonaccrual loans for the years ended
September 30, 1999, 1998 and 1997 amounted to $56,000, $36,000 and
$60,000, respectively. Interest income recognized on nonaccrual loans for
the years ended September 30, 1999, 1998 and 1997 amounted to $36,000,
$25,000 and $38,000, 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, 1999.
(In thousands)
Loan balances, September 30, 1998 $ 4,374
New loans originated 5,043
Loan repayments 2,999
-------------
Loan balances, September 30, 1999 $ 6,418
=============
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 condition.
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, 1999 and 1998, preapproved but unused lines of credit for
loans totaled approximately $23.5 million and $22.7 million, standby
letters of credit approximated $3.7 million and $1.4 million, and
outstanding loan commitments aggregated $1.9 million and $2.2 million,
respectively. Of these loan commitments, $-0- are at variable rates and
$1.9 million and $2.2 million are at fixed rates at September 30, 1999
and 1998, respectively. The interest rates for these commitments at
September 30, 1999 range from 7.25% to 9.00%. 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
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, 1999, 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.
(5) Accrued Interest
----------------
Accrued interest receivable consists of the following:
September 30,
-------------------------
1999 1998
---------- ----------
(In thousands)
Loans $ 1,911 $ 1,742
Investment securities 886 821
Mortgage-backed securities 353 563
---------- ----------
$ 3,150 $ 3,126
========== ==========
At September 30, 1999 and 1998, the allowance for uncollected interest
amounted to $56,000 and $36,000, respectively.
(6) Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans consists of the following:
September 30,
-------------------------
1999 1998
---------- ----------
(In thousands)
Single family residences $ 78 $ 81
Commercial property 10 419
---------- ----------
$ 88 $ 500
========== ==========
(7) 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 $249,000, $247,000 and $288,000 for the years ended
September 30, 1999, 1998, and 1997, respectively.
(Continued)
29
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(8) Premises and Equipment
----------------------
Premises and equipment consist of the following:
Accumulated Net Book
Cost Depreciation Value
---- ------------ -----
September 30, 1999: (In thousands)
Land and improvements $ 3,576 $ 4 $ 3,572
Office buildings and improvements 4,250 1,326 2,924
Leasehold improvements 1,290 694 596
Furniture, fixtures and equipment 1,128 792 336
Automobiles 115 43 72
-------- --------- --------
$ 10,359 $ 2,859 $ 7,500
======== ========= ========
September 30, 1998:
Land and improvements $ 2,918 $ 4 $ 2,914
Office buildings and improvements 4,476 1,197 3,279
Leasehold improvements 790 670 120
Furniture, fixtures and equipment 926 609 317
Automobiles 88 54 34
-------- --------- --------
$ 9,198 $ 2,534 $ 6,664
======== ========= ========
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:
Years ending September 30, (In thousands)
--------------------------
2000 $ 116
2001 98
2002 98
2003 69
2004 61
Later years 188
--------------
$ 630
==============
Rent expense was $116,000, $139,000 and $133,000 for the years ended
September 30, 1999, 1998, and 1997, respectively.
(Continued)
30
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(9) Deposits
--------
Deposits consist of the following:
September 30,
------------------------
1999 1998
---------- ----------
(In thousands)
Noninterest bearing checking $ 27,467 $ 22,038
NOWs (.75% in 1999 and 1.50% in 1998) 43,685 38,228
MMDAs (2.25% in 1999 and 1998) 21,731 19,511
Savings (2.00% in 1999 and 2.25% in 1998) 22,805 22,482
---------- ----------
115,688 102,259
---------- ----------
Time:
Less than 3.00% 10 16
3.00% to 4.99% 110,277 20,117
5.00% to 6.99% 135,671 221,357
7.00% to 9.99% 118 198
---------- ----------
246,076 241,688
---------- ----------
$ 361,764 $ 343,947
========== =========
Weighted average cost of deposits
(as of dates indicated above) 4.26% 4.82%
========== =========
A summary of time deposits by maturity as of September 30, 1999 follows:
(In thousands)
October 1, 1999 - September 30, 2000 $ 223,889
After September 30, 2000 22,187
--------------
Total time deposits $ 246,076
==============
At September 30, 1999 and 1998, the aggregate amount of time deposits of
$100,000 or more amounted to $63.3 million and $58.4 million,
respectively.
Interest expense on deposits consists of the following:
Years ended September 30,
------------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
NOWs and MMDAs $ 1,285 $ 1,502 $ 1,487
Savings 460 524 562
Time 12,778 13,143 11,369
------------- -------------- -------------
$ 14,523 $ 15,169 $ 13,418
============= ============== =============
At September 30, 1999, approximately $45.8 million in investment
securities and mortgage-backed securities were pledged to secure public
deposits and deposits of individuals.
(Continued)
31
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(10) FHLB Advances
-------------
FHLB advances consist of the following:
September 30,
Interest ------------------------
Maturity Date Rate 1999 1998
------------- -------- --------- -----------
(In thousands)
January 8, 1999 5.57% $ - $ 5,000
February 25, 1999 5.30% - 500
April 28, 1999 5.23% - 167
July 27, 1999 5.82% - 1,000
July 27, 2000 6.02% - 1,000
January 29, 2001 5.69% 2,000 2,000
July 5, 2004 6.49% - 6,000
July 30, 2004 5.72% 2,000 -
May 19, 2008 5.09% 16,000 16,000
June 4, 2008 5.55% 25,000 25,000
June 19, 2008 4.97% 4,000 4,000
October 1, 2008 4.89% 5,000 -
October 1, 2008 5.41% 5,000 -
August 7, 2009 4.95% 10,000 -
August 13, 2009 6.39% 5,000 -
Daily Variable 9,000 -
--------- -----------
$ 83,000 $ 60,667
========= ===========
At September 30, 1999, all stock in the FHLB, selected mortgage-backed
securities and a specific lien on certain first mortgage loans secured by
one to four unit single-family dwellings were pledged as collateral to
secure these advances.
(11) Income Taxes
------------
Income tax expense consists of the following:
Years ended September 30,
------------------------------------------------
1999 1998 1997
------------- -------------- -------------
Current: (In thousands)
Federal $ 2,719 $ 3,014 $ 1,629
State 280 277 42
------------- -------------- -------------
2,999 3,291 1,671
------------- -------------- -------------
Deferred:
Federal (350) (818) 211
State (68) (119) 27
------------- -------------- -------------
(418) (937) 238
------------- -------------- -------------
$ 2,581 $ 2,354 $ 1,909
============= ============== =============
(Continued)
32
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
The income tax expense of First Palmetto for the years ended September
30, 1999, 1998, and 1997 was different from the amount computed by
applying the federal income tax rate to income before income taxes
because of the following:
Years ended September 30,
---------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Income tax expense at federal rate $ 2,443 $ 2,220 $ 1,781
Increase in income taxes resulting from:
Other, net 138 134 128
-------- -------- --------
$ 2,581 $ 2,354 $ 1,909
======== ======== ========
Effective tax rate 35.9% 36.0% 36.4%
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at September
30, 1999 and 1998 are presented below:
September 30,
----------------------
1999 1998
---- ----
Deferred tax assets: (In thousands)
Allowance for loan losses $ 2,015 $ 1,720
Accrued vacation pay 25 25
Tax over book basis in intangible asset 374 373
Depreciation 36 34
Other 21 13
--------- ---------
Total gross deferred tax assets 2,471 2,165
--------- ---------
Deferred tax liabilities:
Tax bad debts in excess of base year 335 447
FHLB stock basis over tax basis 315 315
--------- ---------
Total gross deferred tax liability 650 762
--------- ---------
Net deferred tax asset $ 1,821 $ 1,403
========= =========
No valuation allowance for deferred tax assets was required at September
30, 1999 and 1998. 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
Notes to Consolidated Financial Statements
Prior to recent legislation enacted by the 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 1996, the percentage of taxable income method was used.
For tax years beginning after fiscal 1996, this method has been repealed.
In 1998, 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 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. During the year ended September 30,
1999, the Bank recaptured $303,000. The remaining amount to recapture
over the next three years is $908,000. 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 thrift.
Income tax returns for 1996 and subsequent years are subject to
examination by the taxing authorities.
(12) 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.
As of September 30, 1999, the Bank was categorized as well-capitalized
under the regulatory framework for prompt corrective action. To remain
well capitalized, 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
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
------ ----- ------ ----- ------ -----
As of September 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital
(to total assets) $ 26,965 5.68% $ 19,003 4.00% $ 23,754 5.00%
Tier I capital
(to risk-weighted assets) 26,965 9.20 11,723 4.00 17,586 6.00
Total capital
(to risk-weighted assets) 30,651 10.46 23,447 8.00 29,309 10.00
As of September 30, 1998:
Tier 1 capital
(to total assets) $ 24,144 5.58% $ 17,308 4.00% $ 21,635 5.00%
Tier I capital
(to risk-weighted assets) 24,144 9.84 9,814 4.00 14,720 6.00
Total capital
(to risk-weighted assets) 27,230 11.10 19,628 8.00 24,534 10.00
</TABLE>
Under the framework, the Bank's capital levels allow the Bank to accept
brokered deposits without prior approval from regulators.
Federal regulations permit institutions 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 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.
(13) Pension Plan
------------
First Palmetto has a noncontributory defined contribution profit sharing
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 $405,000, $340,000 and $330,000
for the years ended September 30, 1999, 1998, and 1997, respectively.
(Continued)
35
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(14) 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, 1999, no options
had been granted under this plan.
(15) Fair Value of Financial Instruments
-----------------------------------
Fair value estimates, methods, and assumptions as of September 30, 1999
and 1998 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
Notes to Consolidated Financial Statements
First Palmetto's fair value methods and assumptions are as follows:
- Cash and due from banks, interest-bearing deposits in other banks,
certificates of deposit in other banks 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
------ -----
September 30, 1999: (In thousands)
Financial assets:
<S> <C> <C>
Cash and due from banks $ 11,001 $ 11,001
Interest-bearing deposits in other banks 8,748 8,748
Certificates of deposit in other banks 100 100
Investment securities held to maturity 60,174 59,449
Mortgage-backed securities held to maturity 59,877 59,453
Loans 317,012 315,842
FHLB stock 4,150 4,150
Financial liabilities:
Deposits 361,764 360,715
FHLB advances 83,000 76,423
(Continued)
37
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1998:
Financial assets:
Cash and due from banks $ 6,983 $ 6,983
Interest-bearing deposits in other banks 11,892 11,892
Certificates of deposit in other banks 100 100
Investment securities held to maturity 37,969 38,521
Mortgage-backed securities held to maturity 95,862 97,654
Loans 263,989 265,851
FHLB stock 3,333 3,333
Financial liabilities:
Deposits 343,947 345,553
FHLB advances 60,667 61,688
</TABLE>
(Continued)
38
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(16) Summary of Quarterly Income Statement Information (Unaudited)
-------------------------------------------------------------
A summary of quarterly income statement information for the years ended
September 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Three months ended
1999 December 31 March 31 June 30 September 30
---- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Interest income $ 8,342 $ 8,146 $ 8,220 $ 8,502
Interest expense 4,732 4,450 4,358 4,512
------------- ------------- -------------- -------------
Net interest income 3,610 3,696 3,862 3,990
Provision for loan losses 160 335 280 369
------------- ------------- -------------- -------------
Net interest income after
provision for loan losses 3,450 3,361 3,582 3,621
Other income 795 642 592 573
Other expense 2,335 2,424 2,345 2,328
------------- ------------- -------------- -------------
Income before income taxes 1,910 1,579 1,829 1,866
Income taxes 680 566 667 668
------------- ------------- -------------- -------------
Net income $ 1,230 $ 1,013 $ 1,162 $ 1,198
============= ============= ============== =============
Per common share data-basic $ 1.74 $ 1.43 $ 1.64 $ 1.69
============= ============= ============== =============
Average common shares outstanding-basic 708,010 708,010 708,010 708,053
============= ============= ============== =============
Three months ended
1998 December 31 March 31 June 30 September 30
---- ------------- ------------- -------------- -------------
Interest income $ 7,394 $ 7,472 $ 7,879 $ 8,281
Interest expense 4,056 4,072 4,408 4,739
------------- ------------- -------------- -------------
Net interest income 3,338 3,400 3,471 3,542
Provision for loan losses 671 404 500 687
------------- ------------- -------------- -------------
Net interest income after
provision for loan losses 2,667 2,996 2,971 2,855
Other income 1,874 749 630 651
Other expense 2,366 2,094 2,186 2,215
------------- ------------- -------------- -------------
Income before income taxes 2,175 1,651 1,415 1,291
Income taxes 783 594 515 462
------------- ------------- -------------- -------------
Net income $ 1,392 $ 1,057 $ 900 $ 829
============= ============= ============== =============
Per common share data-basic $ 1.97 $ 1.49 $ 1.27 $ 1.17
============= ============= ============== =============
Average common shares outstanding-basic 708,010 708,010 708,010 708,010
============= ============= ============== =============
</TABLE>
(Continued)
39
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(17) 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, 1999, the Bank had available
undivided profits of approximately $6.8 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,
-------------------------------
1999 1998
-------------- -------------
Assets (In thousands)
------
<S> <C> <C>
Cash on deposit with subsidiary $ 443 $ 246
Certificate of deposit 100 -
Investment in subsidiary 27,954 25,189
Taxes receivable 9 9
-------------- -------------
Total assets $ 28,506 $ 25,444
============== =============
Liabilities
-----------
Due to subsidiary $ 275 $ 275
-------------- -------------
Total liabilities 275 275
-------------- -------------
Stockholders' equity
--------------------
Common stock 8 7
Additional paid-in capital 6,979 6,680
Retained earnings, substantially restricted 21,869 19,107
Treasury stock, at cost (625) (625)
-------------- -------------
Total stockholders' equity 28,231 25,169
-------------- -------------
Total liabilities and stockholders' equity $ 28,506 $ 25,444
============== =============
</TABLE>
Statements of Income
--------------------
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Dividends from subsidiary $ 1,850 $ - $ 900
Equity in undistributed net income of subsidiary 2,765 3,887 2,256
Other income 3 485 285
------------- -------------- -------------
Total income 4,618 4,372 3,441
Expenses 15 194 111
------------- -------------- -------------
Net income $ 4,603 $ 4,178 $ 3,330
============= ============== =============
</TABLE>
(Continued)
40
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------------
1999 1998 1997
------------- -------------- -------------
Cash flows from operating activities: (In thousands)
<S> <C> <C> <C>
Net income $ 4,603 $ 4,178 $ 3,330
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of available-for-sale securities - (485) (254)
Equity in undistributed net income of subsidiary (2,765) (3,887) (2,256)
Increase (decrease) in taxes payable/receivable - (103) 94
------------- -------------- -------------
Net cash provided by (used in) operating activities 1,838 (297) 914
------------- -------------- -------------
Cash flows from investing activities:
Purchase of certificate of deposit (100) - -
Proceeds from sale of available-for-sale securities - 907 426
------------- -------------- -------------
Net cash provided by (used in) investing activities (100) 907 426
------------- -------------- -------------
Cash flows from financing activities:
Sale of common stock 300 - 600
Increase in due to bank - 275 -
Dividends paid to stockholders (1,841) (1,559) (1,316)
------------- -------------- -------------
Net cash used in financing activities (1,541) (1,284) (716)
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 197 (674) 624
Cash and cash equivalents at beginning of year 246 920 296
------------- -------------- -------------
Cash and cash equivalents at end of year $ 443 $ 246 $ 920
============= ============== =============
Supplemental schedule of noncash financing activities:
Increase (decrease) in unrealized gain on
available-for-sale securities of parent company - (305) 33
</TABLE>
(18) 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, 1999
was $882,000.
41
<PAGE>
INDEPENDENT AUDITORS' 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
Greenville, South Carolina /s/ KPMG, LLP
KPMG, LLP
November 24, 1999
42
<PAGE>
FIRST PALMETTO FINANCIAL CORPORATION
BOARD of DIRECTORS and EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS EXECUTIVE OFFICERS
H. Davis Green, Jr. H. Davis Green, Jr.
Chairman of the Board, Chairman of the Board
First Palmetto Financial Corporation
H. Davis Green, Jr. Appraisals
Camden, South Carolina
Samuel R. Small Samuel R. Small
Chief Executive Officer, President and Chief Executive Officer
First Palmetto Financial Corporation
Camden, South Carolina
Steve G. Williams, Jr. Steve G. Williams, Jr.
Senior Vice President and Treasurer, Senior Vice-President and Treasurer
First Palmetto Financial Corporation
Camden, South Carolina
Pierce W. Cantey, Jr. Darlene H. Love
Managing Partner, Secretary
Cantey, Tiller, Pierce and Associates, LLP
Camden, South Carolina DIRECTORS EMERITUS
William R. Clyburn H. B. Marshall, Jr.
President, Bill Clyburn Realty, Inc. Retired Agent, New York Life Insurance Company
Kershaw, South Carolina Camden, South Carolina
Frank Goodale Austin M. Sheheen, Sr.
Merchant, F.D. Goodale, Jeweler Business Executive (Retired), Sheheen Texaco
Camden, South Carolina Camden, South Carolina
Donald H. Holland William F. Tripp, Jr.
Attorney Plant Manager (Retired), E.I. DuPont
Camden, South Carolina Camden, South Carolina
Charlie E. Nash
Retired 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 LLP
Suite 900
55 Beattie Place
Greenville, South Carolina 29601
BRANCH OFFICES
104 East Church Street, Bishopville, South Carolina 29010
2310 North Broad Street, Camden, South Carolina 29020
3932 Forest Drive, Columbia, South Carolina 29206
8921 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
409 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
10207 North Kings Highway, Myrtle Beach, South Carolina 29572
501 Highway 17, South, North Myrtle Beach, South Carolina 29582
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, 1999 the Bank employed 128 persons.
44
<PAGE>
COMMON STOCK INFORMATION
At September 30, 1999, First Palmetto had 712,010 shares of common stock
outstanding held by approximately 390 shareholders of record.
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.
October 1, 1998 to October 1, 1997 to
Stock Data-Per Share September 30, 1999 September 30, 1998
- -------------------- ------------------ ------------------
Sales Price (Estimated)
High $75.00 $51.00
Low $51.00 $40.00
Book Value at September 30 $39.65 $35.55
Annual Cash Dividend $ 2.60 $ 2.20
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
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 Palmetto
State Service Corporation, a South Carolina corporation.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 11,001
<INT-BEARING-DEPOSITS> 8,748
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 120,051
<INVESTMENTS-MARKET> 118,902
<LOANS> 317,012
<ALLOWANCE> 5,446
<TOTAL-ASSETS> 475,751
<DEPOSITS> 361,764
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 2,756
<LONG-TERM> 74,000
0
0
<COMMON> 6,362
<OTHER-SE> 21,869
<TOTAL-LIABILITIES-AND-EQUITY> 475,751
<INTEREST-LOAN> 24,892
<INTEREST-INVEST> 7,109
<INTEREST-OTHER> 1,209
<INTEREST-TOTAL> 33,210
<INTEREST-DEPOSIT> 14,523
<INTEREST-EXPENSE> 18,052
<INTEREST-INCOME-NET> 15,158
<LOAN-LOSSES> 1,144
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,432
<INCOME-PRETAX> 7,184
<INCOME-PRE-EXTRAORDINARY> 4,603
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,603
<EPS-BASIC> 6.50
<EPS-DILUTED> 6.50
<YIELD-ACTUAL> 3.37
<LOANS-NON> 836
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,200
<ALLOWANCE-OPEN> 4,649
<CHARGE-OFFS> 626
<RECOVERIES> 279
<ALLOWANCE-CLOSE> 5,446
<ALLOWANCE-DOMESTIC> 5,446
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
