<PAGE>

   [LOGO] PALFED, INC.

1 9 9 6  A N N U A L  R E P O R T
<PAGE>
TABLE OF CONTENTS
-------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                    PAGE
                                                    ----

<S>                                                 <C>
To Our Shareholders...............................    1

Selected Financial Data...........................    6

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

Report of Independent Accountants.................   18

Consolidated Financial Statements.................   19

Notes to Consolidated Financial Statements........   24

Board of Directors................................   43

Principal Officers................................   45

Office Locations..................................   46

Corporate Information.............................   47
</TABLE>

COMPANY PROFILE
-------------------------------------------------------------------------

PALFED, Inc. (together with its subsidiaries, the "Company") is a South Carolina
corporation whose principal subsidiary, Palmetto Federal Savings Bank of South
Carolina ("Palmetto Federal" or the "Bank") is a federal stock savings bank,
originally chartered in 1951. As of December 31, 1996 the Bank operated 21
banking and seven mortgage lending offices in South Carolina, one mortgage
lending office in Georgia and, in March 1997, opened its 22nd branch in Hilton
Head Island, South Carolina. The Company's other subsidiary is PALFED Investment
Services, Inc., a South Carolina corporation that offers retail securities
brokerage services and consumer insurance products.

EQUAL EMPLOYMENT OPPORTUNITY
-------------------------------------------------------------------------

It is the Company's policy to grant equal employment opportunities to all
qualified persons without regard to race, creed, color, religion, age, national
origin, citizenship status, physical or mental handicap, or veteran's status. To
deny a qualified person the chance to contribute to our effort because he or she
is a member of a minority group is unfair, not only to the individual but to our
Company and our nation as well. It is our intent and desire to provide equal
opportunities in employment, promotion, wages, benefits, and all other
privileges, terms and conditions of employment. This policy has the support of
the highest levels of our management team.

ANNUAL MEETING NOTICE
-------------------------------------------------------------------------

All shareholders are cordially invited to the Annual Meeting of Shareholders on
Tuesday, April 22, 1997 at 10:00 a.m. at the Aiken City Hall Meeting Room, 214
Park Avenue, Aiken, South Carolina, 29801.

MISSION
-------------------------------------------------------------------------

Our mission is to maximize shareholder value as South Carolina's Bank.

We shall maximize shareholder value by:

    -providing the best service for our customers, communities, employees and
     shareholders.

    -
     growing our franchise through internal and new market expansion.

Our vision is for PALFED to be the best independent financial institution in
South Carolina.
<PAGE>
TO OUR SHAREHOLDERS:
-------------------------------------------------------------------------

       We are extremely pleased with our results for 1996. Our third consecutive
       year of record operating earnings confirms that our strategy of internal
       growth and market expansion is working to build current and long-term
       shareholder value.
          Shareholder value is our number one priority. We are confident that as
       our problem assets, investment in real estate, and their related expenses
                                       reach normal industry standards, Palmetto
                                       Federal will be a high performance bank
                                       and our shareholders will continue to
                                       benefit accordingly.
                                          Our shareholders have been richly
                                       rewarded in the marketplace with a stock
                                       value that has increased from $5.50 at
                                       the time of our rights offering in 1993
                                       to $15.00 as of our record date in
                                       February. In a collaborative effort with
                                       the Company's independent financial
                                       advisors, we have identified a number of
                                       opportunities to further enhance
                                       shareholder value over the near and
                                       intermediate term. We intend to pursue
                                       these initiatives and believe that, when
                                       realized, they will add to the value of
                                       our stock.

[PHOTO]

                                          Our growth strategy has served us well
                                       over the last four years as we have grown
                                       from sixteen branches to twenty-two and
       from five mortgage offices to eight. During 1996, we opened full-service
       banking centers in downtown Charleston, Lexington, and Mt. Pleasant, as
       well as a mortgage office in Columbia. In March of this year we opened
       our second full-service banking center on Hilton Head Island. These new
       offices made an immediate impact on balance sheet growth and earnings and
       will continue to make a positive impact in the future. During 1996,
       approximately 33% of mortgage originations, 33% of deposit growth and 67%
       of the growth in consumer and commercial loans came from the Bank's new
       markets.
          The industry-wide FDIC Savings Association Insurance Fund ("SAIF")
       recapitalization assessment reduced earnings in 1996 by $3.3 million
       ($2.2 million after tax) and also resulted in an additional $2.4 million
       non-cash charge related to the write-off of Palmetto Federal's remaining
       core deposit intangible. Although the SAIF assessment and deposit
       intangible charges significantly reduced 1996 income, future annual
       earnings will be improved by reduced insurance premiums of nearly
       $825,000 and reduced intangible amortization expenses of approximately
       $250,000. The core deposit intangible write-off had no impact on
       regulatory capital levels and neither charge affected the Bank's "well
       capitalized" status.

                                                                               1
<PAGE>
   The PALFED team is very proud of the progress made since 1993 when some tough
decisions were made to position the Company for the future. The graphs below
illustrate the positive trends the Company has experienced in the very important
areas of operating income, deposit and loan growth, and reduction in
non-performing assets.

<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
                                                               OPERATING INCOME
<S>                                             <C>
1993          $ (2,632,000.00)
1994            $ 3,754,000.00
1995            $ 4,145,000.00
1996            $ 4,700,000.00
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
               DEPOSITS
<S>        <C>
1993          $ 477,218,000
1994          $ 478,248,000
1995          $ 496,746,000
1996          $ 540,128,000
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
                LOANS
<S>        <C>
1993          $ 445,058,000
1994          $ 447,991,000
1995          $ 464,281,000
1996          $ 524,120,000
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
 NON-PERFORMING ASSETS
<S>                      <C>
1993                        $ 45,500,000
1994                        $ 35,859,000
1995                        $ 27,424,000
1996                        $ 18,022,000
</TABLE>

   It is easy to see that as we continue to implement our "classic banking
turnaround," the future is very bright for the Company and its shareholders.
Your Board, Management, and staff have achieved our growth in share value by
hard work and dedication. We shareholders owe them our thanks for a job well
done.

2
<PAGE>
   Let me share one last graph with you -- the outstanding performance of your
Company's stock.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
            PALFED, INC. STOCK PRICE
<S>        <C>
1993                            $7.00
1994                            $7.13
1995                           $11.88
1996                           $14.00
</TABLE>

   Our stock, in recent years, has consistently been among the top performers in
South Carolina. We believe that we will continue to have a top performing stock
as a high performance bank.

                                                                               3
<PAGE>
   The PALFED story is a success story, and we have made giant strides in
solving the Company's problems and building a very valuable franchise. Our
strategic growth plan is working. We still have work to do with the remaining
assets that do not make a satisfactory contribution to earnings, but we intend
to continue to make progress in this area. Every day we see new opportunities to
expand our franchise. When the latest announced bank merger is consummated, we
will be the second largest thrift and the fourth largest independent bank in
South Carolina. Our plan is to continue to grow the Company, strengthen our
franchise and increase shareholder value.
   We believe that well-managed community banks can generate superior returns
for shareholders. We also believe that Palmetto Federal, by offering exceptional
customer service, can outperform its larger, regional competitors.
   Senator Strom Thurmond and Judge Charles Simons founded Palmetto Federal
forty-six years ago to build a strong community bank to serve South Carolina. We
believe that there is an important role for community banks and that all the
fundamentals are present in your Company to achieve greatness for those it was
created to serve: shareholders, customers, communities, and employees as "SOUTH
CAROLINA'S BANK."

       Thank you for your continued support.

                                                   [LOGO]
                                          John C. Troutman
                                          President and
                                          Chief Executive Officer

                     PALMETTO FEDERAL MANAGEMENT COMMITTEE

            HOWARD M. HICKEY, JR., JOE W. DEVORE, JOHN C. TROUTMAN,
    HOLLY Z. JOHNSON, PATRICK D. CUNNING, DARRELL R. RAINS, W. BARRY ADAMS.

4
<PAGE>
SELECTED FINANCIAL DATA
-------------------------------------------------------------------------
The selected financial data presented below for and as of the end of each of the
years in the five year period ended December 31, 1996 have been derived from the
Company's consolidated financial statements.

<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31         1996      1995      1994      1993      1992
(dollars and shares in thousands, except per share
  amounts)
<S>                                                      <C>       <C>       <C>       <C>       <C>
---------------------------------------------------------------------------------------------------------
Total interest income                                    $ 50,735  $ 50,530  $ 46,937  $ 48,191  $ 58,480
Total interest expense                                     28,517    30,530    26,514    30,837    41,079
Net interest income                                        22,218    20,000    20,423    17,354    17,401
Provision for estimated losses on loans                     1,154     1,322     2,329     6,289     6,557
Net interest income after provision for losses on loans    21,064    18,678    18,094    11,065    10,844
Noninterest income                                          4,492     4,178     3,334     1,400     8,422
FDIC SAIF special assessment                                3,300
Write-off of core deposit intangible                        2,407
Other noninterest expenses                                 18,388    16,454    15,917    16,166    16,514
Provision (benefit) for income taxes                        1,349     2,257     1,757    (1,069)    1,229
Income (loss) before cumulative effect of a change in
  accounting principle                                        112     4,145     3,754    (2,632)    1,523
Cumulative effect of a change in accounting principle                                   (10,454)    1,086
Net income (loss)                                        $   *112  $  4,145  $  3,754  $(13,086) $  2,609
---------------------------------------------------------------------------------------------------------
AT DECEMBER 31
Total assets                                             $665,257  $646,024  $662,425  $647,606  $746,362
Interest-earning assets                                   621,176   598,863   618,019   592,945   652,090
Loans receivable (including those held-for-sale)          524,120   464,281   447,991   445,058   453,891
Mortgage-backed securities                                 59,977    77,844   106,273   106,563   125,129
Intangible assets                                                     2,650     2,932     3,193    13,955
Deposits                                                  540,128   496,746   478,249   477,218   520,613
FHLB advances and other borrowed money                     68,400    91,500   135,800   119,459   181,264
Shareholders' equity                                     $ 51,823  $ 51,485  $ 45,156  $ 45,125  $ 39,375
Number of banking offices                                      21        18        16        16        16
---------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (loss)                                        $  *0.02  $   0.80  $   0.73  $  (6.12) $   1.80
Cash dividends declared                                      0.08
Tangible book value                                      $   9.91  $   9.57  $   8.32  $   8.16  $  17.33
Average outstanding shares used to compute net income
  (loss) per share                                          5,242     5,163     5,170     2,137     1,446
---------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average assets                                    *0.02%     0.64%     0.57%    (1.93)%     0.35%
Return on average shareholders' equity                      *0.21      8.54      8.35    (31.94)     6.86
Net interest margin                                          3.59      3.14      3.37      2.95      2.74
Average shareholders' equity to average assets               8.26      7.44      6.84      5.96      5.06
Dividend payout ratio                                          NM
---------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Allowance for loan losses to total loans                     1.33%     1.81%     1.83%     2.22%     1.82%
Net charge-offs to average loans outstanding                 0.54      0.24      0.90      1.03      1.48
Nonperforming assets to total loans and foreclosed real
  estate                                                     3.32      3.47      4.54      6.76      3.64
General allowance for loan losses to nonperforming
  assets and restructured loans                             36.90     26.35     19.31     16.84     17.46
Allowance for loan losses and shareholders' equity to
  nonperforming assets and restructured loans              332.95    218.43    148.83    120.89    115.40
---------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS
Tangible capital                                              6.6%      6.8%      5.9%      5.6%      3.6%
Core capital                                                  6.6       6.8       6.3       6.1       5.0
Risk-based capital                                           10.4      11.4      11.2      10.5       9.3
---------------------------------------------------------------------------------------------------------
NM  Not meaningful
  *  Excluding the SAIF special assessment and the write-off of core deposit intangible results in net
     income of $4.7 million, net income per share of $0.90, a return on average assets of 0.73% and a
     return on average shareholders' equity of 8.86%.
</TABLE>

6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
-------------------------------------------------------------------------------

OVERVIEW

In 1996, PALFED, Inc. reported its third consecutive year of record earnings
from operations. "Core" earnings (earnings excluding the SAIF special assessment
and the core deposit intangible write-off) were $4.7 million or $0.90 per common
share, an increase of 13% over 1995. As a result of the Company's improved
operating performance, in January the Board of Directors increased the quarterly
dividend to $0.03 per share. The Savings Association Insurance Fund ("SAIF")
assessment of approximately $3.3 million ($2.2 million after tax) and the $2.4
million write-off of the Bank's remaining core deposit intangible reduced net
income for 1996 to $112,000, or $0.02 per share, compared to $4.1 million or
$0.80 per share in 1995.

   The Company continued to pursue opportunities to expand the Bank's franchise
into adjacent markets, thereby reducing the Company's exposure to the Central
Savannah River Area (the "CSRA") economy. Declining employment levels at the
U.S. Department of Energy's Savannah River Site ("SRS"), the area's largest
employer, continue to affect the CSRA economy. Located outside Aiken, employment
at SRS has decreased from 22,000 in 1993 to approximately 15,000 currently. SRS
recently announced additional staff reductions of 1,500. Although employment
levels may stabilize at SRS, further reductions are possible.

   Since 1993 the Company's strategy of planned growth and diversification into
new markets has reduced its reliance on the CSRA economy, while expanding the
Company's franchise. In 1995 and 1996, the Company opened six new full service
banking centers in the greater Charleston and Columbia markets and in March 1997
the Company opened its twenty-second full service branch on the north end of
Hilton Head Island. Consolidations and mergers in the banking industry have
allowed the Company to minimize the capital costs of this expansion by acquiring
or leasing offices vacated by other banks. Opening offices in existing banking
facilities also has reduced start up costs and allowed the Company to leverage
the "Palmetto Federal" name as South Carolina's Bank.

   The six offices opened since 1994 have generated significant new business.
During 1996 nearly 33% of mortgage division originations, 33% of the growth in
deposit balances and 67% of the loan growth in the Bank's consumer and
commercial division came from the Bank's presence in new markets.

   Reductions in problem assets continued to be a high priority. As a result of
ongoing efforts, $6.6 million of troubled loans and real estate acquired through
foreclosure were sold during 1996, which contributed to a reduction in
nonperforming assets and restructured loans of $9.4 million. The Company's
strategic focus includes continued enhancement of the credit administration
functions, and a philosophy of continuous improvement in systems to identify and
quickly resolve troubled loans.

   The Company continues to be mindful of the intense competition for customer
deposits from both bank and nonbank institutions. Accordingly, the Company
continues to promote and look for ways to expand its retail brokerage and tax
deferred annuity sales business. Recently, the Company's subsidiary PALFED
Investment Services opened an office in Charleston, South Carolina in order to
complement the retail offices in that market. Additionally, the Company offers
trust services to its customers through an outsourcing arrangement.

   Technology continues to change the manner in which customers expect financial
services to be rendered and the products required to meet those expectations. As
a part of an ongoing process to address these issues, the Company upgraded the
computer equipment and software for its teller and customer service
representative platforms in 1996. The new systems resulted in faster processing,
enhanced transaction controls, and improved balancing procedures for branch
personnel. In addition, the Company improved its existing telephone banking
system so that customers can now order checks, make loan payments, transfer
funds, obtain account information and current rates, and transact a variety of
other services 24 hours a day by telephone. In 1996 the Company began offering
an automated bill paying service through an outside specialty phone vendor. In
1997 the Company will begin to offer VISA debit cards to its checking and ATM
customers and intends to add a home page on the Internet.

   Palmetto Federal places a high priority on meeting its Community Reinvestment
Act responsibilities and meeting the credit needs of the communities it serves.
In 1996 the Bank continued to maintain its "Outstanding" rating for its CRA
efforts. This rating reflects the many efforts the Bank's officers and directors
have made in making affordable housing available in the markets served.

                                                                               7
<PAGE>
COMPARISON OF 1996 AND 1995 OPERATING RESULTS

NET INTEREST INCOME

The Company's primary determinant of earnings is net interest income. During
1996, the Company pursued a strategy of selling investment and mortgage-backed
securities to fund loan growth and to repay Federal Home Loan Bank advances.
This activity, combined with deposit growth in established and new markets,
resulted in significant increases to both the net interest margin and the net
yield. As a result, net interest income increased from $20.0 million in 1995 to
$22.2 million in 1996 despite declines in the Company's level of average
interest-earning assets and average interest-bearing liabilities.

   The following table presents information with respect to interest income from
interest-earning assets and interest expense from interest-bearing liabilities,
expressed in both dollars (in thousands) and rates, for the periods indicated.
Averages are computed using month-end balances for the periods presented.
Nonaccruing loans have been included in average loans receivable for purposes of
calculating the average yield on loans receivable.

<TABLE>
<CAPTION>
                                           Interest                          Interest                           Interest
                                     ---------------------             ---------------------             -----------------------
                                       INCOME/      YIELD/               Income/      Yield/                 Income/      Yield/
                               1996    EXPENSE        RATE       1995    Expense        Rate       1994      Expense        Rate
--------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>          <C>
AVERAGE ASSETS:
  Interest-earning:
    Interest bearing
     deposits             $   4,456  $     233       5.23%  $   6,370  $     360       5.65%  $   4,577   $     153        3.34%
    Loans receivable and
     held-for-sale          491,379     43,756       8.90     456,939     40,677       8.90     444,634      37,752        8.49
    Mortgage-backed
     securities              64,077      4,337       6.77      95,803      6,335       6.61     106,602       6,237        5.85
    Total investments
     (taxable)               29,003      1,620       5.59      42,945      2,369       5.52      40,079       2,124        5.30
    FHLB stock               10,884        789       7.25      10,884        789       7.25      10,873         671        6.17
--------------------------------------------------------------------------------------------------------------------------------
      Total
       interest-earning     599,799     50,735       8.46%    612,941     50,530       8.24%    606,765      46,937        7.73%
--------------------------------------------------------------------------------------------------------------------------------
  Noninterest-earning
   assets                    41,845                            39,187                            50,457
--------------------------------------------------------------------------------------------------------------------------------
      Total average
       assets             $ 641,644                         $ 652,128                         $ 657,222
--------------------------------------------------------------------------------------------------------------------------------
AVERAGE LIABILITIES &
  EQUITY:
  Interest-bearing:
    Retail savings
     deposits             $  32,381  $     838       2.59%  $  31,074        827       2.66%  $  31,409   $     836        2.66%
    Brokered time
     deposits                                                                                     1,862         178        9.55
    Retail time deposits    374,934     21,692       5.79     365,020     21,169       5.80     323,498      15,971        4.94
    Demand deposits         106,611      1,882       1.77      98,666      1,684       1.71     115,615       1,805        1.56
    FHLB Advances            69,335      4,105       5.92     104,042      6,850       6.58     135,125       7,724        5.72
--------------------------------------------------------------------------------------------------------------------------------
      Total
       interest-bearing     583,261     28,517       4.89     598,802     30,530       5.10%    607,509      26,514        4.36%
--------------------------------------------------------------------------------------------------------------------------------
  Other                       5,373                             4,814                             4,779
  Shareholders' equity       53,010                            48,512                            44,934
--------------------------------------------------------------------------------------------------------------------------------
      Total average
       liabilities and
       equity             $ 641,644                         $ 652,128                         $ 657,222
--------------------------------------------------------------------------------------------------------------------------------
  Net interest income                $  22,218                         $  20,000                          $  20,423
--------------------------------------------------------------------------------------------------------------------------------
    Interest rate spread                             3.57%                             3.14%                               3.37%
--------------------------------------------------------------------------------------------------------------------------------
    Net yield                                        3.70%                             3.26%                               3.37%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

   The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Palmetto Federal's interest income and expense during
the periods

8
<PAGE>
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) change in
volume (change in volume multiplied by old rate); (2) change in rates (change in
rate multiplied by old volume); (3) change in rate-volume (change in rate
multiplied by the change in volume).
<TABLE>
<CAPTION>
                                                 1996 VERSUS 1995                     1995 VERSUS 1994
                                              INCREASE (DECREASE)                  INCREASE (DECREASE)
                                                           DUE TO                               DUE TO
------------------------------------------------------------------------------------------------------
                                                   RATE/                              Rate/
                                VOLUME    RATE    VOLUME   TOTAL   Volume    Rate    Volume    Total
<S>                             <C>      <C>      <C>      <C>     <C>      <C>      <C>      <C>
------------------------------------------------------------------------------------------------------

<CAPTION>
(dollars in thousands)
<S>                             <C>      <C>      <C>      <C>     <C>      <C>      <C>      <C>
Changes In:
  Interest revenue:
    Loans receivable            $ 3,066  $    12  $   1    $3,079  $   692  $ 2,188   $ 45    $  2,925
    Mortgage-backed securities   (2,071)     109    (36)   (1,998)    (667)     857    (92)         98
    Investments                    (997)     169    (48)     (876)     244      301     25         570
------------------------------------------------------------------------------------------------------
  Total interest income              (2)     290    (83)      205      269    3,346    (22)      3,593
------------------------------------------------------------------------------------------------------
  Interest expense:
    Deposits                        918     (179)    (7)      732      890    3,819    181       4,890
    Other borrowed money         (2,285)    (690)   230    (2,745)  (1,777)   1,173   (270)       (874)
------------------------------------------------------------------------------------------------------
  Total interest expense         (1,367)    (869)   223    (2,013)    (887)   4,992    (89)      4,016
------------------------------------------------------------------------------------------------------
Net interest income (expense)   $ 1,365  $ 1,159  $(306)   $2,218  $ 1,156  $(1,646)  $ 67    $   (423)
------------------------------------------------------------------------------------------------------
</TABLE>

NONINTEREST INCOME

Noninterest income increased by $314,000 or 7.5% in 1996 compared to 1995,
primarily due to increases in gains on sales of loans and securities, other
income and financial services fees, offset in part by a decrease in gains from
trading account securities and checking transaction fees.

   Gains on sales of loans and securities increased by $669,000 to $1.0 million
in 1996 and resulted primarily from mortgage servicing rights recorded under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights", of $244,000 and a gain of $162,000
from the sale of Federal National Mortgage Association ("FNMA") stock. The
Company adopted SFAS No. 122 effective October 1, 1995.

   Miscellaneous other income increased $94,000 during 1996 primarily due to
receipt of $100,000 in interest on a federal income tax refund. Additionally,
fees on products such as wire transfers, money orders, travelers checks and
ATM's increased by $74,000 or 21.2% due to a greater volume of transactions and
a new ATM fee charged to noncustomers. Additional accretion related to purchased
loans decreased by $43,000 or 55.1% due to slower repayment of the related
loans.

NONINTEREST EXPENSES

Noninterest expenses in 1996 increased $7.7 million, primarily attributable to
the FDIC SAIF special assessment of $3.3 million and the write-off of the $2.4
million core deposit intangible asset. Additionally, other noninterest expenses
increased due primarily to the Company's expansion into new markets.

   Increases in compensation and employee benefits were due to: $771,000 or
10.0% in costs due to normal merit wage adjustments and increased staffing at
new offices; an increase of $365,000 in incentive program costs; an increase of
$125,000 or 15.8% in medical and retirement costs resulting from increased
medical claims in 1996 combined with increased staffing levels. These increases
were offset by an increase of $95,000 or 8.5% in capitalized loan costs
resulting from greater loan origination volume. Additional capitalized costs
result in more fixed costs associated with loan originations being deferred over
the life of the loans rather than being recognized as a current expense.

   The primary components of compensation and employee benefits for the years
ended December 31 follow:

<TABLE>
<CAPTION>
                                              1996       1995
-------------------------------------------------------------
(in thousands)
<S>                                       <C>        <C>
Salaries                                  $  8,507   $  7,736
Incentive programs                             928        563
Medical and retirement expenses                915        790
Payroll and other taxes                        646        593
Other expenses                                 126        122
-------------------------------------------------------------
                                            11,122      9,804
Capitalized costs of loan originations      (1,215)    (1,120)
-------------------------------------------------------------
Compensation and employee benefits        $  9,907   $  8,684
-------------------------------------------------------------
</TABLE>

                                                                               9
<PAGE>
   The 15.5% increase in occupancy and equipment expenses resulted primarily
from $235,000 in costs directly related to new offices opened in late 1995 and
1996. The Company opened 3 new banking offices and one mortgage office in 1996
at an average capital investment of approximately $100,000 per office. The
Company purchased its Lexington branch for approximately $300,000 and is leasing
the other new offices.

   An increased number of loan accounts and direct mailings resulted in
increased postage and supplies expense of $36,000 and $65,000, respectively.
Other expenses include a loss of $290,000 related to a commercial checking
account.

   The 15.5% increase in professional and outside service fees was primarily
attributable to an increase of $112,000 or 31.0% in legal fees, an increase of
$28,000 or 33.3% in financial printing and stock transfer agent expenses and an
increase of $57,000 or 19.3% in outside service fees paid primarily to temporary
and part-time employees as the Company sought to avoid the costs of adding
full-time employees.

INCOME TAXES

The effective tax rate was 92.3% in 1996 compared to 35.3% in 1995. The
significant increase resulted from the previously discussed write-off of an
intangible asset, which is nondeductible under the Internal Revenue Code.

FOURTH QUARTER RESULTS OF OPERATIONS

The fourth quarter net loss was $1.1 million in 1996 compared to earnings of
$1.1 million in 1995. The principal reason for the decrease in 1996 fourth
quarter earnings was the write-off of the $2.4 million core deposit intangible
asset. Additionally, losses from real estate operations increased $413,000 due
to an increased provision for loss on foreclosed real estate and compensation
and employee benefits increased $325,000.

   Positive factors in the 1996 quarter included an increase of $948,000 in net
interest income and a decline of $132,000 in federal deposit insurance premiums.

LENDING ACTIVITIES

Loans comprise the major interest-earning assets of the Company, accounting for
82% and 75% of average interest-earning assets in 1996 and 1995, respectively.
The Bank's loan portfolio consists of real estate mortgage and construction
loans, home equity lines of credit, consumer loans including mobile home loans,
commercial real estate, commercial and multifamily loans. Single family loan
originations consist of both fixed and adjustable rate loans. The Company
generally retains all adjustable rate loans, construction loans, fixed rate
loans with original terms of 20 years or less and balloon loans in portfolio.
FHA, VA and 30 year fixed rate loans are typically originated for sale and
either securitized and sold in the secondary market as mortgage backed
securities or sold for cash through an established investor network.

   Compared with balances at December 31, 1995, net loans receivable grew by
11%. Loan originations increased significantly in 1996 over 1995 levels. In
1996, the Bank originated loans of $227.1 million, compared to $172.2 million in
1995. Although residential mortgage originations comprise the majority of
originations, a significant portion of originations during 1995 and 1996 were
commercial real estate and construction loans. Total residential originations in
1996 were $149.9 million, compared to $106.4 million in 1995. The Bank
originated $36.2 million in commercial and commercial real estate loans in 1996,
compared to $30.9 million in 1995. During 1995, the Bank changed its lending
strategy to increase the origination of larger commercial real estate loans,
including those loans greater than $1.0 million. These loans typically involve
more risk than associated with residential lending. The 1996 originations
included 8 such loans, totalling $10.9 million, compared to 8 loans of this
scope totalling $13.1 million in 1995.

INVESTMENT AND MORTGAGE-BACKED SECURITIES

The primary objective of the Company in managing the investment portfolio is to
maintain a portfolio of high quality, liquid investments with returns
competitive with short term US treasury or agency securities. The objective with
respect to mortgage-backed securities and collateralized mortgage obligations is
generally to maintain a portfolio of highly rated (generally AAA) securities
with a significant amount of monthly repayment of principal at an attractive
yield spread to comparable treasuries at time of purchase. The Bank's strategy
has been to decrease levels of investments and redeploy these funds into retail
loans and reductions in FHLB advances. As a result of this strategy investment
and mortgage-backed securities decreased $35.1 million or 29.8% to $82.7 million
at December 31, 1996.

   In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting For
Certain Debt and Equity Securities", which included a transition provision
allowing all entities to reassess the appropriateness of the classifications of
all securities held and account for any resulting reclassifications at fair
value. In response to the Special Report, the Company transferred securities
with a carrying value of $42.8 million from held-to-maturity to
available-for-sale.

10
<PAGE>
ASSET/LIABILITY MANAGEMENT

Asset and liability management is the process by which Palmetto Federal attempts
to maximize net interest income while minimizing the adverse effects of
potential interest rate changes (interest rate risk). The Company presently does
not utilize financial derivative products such as futures, options or interest
rate swaps as part of its asset and liability management process.

   The Company's Asset and Liability Committee makes weekly pricing and
marketing decisions on deposit and loan products in conjunction with managing
the Company's interest rate risk. The Investment Committee of the Board of
Directors reviews the Bank's investment and mortgage-backed securities
portfolios, FHLB advances and other borrowings as well as the Company's asset
and liability policies. Additionally, the Investment Committee monitors the
interest rate risk of the Bank's balance sheet.

   The Company's primary method used to analyze interest rate risk is balance
sheet modeling. Because rate changes in adjustable rate mortgages and certain
securities and liabilities tend to lag changes in interest rates, management
utilizes computer asset and liability simulation models as another analytical
tool to estimate the effects of interest rate changes on net interest income and
net portfolio value ("NPV") that would result from possible changes in interest
rates. Management utilizes these simulation models to analyze the estimated
impact of various strategies on the Bank's interest rate risk exposure before
implementing such strategies. Palmetto Federal's NPV ratio change, referred to
as the "sensitivity measure", increased from 1.02% at December 31, 1995 to 1.33%
at December 31, 1996, indicating an increase in interest rate risk. Management's
objective is to maintain the sensitivity measure at or below 2.0%. As the
Company is liability sensitive, the sensitivity measure generally increases when
market interest rates rise. During 1996, the benchmark 30 year Treasury bond
yield increased 69 basis points. The Office of Thrift Supervision ("OTS") uses a
similar computer simulation model to calculate interest rate risk on
institutions it regulates.

NONPERFORMING ASSETS AND RESTRUCTURED LOANS

The Company marked a third consecutive year of reducing nonperforming assets and
restructured loans in 1996 with a reduction of $9.7 million. The decrease was
primarily attributable to sales of certain nonaccrual loans and foreclosed real
estate.

   The table below sets forth the amounts and categories of Palmetto Federal's
nonaccrual and restructured loans and foreclosed real estate at the dates
indicated. Restructured loans include loans restructured under the provisions of
both SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" and SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan".
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
DECEMBER 31                                 1996       1995       1994       1993       1992
<S>                                       <C>        <C>        <C>        <C>        <C>
----------------------------------------------------------------------------------------------

<CAPTION>
(dollars in thousands)
<S>                                       <C>        <C>        <C>        <C>        <C>
Nonaccrual loans                          $  4,302   $  8,391   $ 12,466   $ 23,790   $ 12,209
Foreclosed real estate                       7,187      8,015      8,269      6,775      4,563
Restructured loans                           6,562     12,210     16,412     17,158     25,511
----------------------------------------------------------------------------------------------
                                            18,051     28,616     37,147     47,723     42,283
Less specific valuation allowances            (360)    (1,192)    (1,288)    (2,223)    (1,030)
----------------------------------------------------------------------------------------------
                                          $ 17,691   $ 27,424   $ 35,859   $ 45,500   $ 41,253
----------------------------------------------------------------------------------------------
General allowance for loan losses as a
  percentage of the total                    36.2%      26.3%      19.3%      16.8%      17.5%
Total as a percentage of loans
  receivable, net                             3.4%       5.9%       8.1%      10.2%       9.1%
Total as a percentage of total assets         2.7%       4.2%       5.4%       7.0%       5.5%
----------------------------------------------------------------------------------------------
</TABLE>

   Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrower's
ability to comply with present repayment terms. These loans, which are primarily
commercial real estate loans, are not included in nonperforming assets and
restructured loans. These loans totalled approximately $14.5 million and $9.4
million at December 31, 1996 and 1995, respectively. The increase is due
primarily to the upgrade of certain assets which were previously nonperforming
or restructured, but which management continues to monitor closely.

                                                                              11
<PAGE>
   Changes in the components of nonperforming assets and restructured loans, net
of specific valuation allowances, during the year ended December 31, 1996 were
as follows:

<TABLE>
<CAPTION>
                                          Restructured   Nonaccrual   Foreclosed
                                             Loans         Loans      Real Estate    Total
--------------------------------------------------------------------------------------------
(in thousands)
<S>                                       <C>            <C>          <C>           <C>
December 31, 1995                           $   11,553    $   7,856    $    8,015   $ 27,424
Performing loans which became
  nonperforming                                  1,310        2,385         1,289      4,984
Upgrades due to performance                     (3,561)        (797)                  (4,358)
Sales                                                        (1,420)       (5,214)    (6,634)
Charge-offs and other                                          (852)         (899)    (1,751)
Cash repayments of principal                      (629)      (1,345)                  (1,974)
Nonaccrual loans which became
  restructured                                     376         (376)
Nonaccrual loans which became
  foreclosures                                               (2,821)        2,821
Restructured loans which became
  foreclosures                                  (1,175)                     1,175
Restructured loans which became
  nonaccrual loans                              (1,341)       1,341
--------------------------------------------------------------------------------------------
December 31, 1996                           $    6,533    $   3,971    $    7,187   $ 17,691
--------------------------------------------------------------------------------------------
</TABLE>

   Although restructured loans include earning assets, there is more than normal
risk associated with these loans due to the fact that some were made to
facilitate the sale of foreclosed real estate and some were restructured because
the borrower could not meet the original loan terms. The following table lists
Palmetto Federal's three largest restructured loans at December 31, 1996. These
loans represent approximately 67% of the Bank's restructured loans.

<TABLE>
<CAPTION>
 Amount                                  Description
----------------------------------------------------------------------------------
(in thousands)
<C>         <S>
$  2,187    Loan collateralized by a 102 unit apartment complex in Myrtle Beach,
            South Carolina. The 1994 restructuring included a principal charge-off
            of approximately $624,000, a new borrower and new repayment terms.

   1,562    Loans to finance the December 1993 sale of the remaining lots, seven
            outparcels and the development and sales offices at Woodside
            Plantation. The 1995 restructuring included: the Company acquired 35
            lots and reduced principal by $492,000; agreed to pay $330,000 in
            joint marketing expenses and $184,500 to Woodside Plantation Country
            Club under the membership agreement; and granted a 2 year extension of
            the option to purchase the remaining undeveloped acreage.

     654    Loan to finance the sale of several units within a condominium project
            in Columbia, South Carolina. The 1994 restructuring included a
            write-off of principal and a reduction in the interest rate.
----------------------------------------------------------------------------------
$  4,403
----------------------------------------------------------------------------------
</TABLE>

   Palmetto Federal's nonaccrual loans at December 31, 1996 include one $1.0
million loan collateralized by a 40 unit townhouse type apartment complex in
Charleston, South Carolina. A 1994 restructuring of this loan included a
principal charge-off of approximately $314,000, a change in repayment terms and
a decrease in the interest rate. The remaining nonaccrual loans are primarily
comprised of loans collateralized by real estate, none of which individually
exceeds $400,000.

   The following table lists Palmetto Federal's five largest foreclosed
properties at December 31, 1996. These properties represent approximately 48% of
the Bank's foreclosed properties.

<TABLE>
<CAPTION>
Amount                                   Description
----------------------------------------------------------------------------------
(in thousands)
<C>         <S>
$    949    Undeveloped commercial land comprised of two tracts of 76 acres and
            13.3 acres, respectively. The tracts are located south of Aiken, South
            Carolina adjacent to Woodside Plantation.

     839    A 26,024 square foot office building located within a commercial
            office park in Aiken, South Carolina.

     708    Thirty-three single family residential lots in Woodside Plantation
            acquired in a 1995 debt restructuring. A single family house was built
            on one lot in 1996. See REAL ESTATE DEVELOPMENT ACTIVITIES.

     505    Sixteen single family residential lots and 75 acres of vacant land
            south of Aiken, South Carolina.

     450    Single family residence located in Aiken, South Carolina.
----------------------------------------------------------------------------------
$  3,451
----------------------------------------------------------------------------------
</TABLE>

   The Asset Classification and Review Committee reviews quarterly all loan
relationships and REO greater than $250,000, and is responsible for the
appropriate classification of assets in accordance with OTS regulations.
Palmetto

12
<PAGE>
Federal uses the quarterly classifications as well as historical charge-offs in
its determination of the allowance for loan losses. The Credit Administration
Department monitors lending relationships whose balances exceed $100,000,
exclusive of debt collateralized by a primary residence.

   The determination of individual asset classifications depends on the degree
of risk associated with the asset and the likelihood of repayment or orderly
liquidation. The portion of a loan or other asset classified as "loss" is
considered uncollectible and a specific valuation allowance is established in
the amount of that portion. A "doubtful" asset has a high possibility of loss
but certain pending factors preclude the estimation of a specific valuation
allowance. Palmetto Federal classifies an asset as "substandard" if the asset
exhibits a defined weakness and is inadequately protected either by the paying
capacity of the borrower or the value of the underlying collateral. "Special
mention" assets are those assets that have potential weaknesses which, if not
corrected, could increase the risk of financial loss. The Bank's total
criticized assets include its nonperforming assets and restructured loans of
$18.0 million as well as its potential problem loans of $14.5 million. The
following table summarizes the Bank's criticized assets at December 31:

<TABLE>
<CAPTION>
                                              1996       1995       1994
------------------------------------------------------------------------
(in thousands)
<S>                                       <C>        <C>        <C>
Special mention                           $ 13,278   $  9,867   $ 11,050
Substandard                                 17,702     25,450     30,138
Doubtful                                       364
Loss                                         1,220      1,462      1,822
------------------------------------------------------------------------
                                          $ 32,564   $ 36,779   $ 43,010
------------------------------------------------------------------------
</TABLE>

   The following table summarizes Palmetto Federal's loan loss experience for
each of the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                       1996        1995        1994        1993        1992
<S>                                       <C>         <C>         <C>         <C>         <C>
---------------------------------------------------------------------------------------------------

<CAPTION>
(dollars in thousands)
<S>                                       <C>         <C>         <C>         <C>         <C>
Average loans for the year                $ 491,379   $ 456,939   $ 444,634   $ 450,732   $ 499,816
---------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of
  the year                                $   8,417   $   8,213   $   9,883   $   8,232   $   9,054
---------------------------------------------------------------------------------------------------
Charge-offs:
  Permanent residential                         228         124         404         344         550
  Second mortgages                               24          68          64           9           3
  Commercial real estate                      1,414         671       3,150       3,382       5,746
  Consumer                                    1,193         829         564         766         870
  Commercial                                    185          78         390         378         406
---------------------------------------------------------------------------------------------------
Total charge-offs                             3,044       1,770       4,572       4,879       7,575
---------------------------------------------------------------------------------------------------
Recoveries:
  Permanent residential                          13          36          58           9          51
  Second mortgage                                 5                      10
  Commercial real estate                        288         441         332         142
  Consumer                                      131         102         103          84         134
  Commercial                                     19          73          70           6          11
---------------------------------------------------------------------------------------------------
Total recoveries                                456         652         573         241         196
---------------------------------------------------------------------------------------------------
Net charge-offs for the year                 (2,588)     (1,118)     (3,999)     (4,638)     (7,379)
Provision for loan losses                     1,154       1,322       2,329       6,289       6,557
---------------------------------------------------------------------------------------------------
Allowance for loan losses, end of the
  year                                    $   6,983   $   8,417   $   8,213   $   9,883   $   8,232
---------------------------------------------------------------------------------------------------
  Ratio of net charge-offs to average
   loans                                      0.53%       0.24%       0.90%       1.03%       1.48%
---------------------------------------------------------------------------------------------------
</TABLE>

   The provision for loan losses in 1996, 1995 and 1994 reflected the decreases
in nonperforming assets and restructured loans and classified loans. The
provision for loan losses for 1992 and 1993 averaged $6.4 million due to the
significant increase in nonperforming assets and restructured loans as well as a
significant increase in classified assets. These increases were principally
caused by the general weakening of certain commercial real estate loans and
single family development loans, which resulted in increased delinquencies and
loan restructurings.

   Charge-offs in 1996 increased principally due to increases in charge-offs of
commercial real estate and consumer loans. The increase in the commercial real
estate sector occurred primarily because of one charge-off of approximately
$481,000 on a previously restructured loan. The underlying collateral of this
loan was sold to a new borrower and the loan modified to market terms. The 1996
increase in the consumer sector resulted from an increase of $514,000 in mobile
home loan charge-offs. In 1995, the Company began aggressively repossessing the
collateral related to these delinquent loans and in

                                                                              13
<PAGE>
1996 repossessed 51 mobile homes with a carrying value of $504,000 and sold 75
mobile homes with a carrying value of $758,000. The Company has also tightened
underwriting standards related to this type of lending and the portfolio
declined by $3.8 million to $18.4 million, after declining $3.1 million in 1995.

   Charge-offs in 1995 declined principally due to a decline of $2.4 million in
commercial real estate loan charge-offs. In 1994, as in 1993 and 1992, portions
of several commercial real estate loans were charged-off as those loans were
restructured or written off as uncollectible. Charge-offs in other categories
declined as well in 1995, except for consumer loans, for which charge-offs
increased $265,000. This increase occurred primarily due to an increase of
$166,000 or 70.6% in mobile home loan charge-offs resulting from increased
collection efforts.

   The provision for loan losses is a reflection of actual losses experienced
during the year and management's judgment as to the adequacy of the allowance
for loan losses to absorb future losses in loans currently outstanding. Some of
the factors considered by management in determining the amount of the provision
and resulting allowance include: (1) credit reviews of individual loans and
relationships; (2) net charge-offs over the prior three years; (3) growth in and
composition of the loan portfolio; (4) the current level of the allowance in
relation to total loans and to historical loss levels; (5) the level of
classified assets; (6) fair value of collateral property; and (7) management's
estimate of future economic conditions and the resulting impact on the Company.

   Management's determination of the adequacy of the allowance for loan losses
requires the use of judgments and estimates that may change in the future.
Unfavorable changes in the factors used by management to determine the adequacy
of the allowance, or the availability of new information, could cause the
allowance for loan losses to be increased or decreased in future periods. In
addition, bank regulatory agencies, as part of their examination process, may
require additions to the allowance for loan losses based on their judgments and
estimates.

REAL ESTATE DEVELOPMENT ACTIVITY

At December 31, 1996, real estate acquired for development and sale (including
partnership interests) totalled $6.3 million compared to $6.4 million in 1995.
Approximately $4.5 million of the total consists of 2 outparcels and
approximately 1,000 acres of undeveloped land surrounding a golf course at
Woodside Plantation in Aiken, South Carolina.

   Approximately $915,000 relates to 2 houses and 38 single family lots in the
Rapids subdivision in North Augusta, South Carolina. The Company recently sold
one of these homes and may build two additional speculative homes to facilitate
the sale of these lots.

   The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual home owners, comprised of
real estate held for development, acquisition and development loans, foreclosed
real estate and a 50% ownership in a partnership. The carrying values of these
components were as follows at December 31:
<TABLE>
<S>                                       <C>        <C>
                                              1996       1995

<CAPTION>
-------------------------------------------------------------
(in thousands)
<S>                                       <C>        <C>
1,000 acres                               $  3,733   $  3,733
2 outparcels                                   750        750
WPCC loans                                   4,393      4,454
Woodside Development L.P. loans              2,308      3,311
Lots received in restructuring,
  including subsequent improvements            708        492
Development loan to unrelated borrower         150        525
Investment in and loans to partnership
  adjacent to Woodside Plantation              457        613
-------------------------------------------------------------
                                          $ 12,499   $ 13,878
-------------------------------------------------------------
</TABLE>

   The Company was the original developer of the Woodside Plantation project, a
development planned to contain a country club and over 1,800 single family lots
as well as developed outparcels. The Company sold the country club in 1990 and
sold the remaining 219 lots and certain other outparcels to Woodside Development
L.P. (the "Purchaser") in December 1993. In addition, the Purchaser assumed
liabilities related to the purchase of memberships at Woodside Plantation
Country Club ("WPCC") and also entered into an option agreement, which expires
December 31, 1997, to acquire parcels of the undeveloped land at Woodside
Plantation. There are no assurances the Purchaser will acquire the entire 1,000
acres under the option agreement. During 1996, the Purchaser's indebtedness to
the Bank declined $1.0 million or 30.3% as a result of sales of lots and houses.

   The Purchaser's ability to repay its indebtedness is primarily based on the
volume and timing of lot sales. Although there are no assurances that lot sales
will be sufficient to repay the debt, the Purchaser's business plan is targeted
primarily to the national retiree market, and therefore, current and future
sales are less reliant on the local economy.

14
<PAGE>
   Similarly, the ability of WPCC to repay its loans to Palmetto Federal depends
in part on the success of real estate sales, which in turn provides cash flow
through additional initiation deposits and membership fees to the Club.
Effective April 1, 1996, Palmetto Federal modified its loans to WPCC from
amortizing to interest only for one year.

LIQUIDITY AND CAPITAL RESOURCES

Palmetto Federal's principal sources of funds are deposits, principal and
interest payments on loans, investment and mortgage-backed securities, proceeds
from sales of investment and mortgage-backed securities, FHLB advances, other
borrowings, and retained earnings. Palmetto Federal's liquidity is measured by
the ratio of cash and short-term investments (as defined by the OTS regulations)
to the sum of savings and borrowings payable in one year, less loans on savings.
The Bank's average liquidity level of 6.5% was in excess of the required amount
of 5.0% for December 1996.

   Shareholders' equity increased by 0.7% from December 31, 1995 to December 31,
1996, principally due to earnings of $112,000 and issuance of 130,000 shares of
common and treasury stock. The shareholders' equity to assets ratio decreased
from 7.97% at December 31, 1995 to 7.79% at December 31, 1996.

   The Company's capital expenditures for its four new offices opened in 1996
were $398,000, principally for computers, office equipment and furniture.
Additionally, the company upgraded its branch network computer equipment and
software for approximately $240,000. Management does not expect significant
capital expenditures related to the opening of additional offices in 1997.

SAIF ASSESSMENT AND CORE DEPOSIT INTANGIBLE WRITE-OFF

On September 30, 1996, the President signed legislation to recapitalize the SAIF
through a special assessment to bring it up to the same reserve level as the
Bank Insurance Fund. The $3.3 million assessment equaled 65.7 cents per $100 of
insured deposits outstanding as of March 31, 1995. Following the SAIF
recapitalization, the FDIC reduced deposit insurance premiums for thrifts. As a
result, Palmetto Federal will pay 3 cents per $100 of deposits in 1997, compared
to 26 cents per $100 of deposits in 1996, resulting in estimated savings of
$825,000.

   In addition, the costs of the Financing Corporation ("FICO") bonds will be
shared by the bank and thrift industries. Previously, the thrifts paid the
entire cost of these bond payments. Banks and thrifts will pay 1.29 cents and
6.48 cents, respectively, per $100 of deposits. After January 1, 2000, both
banks and thrifts will pay 2.43 cents per $100 of deposits. These rates are only
for FICO interest and further premiums could be assessed.

   On the date the SAIF assessment was enacted, the remaining core deposit
intangible asset which resulted from the 1982 acquisition of another savings
institution totalled $2.4 million and had an estimated remaining life of
approximately 11 years. As a result of the SAIF assessment, management
reassessed the carrying value of this intangible asset, concluded that the asset
was impaired and wrote-off the remaining balance in December 1996.

RECENT ACCOUNTING AND REPORTING CHANGES

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and extinguishments of Liabilities", which the
Company is required to adopt effective January 1, 1997. SFAS No. 125 establishes
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. After a transfer of financial assets,
the Company recognizes the financial and servicing assets it controls and the
liabilities it has incurred and derecognizes financial assets when control has
been surrendered and derecognizes liabilities when extinguished. SFAS No. 125
also provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. Management
believes the adoption of SFAS No. 125 will not have a significant effect on the
financial condition or results of operations of the Company.

   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 until
January 1, 1998, certain provisions of SFAS No. 125.

EFFECT OF INFLATION AND CHANGING PRICES

The Company's consolidated financial statements and related data have been
prepared in accordance with generally accepted accounting principles that
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, noninterest expenses do
reflect general levels of inflation.

                                                                              15
<PAGE>
COMPARISON OF 1995 AND 1994 OPERATING RESULTS

PALFED recorded net earnings of $4.1 million or $0.80 per share in 1995 compared
to $3.8 million or $0.73 per share in 1994. Total assets were $646.0 million and
$662.4 million at December 31, 1995 and 1994, respectively.

NET INTEREST INCOME

Net interest income in 1995 was $20.0 million, a decrease of 2.1% from 1994.
Total interest income in 1995 was $50.5 million compared to $46.9 million in
1994, an increase of $3.6 million. Total interest expense in 1995 was $30.5
million compared to $26.5 million in 1994. During 1995, the Company's level of
average interest-earning assets increased while average interest-bearing
liabilities decreased, which improved earnings by $1.2 million. However, rates
paid on liabilities increased faster than rates earned on assets, which
decreased earnings by $1.6 million.

PROVISION FOR ESTIMATED LOSSES ON LOANS

Due principally to the decrease in the level of problem assets during the year,
the provision for estimated loan losses decreased from $2.3 million in 1994 to
$1.3 million in 1995. Net charge-offs in 1995 were $1.1 million or $0.2 million
less than the provision, resulting in an increase in the allowance for estimated
loan losses to $8.4 million or 1.81% of loans receivable at December 31, 1995
compared to $8.2 million or 1.83% of loans receivable at December 31, 1994.

NONINTEREST INCOME

Noninterest income increased by $844,000 in 1995 compared to 1994. The increase
was primarily attributable to: (1) decline of $1.5 million in losses from real
estate operations; (2) an increase of $406,000 in gains on sales of investment
and mortgage-backed securities and loans; and (3) an increase of $118,000 in
late charge and other fees. These factors were offset by a decrease of $1.0
million in other income.

   The decrease in the loss from real estate operations resulted primarily from
the decrease of $1.1 million in the provision for loss on foreclosed real
estate, a decrease of $176,000 in expenses associated with foreclosed real
estate, and a decrease of $139,000 in expenses associated with real estate at
Woodside Plantation.

   Gains on sales of investment and mortgage-backed securities and loans
increased due to increased sales of such assets. Additionally, in the fourth
quarter of 1995, the Company adopted Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights", resulting in a gain of
$153,000.

   Late charges on loans and other fees increased by $118,000 or 29.7% in 1995
primarily as a result of an increase of $98,000 in collections of reimbursable
fees from borrowers on credit bureau reports and appraisals.

   Other income decreased $1.0 million during 1995 primarily due to the 1994
receipt of $923,000, net of related expenses, in interest on federal and state
income tax refunds. Additionally, insurance commissions on credit life insurance
sales decreased by $64,000 or 40.5% and miscellaneous fees decreased by $50,000
or 58.1%.

NONINTEREST EXPENSES

Noninterest expenses for 1995 were $16.5 million compared to $15.9 million for
1994, an increase of $537,000. Compensation and employee benefits increased
$673,000 or 8.4% and advertising and public relations increased by $296,000 or
67.6%. The net increase in compensation and benefits was due to: lower loan
origination volume resulting in $222,000 more in fixed costs associated with
loan originations recognized as current expense rather than deferred over the
life of the loans; $297,000 or 4.0% more in costs due to normal merit wage
adjustments and increased incentive programs costs of $159,000 due to increased
earnings. The increase in advertising and public relations resulted from the
introduction of a new multimedia advertising campaign to position Palmetto
Federal as "The Bank of Choice" in South Carolina.

   These increases were offset primarily by decreases of $352,000 and $195,000
in professional and outside service fees and federal insurance premiums and
assessments, respectively. The decrease in professional and outside service fees
was primarily attributable to decreased consultant fees of $155,000 and to
decreased legal fees of $111,000.

INCOME TAXES

The effective tax rate was 35.3% in 1995 compared to 31.9% in 1994. During 1994,
the Internal Revenue Service completed its audit of the Company's consolidated
federal income tax returns through 1991. The audit resulted in federal income
tax refunds of $1.2 million plus $162,000 in related state income tax refunds
which reduced the 1994 effective tax rate.

16
<PAGE>
INFORMATION IN THIS ANNUAL REPORT, OTHER THAN HISTORICAL INFORMATION, CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT
NOT LIMITED TO, THE IMPACT OF FUTURE REGULATORY ACTIONS OF THE FDIC REGARDING
FEDERAL DEPOSIT INSURANCE RATES, THE TIMING AND SUCCESS OF CERTAIN BUSINESS
INITIATIVES BY THE COMPANY, THE SUCCESS OF THE COMPANY'S EFFORTS IN REDUCING ITS
INVESTMENT IN REAL ESTATE AND LEVELS OF NONPERFORMING ASSETS, AND THE COMPANY'S
INTEREST RATE RISK POSITION. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
AND ADVERSELY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE READER
MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996 FOR A MORE COMPLETE ANALYSIS OF THE COMPANY'S OPERATIONS.

                                                                              17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

<TABLE>
<S>                   <C>
                      To the Board of Directors and Shareholders
                      PALFED, Inc.

                      We have audited the accompanying consolidated statements of financial condition of
                      PALFED, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
                      consolidated statements of income, shareholders' equity, and cash flows for each of
                      the three years in the period ended December 31, 1996. These financial statements
                      are the responsibility of the Company's management. Our responsibility is to express
                      an opinion on these 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 financial statements referred to above present fairly, in all
                      material respects, the consolidated financial position of PALFED, Inc. and
                      Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their
                      operations and cash flows for each of the three years in the period ended December
                      31, 1996 in conformity with generally accepted accounting principles.

                      As discussed in Note 1 to the consolidated financial statements, the Company changed
                      its methods of accounting for impaired loans and mortgage servicing rights in 1995.

                      [LOGO]
                      Atlanta, Georgia
                      February 22, 1997
</TABLE>

18
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES        DECEMBER 31,                                                           1996       1995
                        --------------------------------------------------------------------------------------
                        (IN THOUSANDS EXCEPT SHARE DATA)
<S>                     <C>                                                               <C>        <C>
                        ASSETS
                        --------------------------------------------------------------------------------------
                        Cash and due from banks                                           $  16,942  $  15,471
                        Interest-bearing deposits with other banks                            3,465      5,854
                        Investment and mortgage-backed securities:
                        Available-for-sale                                                   24,007     55,550
                        Held-to-maturity                                                     58,700     62,293
                        Loans held-for-sale                                                  11,241      2,836
                        Loans receivable, net                                               512,879    461,445
                        Investment in real estate, net                                       13,501     14,448
                        Investment in Federal Home Loan Bank stock                           10,884     10,884
                        Premises and equipment, net                                           5,958      5,350
                        Accrued interest receivable                                           3,835      4,256
                        Other assets                                                          3,845      7,637
                        --------------------------------------------------------------------------------------
                                                                                          $ 665,257  $ 646,024
                        --------------------------------------------------------------------------------------
                        LIABILITIES AND SHAREHOLDERS' EQUITY
                        --------------------------------------------------------------------------------------
                        Deposits:
                        Noninterest-bearing accounts                                      $  30,577  $  27,333
                        Savings and NOW accounts                                            121,432    105,329
                        Certificates of deposit                                             384,678    363,193
                        Accrued interest payable                                              3,441        891
                        --------------------------------------------------------------------------------------
                        Total deposits                                                      540,128    496,746
                        Federal Home Loan Bank advances                                      68,400     91,500
                        Other liabilities                                                     4,906      6,293
                        --------------------------------------------------------------------------------------
                        TOTAL LIABILITIES                                                   613,434    594,539
                        --------------------------------------------------------------------------------------
                        COMMITMENTS AND CONTINGENCIES
                        --------------------------------------------------------------------------------------
                        Shareholders' equity:
                        Common stock, $1 par value; authorized 10,000,000 shares; issued
                            5,231,317 and 5,142,166 shares; 5,231,317 and 5,101,297
                            shares outstanding, respectively                                  5,231      5,142
                        Additional paid-in capital                                           28,115     26,904
                        Retained earnings                                                    20,320     20,626
                        Unearned compensation                                                (1,128)
                        Net unrealized loss on securities, net of tax benefit of $369
                            and $456, respectively                                             (715)      (884)
                        Treasury stock, at cost (40,869 shares)                                           (303)
                        --------------------------------------------------------------------------------------
                        TOTAL SHAREHOLDERS' EQUITY                                           51,823     51,485
                        --------------------------------------------------------------------------------------
                                                                                          $ 665,257  $ 646,024
                        --------------------------------------------------------------------------------------
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                 CONSOLIDATED FINANCIAL STATEMENTS.

                                                                              19
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES  FOR THE YEARS ENDED DECEMBER 31,                        1996      1995      1994
                  --------------------------------------------------------------------------------
                  (in thousands, except per share data)
<S>               <C>                                                 <C>       <C>       <C>
                  Interest income:
                  Loans                                               $ 43,756  $ 40,677  $ 37,752
                  Mortgage-backed securities                             4,337     6,335     6,237
                  Investment securities                                  2,409     3,158     2,795
                  Other                                                    233       360       153
                  --------------------------------------------------------------------------------
                  Total interest income                                 50,735    50,530    46,937
                  --------------------------------------------------------------------------------
                  Interest expense:
                  Deposits                                              24,412    23,680    18,790
                  Other borrowings                                       4,105     6,850     7,724
                  --------------------------------------------------------------------------------
                  Total interest expense                                28,517    30,530    26,514
                  --------------------------------------------------------------------------------
                  Net interest income                                   22,218    20,000    20,423
                  Provision for estimated losses on loans                1,154     1,322     2,329
                  --------------------------------------------------------------------------------
                  Net interest income after provision for losses on
                    loans                                               21,064    18,678    18,094
                  --------------------------------------------------------------------------------
                  Noninterest income:
                  Checking transaction fees                              2,433     2,621     2,824
                  Financial services fees                                  817       756       752
                  Late charge and other fees                               490       515       397
                  Net trading account gains and losses                     335       374       129
                  Gain on sales of available-for-sale securities           239       145         1
                  Gain on sales of loans                                   380        50        33
                  Real estate operations                                (1,087)   (1,074)   (2,596)
                  Other                                                    885       791     1,794
                  --------------------------------------------------------------------------------
                  Total noninterest income                               4,492     4,178     3,334
                  --------------------------------------------------------------------------------
                  Noninterest expenses:
                  Compensation and employee benefits                     9,907     8,684     8,011
                  Occupancy and equipment                                3,036     2,629     2,516
                  FDIC SAIF special assessment                           3,300
                  Write-off of core deposit intangible asset             2,407
                  Federal insurance premiums and assessments             1,294     1,401     1,596
                  Professional and outside service fees                  1,370     1,186     1,538
                  Data processing                                          861       880       813
                  Advertising and public relations                         695       734       438
                  Amortization of intangible assets                        243       281       261
                  Other                                                    982       659       744
                  --------------------------------------------------------------------------------
                  Total noninterest expenses                            24,095    16,454    15,917
                  --------------------------------------------------------------------------------
                  Income before provision for income taxes               1,461     6,402     5,511
                  --------------------------------------------------------------------------------
                  Provision (benefit) for income taxes:
                  Current                                                  726       359       (30)
                  Deferred                                                 623     1,898     1,787
                  --------------------------------------------------------------------------------
                  Total provision for income taxes                       1,349     2,257     1,757
                  --------------------------------------------------------------------------------
                  Net income                                          $    112  $  4,145  $  3,754
                  --------------------------------------------------------------------------------
                  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE   $   0.02  $   0.80  $   0.73
                  --------------------------------------------------------------------------------
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                 CONSOLIDATED FINANCIAL STATEMENTS.

20
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES
                                                                                                      Unrealized
                                                        Additional                                Gain (Loss) on
                                               Common      Paid-In     Retained         Unearned     Securities,     Treasury
                                                Stock      Capital     Earnings     Compensation             Net        Stock
-----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S>                                       <C>          <C>          <C>          <C>              <C>             <C>
Balance, December 31, 1993                 $   5,138    $  26,881    $  12,727                           $379
Issuance of common stock                           4           57
Purchase of treasury stock                                                                                         $    (480)
Change in unrealized loss on securities,
  net                                                                                                  (3,304)
Net income                                                               3,754
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994                     5,142       26,938       16,481                         (2,925)          (480)
Issuance of treasury stock                                    (34)                                                       177
Change in unrealized loss on securities,
  net                                                                                                   2,041
Net income                                                               4,145
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                     5,142       26,904       20,626                           (884)          (303)
Issuance of common stock                          89        1,117
Issuance of treasury stock                                                                                               303
Incentive stock grants issued                                                       $  (1,275)
Amortization of unearned compensation                          94                         147
Change in unrealized loss on securities,
  net                                                                                                     169
Payment of cash dividends ($0.08 per
  share)                                                                  (418)
Net income                                                                 112
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                 $   5,231    $  28,115    $  20,320      $  (1,128)          $(715)     $       0
-----------------------------------------------------------------------------------------------------------------------------

<CAPTION>
PALFED, INC.
AND SUBSIDIARIES

                                                  Total
                                          Shareholders'
                                                 Equity
---------------------------------------------------------------------
(in thousands)
<S>                                       <C>
Balance, December 31, 1993                  $  45,125
Issuance of common stock                           61
Purchase of treasury stock                       (480)
Change in unrealized loss on securities,
  net                                          (3,304)
Net income                                      3,754
-----------------------------------------------------------------------------------
Balance, December 31, 1994                     45,156
Issuance of treasury stock                        143
Change in unrealized loss on securities,
  net                                           2,041
Net income                                      4,145
-------------------------------------------------------------------------------------------------
Balance, December 31, 1995                     51,485
Issuance of common stock                        1,206
Issuance of treasury stock                        303
Incentive stock grants issued                  (1,275)
Amortization of unearned compensation             241
Change in unrealized loss on securities,
  net                                             169
Payment of cash dividends ($0.08 per
  share)                                         (418)
Net income                                        112
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                  $  51,823
-----------------------------------------------------------------------------------------------------------------------------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                                                              21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES   FOR THE YEARS ENDED DECEMBER 31,                       1996     1995      1994
                   ------------------------------------------------------------------------------
                   (in thousands)
<S>                <C>                                                 <C>      <C>      <C>
                   OPERATING ACTIVITIES:
                   CASH FLOWS FROM OPERATING ACTIVITIES:
                   Net income                                          $   112  $ 4,145  $  3,754
                   Adjustments to reconcile net income to cash
                     provided by operations:
                   Provision for deferred income taxes                     623    1,898     1,787
                   Write-off of core deposit intangible asset            2,407
                   Depreciation and amortization                           900      863       946
                   Provision for estimated losses on loans and real      2,385    2,913     4,819
                     estate
                   Other gains, net                                       (749)    (869)      (77)
                   Proceeds from sales of loans held-for-sale           20,579   13,508    14,738
                   Origination of loans held-for-sale                  (43,477) (33,007)  (31,623)
                   Proceeds from sales of trading account securities    28,141   25,486    22,761
                   Gain on sales of available-for-sale securities         (239)    (145)       (1)
                   Change in:
                   Accrued interest receivable, net                       (252)  (1,722)   (1,414)
                   Accrued interest payable                              2,550      249      (225)
                   Other assets                                            727   (1,155)    1,390
                   Other liabilities (excluding deferred income)          (870)   3,120    (2,733)
                     Other, net                                            966      282       811
                   ------------------------------------------------------------------------------
                   NET CASH PROVIDED BY OPERATING ACTIVITIES            13,803   15,566    14,933
                   ------------------------------------------------------------------------------
                   INVESTING ACTIVITIES:
                   CASH FLOWS FROM INVESTING ACTIVITIES:
                   Purchases of available-for-sale securities           (7,925) (10,763)  (44,791)
                   Proceeds from sales of available-for-sale            26,053   37,934    21,848
                     securities
                   Principal collections on available-for-sale          14,287    4,711     6,512
                     securities
                   Net increase in loans receivable                    (69,922) (34,779)  (26,514)
                   Purchases of held-to-maturity securities             (6,852)           (11,043)
                   Principal collections and maturities of               9,966   14,003    16,168
                     held-to-maturity securities
                   Proceeds from sales of foreclosed real estate         2,936    3,366     4,877
                   Purchase of office premises and equipment            (1,451)    (981)   (1,375)
                   Other, net                                            1,118     (260)       20
                   ------------------------------------------------------------------------------
                   NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES    (31,790)  13,231   (34,298)
                   ------------------------------------------------------------------------------
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                 CONSOLIDATED FINANCIAL STATEMENTS.

22
<PAGE>

<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES   FOR THE YEARS ENDED DECEMBER 31,                        1996      1995      1994
                   --------------------------------------------------------------------------------
                   (in thousands)
<S>                <C>                                                 <C>       <C>       <C>
                   FINANCING ACTIVITIES:
                   CASH FLOWS FROM FINANCING ACTIVITIES:
                   Net increase in deposit accounts                      40,832    18,249     1,256
                   Proceeds from FHLB advances and other borrowed       129,650    68,200   123,100
                     money
                   Repayments of FHLB advances and other borrowed      (152,750) (112,500) (106,759)
                     money
                   Payment of cash dividends                               (418)
                   (Purchase) sale of treasury stock                        108                (480)
                   Other, net                                              (353)      248       355
                   --------------------------------------------------------------------------------
                   NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES      17,069   (25,803)   17,472
                   --------------------------------------------------------------------------------
                   NET INCREASE (DECREASE) IN CASH AND CASH                (918)    2,994    (1,893)
                     EQUIVALENTS
                   CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR          21,325    18,331    20,224
                   --------------------------------------------------------------------------------
                   CASH AND CASH EQUIVALENTS, END OF YEAR              $ 20,407  $ 21,325  $ 18,331
                   --------------------------------------------------------------------------------
                   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                   CASH PAID DURING THE YEAR FOR:
                   Interest                                            $ 25,967  $ 30,283  $ 26,739
                   Income taxes                                           1,217     1,100
                   SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
                     FINANCING ACTIVITIES:
                   Securitizations of mortgage loans                     27,806    33,833    41,593
                   Conversion of adjustable rate and construction
                     loans receivable to 30 year fixed rate mortgage     13,589     5,373     2,391
                     loans held-for-sale
                   Loans foreclosed or in-substance foreclosed            4,742     9,017     3,099
                   Financed sales of foreclosed real estate               2,730     6,215     2,603
                   Transfers of investment and mortgage-backed
                     securities from available-for-sale to
                     held-to-maturity                                                        91,574
                   Transfers of investment and mortgage-backed
                     securities from held-to-maturity to
                     available-for-sale                                            42,842
                   Issuance of treasury stock as compensation                47       172        31
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                 CONSOLIDATED FINANCIAL STATEMENTS.

                                                                              23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PALFED, INC.           Following is a description of the more significant
AND SUBSIDIARIES       accounting and financial reporting policies followed by
                       the Company in preparing and presenting its consolidated
                       financial statements.
NOTE 1:                PRINCIPLES OF CONSOLIDATION
SUMMARY OF             The consolidated financial statements include the
SIGNIFICANT            accounts of PALFED, Inc. ("PALFED"); its wholly owned
ACCOUNTING             subsidiaries, Palmetto Federal Savings Bank of South
POLICIES               Carolina ("Palmetto Federal" or the "Bank") and PALFED
                       Investment Services, Inc.; Palmetto Federal's subsidiary,
                       Palmetto Service Corporation ("PSC"); and PSC's
                       subsidiary, Woodside Development Company of Aiken, Inc.
                       (collectively referred to as the "Company"). All
                       significant intercompany accounts and transactions have
                       been eliminated.

                       PALFED is a savings and loan holding company. The
                       Company's principal line of business is community
                       banking. The Company also has lines of business in real
                       estate and retail securities brokerage. The principal
                       markets for the Company's products and services are
                       individuals and families, professionals, and small and
                       medium sized businesses in South Carolina.

                       CASH AND CASH EQUIVALENTS
                       For purposes of presentation in the consolidated
                       statements of cash flows, cash and cash equivalents
                       include cash and due from banks and interest-bearing
                       deposits with other banks. Cash and due from banks
                       include all noninterest-bearing deposits with other
                       banks.

                       TRADING SECURITIES
                       Mortgage-backed securities held for sale in conjunction
                       with mortgage banking activities are classified as
                       trading securities and recorded at their fair values.
                       Unrealized gains and losses on trading account securities
                       are included in income. The Company held no trading
                       securities at December 31, 1996 or 1995.

                       SECURITIES HELD-TO-MATURITY
                       Bonds, notes and mortgage-backed securities for which the
                       Company has the positive intent and ability to hold to
                       maturity are carried at cost, adjusted for premiums and
                       discounts that are recognized in interest income using
                       the interest method over the period to maturity.

                       SECURITIES AVAILABLE-FOR-SALE
                       Available-for-sale securities consist of bonds, equity
                       and mortgage-backed securities not classified as held-to-
                       maturity or trading. Unrealized holding gains and losses
                       on available-for-sale securities are reported net of
                       income taxes as a separate component of shareholders'
                       equity until realized.

                       In November 1995, the Financial Accounting Standards
                       Board ("FASB") issued a Special Report, "A Guide to
                       Implementation of Statement 115 on Accounting For Certain
                       Debt and Equity Securities", which included a transition
                       provision allowing all entities to reassess the
                       appropriateness of the classifications of all securities
                       held and account for any resulting reclassifications at
                       fair value. Reclassifications from the held-to-maturity
                       category resulting from this one-time reassessment did
                       not call into question, or "taint", the intent of the
                       entity to hold other debt securities to maturity in the
                       future. In accordance with this Special Report, the
                       Company transferred securities with an amortized cost of
                       $42.8 million from held-to-maturity to available-for-sale
                       in December 1995. The transfer was effected at the fair
                       value of the securities and the unrealized loss on these
                       securities at the time of transfer was not significant.

                       Gains and losses on sales of securities are determined
                       using the specific identification method. Premiums and
                       discounts are recognized in interest income using the
                       interest method over the period to maturity.

                       LOANS HELD-FOR-SALE
                       Mortgage loans originated and intended for sale in the
                       secondary market are carried at the lower of cost or
                       estimated market value in the aggregate. Net unrealized
                       losses are recognized through a valuation allowance by
                       charges to income.

24
<PAGE>
<TABLE>
<S>                    <C>
                       LOANS RECEIVABLE
                       Loans receivable that management has the intent and
                       ability to hold for the foreseeable future or until
                       maturity or payoff are reported at their outstanding
                       principal adjusted for charge-offs, the allowance for
                       loan losses and any deferred fees or costs on originated
                       loans and unamortized premiums or discounts on purchased
                       loans.

                       The allowance for loan losses is increased by charges to
                       income and decreased by charge-offs (net of recoveries).
                       Management's periodic evaluation of the adequacy of the
                       allowance is based on the Company's past loan experience,
                       known and inherent risks in the portfolio, adverse
                       situations that may affect the borrower's ability to
                       repay, the estimated value of any underlying collateral,
                       and current economic conditions. While management uses
                       its best judgment in establishing the allowances for
                       losses, future adjustments to the allowances may be
                       necessary if economic conditions differ substantially
                       from the assumptions used in making the evaluations.

                       On January 1, 1995, the Company adopted Statement of
                       Financial Accounting Standards ("SFAS") No. 114,
                       "Accounting By Creditors for Impairment of a Loan", as
                       amended by SFAS No. 118, "Accounting By Creditors For
                       Impairment of a Loan -- Income Recognition and
                       Disclosures, an Amendment of SFAS No. 114". Under these
                       new standards, a loan is considered impaired, based on
                       current information and events, if it is probable that
                       the Company will be unable to collect the scheduled
                       payments of principal and interest when due according to
                       the contractual terms of the loan agreement.

                       The Company uses several factors in determining if a loan
                       is impaired under SFAS No. 114. Quarterly asset
                       classification procedures generally include a review of
                       significant loans and lending data, including loan
                       payment status and borrowers' financial data and
                       operating factors, such as cash flows and operating
                       income or loss. The measurement of impaired loans is
                       generally based on the present value of expected future
                       cash flows discounted at the historical effective
                       interest rate of the loan, except that collateral
                       dependent loans are measured for impairment at the fair
                       value of the collateral. The adoption of SFAS No. 114
                       resulted in no additional provision for credit losses at
                       January 1, 1995.

                       Interest income is recognized under the interest method.
                       The accrual of interest on loans, including impaired
                       loans, in excess of 90 days past due is generally
                       discontinued and previously recognized interest income is
                       reversed until the loans become current. Additionally,
                       the Bank discontinues the accrual of interest on any loan
                       when it is determined that collection of interest is not
                       probable.

                       Loan origination and commitment fees and certain direct
                       origination costs are recognized as an adjustment of the
                       yield over the life of the related loan.

                       LOAN SERVICING
                       The Company adopted SFAS No. 122, "Accounting for
                       Mortgage Servicing Rights", effective October 1, 1995.
                       SFAS No. 122 requires that the right to service mortgage
                       loans for others be recognized as an asset, whether that
                       servicing right is acquired or originated. The total cost
                       of mortgage loans sold or securitized is allocated to the
                       loans and to the mortgage servicing rights based upon
                       their relative fair values. The Company evaluates
                       mortgage servicing rights for impairment based on the
                       fair value of those rights. The servicing rights are
                       stratified based on the weighted average interest rates
                       of the underlying loans on an aggregate loan basis. The
                       Company amortizes the mortgage servicing rights over the
                       period of the estimated net servicing income. Servicing
                       rights of $153,000 were recorded during 1995 as a result
                       of adopting this standard, resulting in a gain of
                       $101,000 net of income taxes. The Company capitalized
                       $483,000 and amortized $87,000 in originated mortgage
                       servicing rights during 1996.

                       The Company typically sells loans on a nonrecourse basis.
                       Gains and losses on sales of loans are recognized at the
                       time of sale, as determined by: (1) the difference
                       between the net sale proceeds and the book value of the
                       loans sold, and (2) the estimated present value
                       associated with excess or deficient servicing fees. Gains
                       and losses related to excess or deficient servicing fees
                       are amortized on the level yield method over the
                       estimated lives of the related mortgage loans as a
                       reduction or increase, respectively, in income on
                       servicing fees received.
</TABLE>

                                                                              25
<PAGE>
<TABLE>
<S>                    <C>
                       INVESTMENT IN REAL ESTATE
                       Investment in real estate includes real estate acquired
                       in settlement of loans ("REO"), real estate acquired for
                       development and sale, and equity in and loans to
                       partnerships.

                       Real estate properties acquired through, or in lieu of,
                       loan foreclosure are initially recorded at fair value at
                       the date of foreclosure, establishing a new cost basis.
                       After foreclosure, valuations are periodically performed
                       by management and the real estate is carried at the lower
                       of cost or fair value minus estimated costs to sell.
                       Revenue and expenses from operations and additions to the
                       valuation allowance are included in real estate
                       operations.

                       Real estate acquired for development and sale is carried
                       at the lower of cost or estimated net realizable value.
                       Profits from the sales of real estate are recognized
                       under either the full accrual method or the percentage of
                       completion method, whichever is appropriate under the
                       terms and conditions of the sales transaction.

                       From time to time, as a result of the Company's various
                       investments in real estate, potential liabilities for
                       environmental remediation may arise. Liabilities are
                       recorded when environmental assessments and/or remedial
                       efforts are probable and the cost can be reasonably
                       estimated. At December 31, 1996 and 1995, no such
                       liabilities were recorded.

                       PREMISES AND EQUIPMENT
                       Premises and equipment consist principally of furniture,
                       fixtures and equipment and office buildings. Land is also
                       included in premises and equipment and is carried at
                       cost. Other premises and equipment are carried at cost
                       and are depreciated using straight-line and declining
                       balance methods over the estimated lives of the related
                       assets (20 to 40 years for buildings and 3 to 10 years
                       for equipment). Gains and losses on disposal are
                       reflected in income. Accumulated depreciation was $10.6
                       million and $9.9 million at December 31, 1996 and 1995,
                       respectively.

                       CORE DEPOSIT INTANGIBLE
                       The Company used the purchase method of accounting for
                       the acquisition of a savings institution in 1982. The
                       goodwill resulting from this acquisition has been
                       substantially amortized in prior years. The core deposit
                       intangible asset acquired of $5.4 million was being
                       amortized on a straight-line basis over 25 years and, at
                       September 30, 1996, totalled $2.4 million and had an
                       estimated remaining life of approximately 11 years. As a
                       result of the SAIF special assessment on September 30,
                       1996, management reassessed the carrying value of this
                       intangible asset. As a result of this reassessment,
                       management concluded that the asset was impaired and
                       wrote-off the remaining balance in December 1996.

                       STOCK-BASED COMPENSATION
                       Effective January 1, 1996, the Company adopted SFAS No.
                       123, "Accounting for Stock-Based Compensation". SFAS No.
                       123 establishes a fair value based method of accounting
                       for stock-based compensation. SFAS No. 123 allows for the
                       continued use of the intrinsic value method prescribed by
                       Accounting Principles Board Opinion No. 25, "Accounting
                       for Stock Issued to Employees". The Company continues to
                       account for stock-based compensation under the provisions
                       of Opinion No. 25.

                       ADVERTISING COSTS
                       The Company expenses the production costs of advertising
                       the first time the advertising takes place. The costs of
                       communicating the advertising, such as television air
                       time or print media space, is capitalized and amortized
                       over the period of use. Direct-response advertising is
                       expensed as incurred due to the relatively minor nature
                       of such costs.

                       At December 31, 1996 and 1995, no advertising costs were
                       reported as assets. Advertising expense was $416,000,
                       $335,000 and $236,000 in 1996, 1995 and 1994,
                       respectively.
</TABLE>

26
<PAGE>
<TABLE>
<S>                    <C>
                       INCOME TAXES
                       The Company uses the asset and liability approach for
                       financial accounting and reporting for income taxes.
                       Deferred tax assets and liabilities are reflected at
                       currently enacted income tax rates applicable to the
                       period in which the deferred tax assets or liabilities
                       are expected to be realized or settled. As changes in tax
                       laws or rates are enacted, deferred tax assets and
                       liabilities are adjusted through the provision for income
                       taxes.

                       EARNINGS PER SHARE
                       Earnings per share is based on the weighted average
                       number of common shares outstanding, plus common stock
                       equivalents (principally equivalent common shares
                       calculated for stock options outstanding). Allocated
                       shares owned by the PALFED, Inc. Employee Savings and
                       Stock Ownership Plan are included in shares outstanding.
                       The weighted average number of shares used in the
                       computation for 1996, 1995 and 1994 was approximately
                       5,242,000, 5,163,000 and 5,170,000, respectively.

                       USE OF ESTIMATES
                       The preparation of financial statements in conformity
                       with generally accepted accounting principles requires
                       management to make estimates and assumptions that affect
                       the reported amounts of assets and liabilities and
                       disclosure of contingent assets and liabilities at the
                       dates of the financial statements and the reported
                       amounts of income and expenses during the reporting
                       periods. Actual results could differ from those
                       estimates.

                       RECLASSIFICATIONS
                       Certain accounts have been reclassified in the 1995 and
                       1994 financial statements to conform to the 1996
                       presentation. Included in these accounts are net
                       reclassifications between operating and investing
                       activities in the statements of cash flows of $6.0
                       million and $5.9 million in 1995 and 1994, respectively,
                       relating to loans held-for-sale and trading securities.

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

                       Cash and cash equivalents:  The carrying amounts
                       approximate fair value.

                       Investment and mortgage-backed securities:  Fair values
                       are based on quoted market prices or dealer quotes, where
                       available. If quoted market prices are not available,
                       fair values are estimated using quoted market prices for
                       similar securities.

                       Loans held-for-sale:  Fair values are based on quoted
                       market prices, dealer quotes or forward sales
                       commitments.

                       Loans receivable:  The fair values are estimated by
                       discounting the future cash flows using the current
                       interest rates at which similar loans would be made to
                       borrowers with similar credit ratings and for the same
                       remaining maturities.

                       Accrued interest receivable and payable:  The fair values
                       approximate the carrying values.

                       Investment in FHLB stock:  The fair value approximates
                       the carrying value of this investment as this is the
                       amount which would be received upon sale of the stock.

                       Mortgage servicing rights:  The fair value is estimated
                       by discounting net cash flows from servicing rights using
                       the discount rates that approximate current market rates.

                       Deposits:  The fair value of demand deposits, savings
                       accounts, and certain money market deposits is the amount
                       payable on demand at the reporting date. The fair value
                       of fixed-maturity certificates of deposit is estimated
                       using the rates currently offered for deposits of similar
                       remaining maturities.

                       FHLB advances:  The carrying amounts reported for
                       short-term advances approximate those liabilities' fair
                       values. The fair value of long-term advances is estimated
                       using the rates currently offered for these liabilities
                       of similar remaining maturities.
</TABLE>

                                                                              27
<PAGE>
<TABLE>
<S>                    <C>
                       Commitments to originate loans, unused lines of credit
                       and standby letters of credit: The fair value of
                       commitments is estimated using the fees currently charged
                       to enter into similar agreements, taking into account the
                       remaining terms of the agreements and the present credit
                       worthiness of the counterparties. The fair value of
                       letters of credit is based on fees currently charged for
                       similar agreements with the counterparties at the
                       reporting date.

                       SFAS No. 119, "Disclosure About Derivative Financial
                       Instruments and Fair Value of Financial Instruments",
                       requires disclosures about derivative financial
                       instruments -- futures, forward, swap and option
                       contracts, and other financial instruments with similar
                       characteristics. As of December 31, 1996 and 1995, the
                       Company did not hold, and had not issued, instruments
                       which are subject to the disclosure requirements of SFAS
                       No. 119.

                       RECENTLY ISSUED ACCOUNTING STANDARDS
                       In June 1996, the FASB issued SFAS No. 125, "Accounting
                       for Transfers and Servicing of Financial Assets and
                       Extinguishments of Liabilities", effective January 1,
                       1997. SFAS No. 125 establishes accounting and reporting
                       standards for transfers and servicing of financial assets
                       and extinguishments of liabilities. After a transfer of
                       financial assets, the Company recognizes the financial
                       and servicing assets it controls and the liabilities it
                       has incurred, derecognizes financing assets when control
                       has been surrendered, and derecognizes liabilities when
                       extinguished. SFAS No. 125 also provides consistent
                       standards for distinguishing transfers of financial
                       assets that are sales from transfers that are secured
                       borrowings. Management believes the adoption of SFAS No.
                       125 will not have a significant effect on the financial
                       condition or results of operations of the Company.

                       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 until January 1,
                       1998, certain provisions of SFAS No. 125.
</TABLE>

<TABLE>
<S>                    <C>                                       <C>         <C>          <C>          <C>
NOTE 2:                Investment and mortgage-backed securities are summarized as follows:
INVESTMENT AND
MORTGAGE-BACKED
SECURITIES
                                                                                  Gross        Gross
                                                                 Amortized   Unrealized   Unrealized       Fair
                       AVAILABLE-FOR-SALE                             Cost        Gains       Losses      Value
                       ----------------------------------------------------------------------------------------
                       (in thousands)

                       December 31, 1996:
                       U.S. Treasury and agency obligations      $ 15,964      $   30       $  226     $ 15,768
                       FNMA, FHLMC and GNMA securities              6,374          90           30        6,434
                       Other mortgage-backed securities             1,787          18                     1,805
                       ----------------------------------------------------------------------------------------
                                                                 $ 24,125      $  138       $  256     $ 24,007
                       ----------------------------------------------------------------------------------------
                       December 31, 1995:
                       U.S. Treasury and agency obligations      $ 31,230      $   86       $  256     $ 31,060
                       FNMA, FHLMC and GNMA securities             20,799         165          114       20,850
                       Other mortgage-backed securities             3,584          56                     3,640
                       ----------------------------------------------------------------------------------------
                                                                 $ 55,613      $  307       $  370     $ 55,550
                       ----------------------------------------------------------------------------------------
                       HELD-TO-MATURITY
                       December 31, 1996:
                       U.S. government agency obligations        $  6,962      $   12       $   27     $  6,947
                       FNMA, FHLMC and GNMA securities             34,166         307          276       34,197
                       Other mortgage-backed securities            17,572         506                    18,078
                       ----------------------------------------------------------------------------------------
                                                                 $ 58,700      $  825       $  303     $ 59,222
                       ----------------------------------------------------------------------------------------
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Gross        Gross
                                                                 Amortized   Unrealized   Unrealized       Fair
                                                                      Cost        Gains       Losses      Value
<S>                    <C>                                       <C>         <C>          <C>          <C>
                       ----------------------------------------------------------------------------------------
                       December 31, 1995:
                       U.S. government agency obligations        $  8,940      $    5       $   66     $  8,879
                       FNMA, FHLMC and GNMA securities             36,971         488            1       37,458
                       Other mortgage-backed securities            16,382         851                    17,233
                       ----------------------------------------------------------------------------------------
                                                                 $ 62,293      $1,344       $   67     $ 63,570
                       ----------------------------------------------------------------------------------------

                       The change in the unrealized gain (loss) on investment and mortgage-backed securities
                       for the years ended December 31, 1994, 1995 and 1996 is as follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                 Available-    Held-To-   Income Tax
                                                                  For-Sale     Maturity       Effect      Total
                       ----------------------------------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>         <C>          <C>          <C>
                       Balance at December 31, 1993              $    575                   $ (196)    $    379
                       Net change in unrealized losses             (2,833)                     964       (1,869)
                       Unrealized loss on securities
                         transferred from available-for-sale                   $(2,519)        856       (1,663)
                       Amortization of unrealized loss on
                         transferred securities                                   347         (119)         228
                       ----------------------------------------------------------------------------------------
                       Balance at December 31, 1994                (2,258)     (2,172)       1,505       (2,925)
                       ----------------------------------------------------------------------------------------
                       Net change in unrealized losses              2,195                     (745)       1,450
                       Unrealized loss on securities
                         transferred from available-for-sale                      486         (165)         321
                       Amortization of unrealized loss on
                         transferred securities                                   409         (139)         270
                       ----------------------------------------------------------------------------------------
                       Balance at December 31, 1995                   (63)     (1,277)         456         (884)
                       ----------------------------------------------------------------------------------------
                       Net change in unrealized losses                (55)                      18          (37)
                       Amortization of unrealized loss on
                         transferred securities                                   312         (106)         206
                       ----------------------------------------------------------------------------------------
                       Balance at December 31, 1996              $   (118)     $ (965)      $  368     $   (715)
                       ----------------------------------------------------------------------------------------

                       Proceeds from sales of investment and mortgage-backed securities during the years ended
                       December 31, 1996, 1995 and 1994, as well as the gross gains and gross losses realized,
                       are summarized as follows:
</TABLE>

<TABLE>
<CAPTION>
                       AVAILABLE-FOR-SALE SECURITIES                   1996       1995         1994
                       ----------------------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>          <C>        <C>
                       Proceeds from sales                        $  26,053   $ 37,934     $ 21,848
                       ----------------------------------------------------------------------------
                       Gross gains                                $     272   $    150     $     14
                       ----------------------------------------------------------------------------
                       Gross losses                               $      33   $      4     $     13
                       ----------------------------------------------------------------------------

                       The amortized cost and estimated market value of investments at December 31,
                       1996, by contractual maturity, are shown below. Expected maturities will
                       differ from contractual maturities because borrowers may have the right to
                       prepay obligations with or without call or prepayment penalties.
</TABLE>

                                                                              29
<PAGE>

<TABLE>
<CAPTION>
                                                               Held-to-maturity   Available-for-sale
                                                            -------------------  -------------------
                                                            Amortized      Fair  Amortized      Fair
                                                                 Cost     Value       Cost     Value
                       -----------------------------------------------------------------------------
                                                                         (in thousands)
<S>                    <C>                                  <C>         <C>      <C>         <C>
                       After one year through five years     $ 3,967    $ 3,980   $15,561    $15,335
                       After five years through ten years      2,995      2,967
                       After ten years                                                403        433
                       Mortgage-backed securities             51,738     52,275     8,161      8,239
                       -----------------------------------------------------------------------------
                                                             $58,700    $59,222   $24,125    $24,007
                       -----------------------------------------------------------------------------

NOTE 3:                Loans receivable are summarized as follows at December 31:
LOANS
RECEIVABLE
</TABLE>
<TABLE>
<CAPTION>
                                                                      1996        1995
<S>                    <C>                                       <C>         <C>
                       ---------------------------------------------------------------

<CAPTION>
                       (in thousands)
<S>                    <C>                                       <C>         <C>
                       Loans collateralized by real estate:
                         Permanent residential mortgage          $ 224,955   $ 204,835
                         Construction                               54,816      38,114
                         Second mortgage                            56,022      52,313
                         Commercial                                145,685     128,051
                       Loans collateralized by other property:
                         Consumer                                   34,903      39,585
                         Commercial                                 16,209      16,080
                       Loans collateralized by savings account       4,725       4,769
                       ---------------------------------------------------------------
                                                                   537,315     483,747
                       Less:
                         Loans in process                          (16,263)    (13,141)
                         Unamortized yield adjustments              (1,190)       (744)
                         Allowance for estimated losses             (6,983)     (8,417)
                       ---------------------------------------------------------------
                                                                 $ 512,879   $ 461,445
                       ---------------------------------------------------------------
                       Weighted average yield on loans               8.73%       8.87%
                       ---------------------------------------------------------------

                       Changes in the allowance for estimated losses on loans are
                       summarized as follows for each of the years ended December 31:
</TABLE>

<TABLE>
<CAPTION>
                                                                     1996       1995       1994
                       ------------------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>        <C>        <C>
                       Balance, beginning of year                $  8,417   $  8,213   $  9,883
                       Provision                                    1,154      1,322      2,329
                       Charge-offs                                 (3,044)    (1,770)    (4,572)
                       Recoveries                                     456        652        573
                       ------------------------------------------------------------------------
                       Balance, end of year                      $  6,983   $  8,417   $  8,213
                       ------------------------------------------------------------------------
</TABLE>

30
<PAGE>
<TABLE>
<S>                    <C>                                       <C>        <C>        <C>
                       At December 31, 1996 and 1995, the recorded investment in loans for
                       which impairment has been recognized in accordance with SFAS No. 114
                       totalled approximately $8.2 million and $13.0 million, respectively. Of
                       these amounts, $2.2 million and $6.1 million, respectively, related to
                       loans with corresponding valuation allowances of $401,000 and $1.1
                       million, respectively. The impaired loans at December 31, 1996 and 1995
                       were measured for impairment using the fair value of the collateral as
                       substantially all of these loans were collateral dependent. The average
                       recorded investment in impaired loans during 1996 and 1995 was
                       approximately $10.9 million and $14.5 million, respectively. The
                       interest income recognized on impaired loans during 1996 and 1995 was
                       $537,000 and $743,000, respectively. Impaired loans are summarized as
                       follows at December 31:
</TABLE>

<TABLE>
<CAPTION>
                                                                     1996       1995
                       -------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>        <C>
                       Construction loans                        $    557   $    844
                       Commercial real estate loans                 7,150     11,300
                       Residential mortgage                           515        899
                       -------------------------------------------------------------
                                                                 $  8,222   $ 13,043
                       -------------------------------------------------------------

                       Troubled debt restructurings, resulting primarily from
                       commercial real estate loans, had principal balances of
                       approximately $3.0 million and $6.1 million at December 31,
                       1996 and 1995, respectively. The amount of interest income on
                       these restructured loans included in net earnings for 1996
                       and 1995 was approximately $208,000 and $428,000,
                       respectively. The additional interest income that would have
                       been recorded if these loans had been current in accordance
                       with their original terms and had been outstanding throughout
                       the years would have been $160,000 and $222,000 in 1996 and
                       1995, respectively.

                       The Company was servicing first mortgage loans of
                       approximately $248.1 million and $237.1 million at December
                       31, 1996 and 1995, respectively, which had been sold to
                       investors on a nonrecourse basis, and approximately $4.4
                       million and $5.3 million, at December 31, 1996 and 1995,
                       respectively, which had been sold to investors on a recourse
                       basis. Mortgage loans serviced for others are not included in
                       the accompanying consolidated statements of financial
                       condition.

NOTE 4:                The Company's investment in real estate is summarized as
INVESTMENT IN          follows at December 31:
REAL ESTATE
</TABLE>

<TABLE>
<CAPTION>
                                                                     1996       1995
                       -------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>        <C>
                       Acquired in settlement of loans           $  7,896   $  8,286
                       Less allowance for estimated losses           (709)      (271)
                       -------------------------------------------------------------
                                                                    7,187      8,015
                       -------------------------------------------------------------
                       Acquired for development and sale            6,257      6,083
                       Less allowance for estimated losses           (400)      (370)
                       -------------------------------------------------------------
                                                                    5,857      5,713
                       -------------------------------------------------------------
                       Equity in and loans to partnerships            457        720
                       -------------------------------------------------------------
                                                                 $ 13,501   $ 14,448
                       -------------------------------------------------------------

                       Real estate acquired for development and sale at December 31,
                       1996 consisted principally of 2 outparcels and approximately
                       1,000 acres of undeveloped land at Woodside Plantation, a
                       real estate project located in Aiken, South Carolina, subject
                       to a purchase option that expires December 31, 1997.
</TABLE>

                                                                              31
<PAGE>
<TABLE>
<S>                    <C>                                       <C>        <C>
                       Changes in the allowance for estimated losses on real estate
                       are summarized as follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                           Development
                                                                     REO      and Sale      Total
                       --------------------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>       <C>           <C>
                       Balance at December 31, 1993              $   118     $   230     $    348
                         Provision for loss                        1,388         100        1,488
                         Charge-offs                              (1,062)                  (1,062)
                         Recoveries                                   90                       90
                       --------------------------------------------------------------------------
                       Balance at December 31, 1994                  534         330          864
                         Provision for loss                          374          40          414
                         Charge-offs                                (637)                    (637)
                       --------------------------------------------------------------------------
                       Balance at December 31, 1995                  271         370          641
                         Provision for loss                          528          30          558
                         Charge-offs                                 (90)                     (90)
                       --------------------------------------------------------------------------
                       Balance at December 31, 1996              $   709     $   400     $  1,109
                       --------------------------------------------------------------------------

                       Real estate operations for each of the years ended December 31 consists of
                       the following:
</TABLE>

<TABLE>
<CAPTION>
                                                                     1996       1995       1994
                       ------------------------------------------------------------------------
                       (in thousands)
<S>                    <C>                                       <C>        <C>        <C>
                       Provision for estimated losses on real
                         estate held for development             $    (30)  $    (40)  $   (100)
                       Real estate expenses, including
                         provision for estimated losses on REO     (1,098)    (1,129)    (2,515)
                       Other                                           41         95         19
                       ------------------------------------------------------------------------
                                                                 $ (1,087)  $ (1,074)  $ (2,596)
                       ------------------------------------------------------------------------

NOTE 5:                A summary of certificates of deposit by interest rate at December 31
DEPOSITS               follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                            1996      1995
                    ----------------------------------------------------------------------
                    (in thousands)
<S>                 <C>                                                 <C>       <C>
                    Under 4.00%                                         $ 16,985  $ 20,943
                    4.01%-6.00%                                          254,986   165,733
                    6.01%-8.00%                                          101,219   165,057
                    Above 8.00%                                           11,488    11,460
                    ----------------------------------------------------------------------
                                                                        $384,678  $363,193
                    ----------------------------------------------------------------------

                    A summary of certificates of deposit at December 31 by contractual
                    maturities follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                                        1996       1995
                      ---------------------------------------------------------------------------------
                      (in thousands)
<S>                   <C>                                                          <C>        <C>
                      Within one year                                              $ 265,915  $ 244,206
                      1-2 years                                                       77,555     69,330
                      2-3 years                                                       23,826     18,168
                      3-4 years                                                       10,802     17,671
                      4-5 years                                                        4,028     10,540
                      Over 5 years                                                     2,552      3,278
                      ---------------------------------------------------------------------------------
                                                                                   $ 384,678  $ 363,193
                      ---------------------------------------------------------------------------------
</TABLE>

32
<PAGE>
<TABLE>
<S>                   <C>                                                          <C>        <C>
                      The aggregate amount of time deposits greater than or equal to $100,000 was $90.5
                      million and $82.9 million at December 31, 1996 and 1995, respectively. The
                      weighted average interest rate on savings deposits was 4.78% and 4.98% at
                      December 31, 1996 and 1995, respectively.

                      At December 31, 1996 and 1995, certain certificates of deposit were
                      collateralized by certain investment and mortgage-backed securities aggregating
                      $32.6 million and $33.0 million, respectively.

                      Interest expense on savings deposits is summarized as follows for the years ended
                      December 31:
</TABLE>

<TABLE>
<CAPTION>
                                                                           1996     1995     1994
                    -----------------------------------------------------------------------------
                    (in thousands)
<S>                 <C>                                                 <C>      <C>      <C>
                    Regular and statement savings                       $   838  $   827  $   823
                    NOW/IFA accounts                                      1,878    1,685    1,819
                    Certificates of deposit                              21,794   21,289   16,238
                    -----------------------------------------------------------------------------
                                                                         24,510   23,801   18,880
                    Penalties for early withdrawal                          (98)    (121)     (90)
                    -----------------------------------------------------------------------------
                                                                        $24,412  $23,680  $18,790
                    -----------------------------------------------------------------------------

NOTE 6:             Maturities and interest rates of FHLB advances were as follows at December
FEDERAL HOME LOAN   31:
BANK ADVANCES
</TABLE>

<TABLE>
<CAPTION>
                                                                                 1996                     1995
                                                              -----------------------  -----------------------
                                                                             INTEREST                 Interest
                                                                 AMOUNT          RATE     Amount          Rate
                        --------------------------------------------------------------------------------------
                        (dollars in thousands)
<S>                     <C>                                   <C>        <C>           <C>        <C>
                        One year                              $  57,900  5.30 - 6.95%  $  81,500  5.73 - 9.10%
                        Two years                                10,500  5.39 - 5.87      10,000          6.37
                        --------------------------------------------------------------------------------------
                                                              $  68,400         5.94%  $  91,500         6.56%
                        --------------------------------------------------------------------------------------

                        At December 31, 1996 and 1995, advances were collateralized by $145.6 million and
                        $160.4 million of specifically identified unencumbered first mortgage loans and
                        mortgage-backed securities, respectively. The weighted average interest rate on short
                        term advances was 6.01% and 6.59% at December 31, 1996 and 1995, respectively.

NOTE 7:                 Actual income taxes differ from income taxes computed at the federal corporate
FEDERAL AND STATE       statutory rate of 34% as shown below for the years ended December 31:
INCOME TAXES
</TABLE>

<TABLE>
<CAPTION>
                                                                                1996       1995       1994
                      ------------------------------------------------------------------------------------

                      (in thousands)
<S>                   <C>                                                  <C>        <C>        <C>
                      Tax expense at statutory federal income tax rate     $     497  $   2,177  $   1,874
                      Amortization and accretion of discounts, premiums
                        and intangible assets related to purchase
                        adjustments                                              901         96         89
                      State income tax refund                                               (53)      (162)
                      Other, net                                                 (49)        37        (44)
                      ------------------------------------------------------------------------------------
                      Provision for income taxes                           $   1,349  $   2,257  $   1,757
                      ------------------------------------------------------------------------------------
</TABLE>

                                                                              33
<PAGE>
<TABLE>
<S>                   <C>                                                  <C>        <C>        <C>
                      Under the liability method of accounting for income taxes, deferred income tax
                      expense arises from temporary differences between the tax basis of assets and
                      liabilities and their reported amounts in the financial statements. The tax effects
                      of temporary differences that give rise to significant portions of deferred tax
                      assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                                         1996       1995
                      -------------------------------------------------------------------------------------
                      (in thousands)
<S>                   <C>                                                              <C>        <C>
                      DEFERRED TAX ASSETS:
                      Allowance for loan losses                                        $   2,555  $   3,002
                      Deferred loan fees                                                     312        143
                      Basis difference in acquired assets                                     59         76
                      Unrealized securities losses                                           449        616
                      Deferred income                                                         14         30
                      Other                                                                  339        250
                      -------------------------------------------------------------------------------------
                                                                                       $   3,728  $   4,117
                      -------------------------------------------------------------------------------------
                      DEFERRED TAX LIABILITIES:
                      Tax bad debt reserve in excess of base year reserve              $   1,034  $   1,034
                      Recognition of profits on sales of real estate                         137        137
                      Differences in depreciation methods for premises and equipment          90         90
                      Deferred loan fees                                                     967        630
                      FHLB stock dividends not recognized for tax                          1,006      1,006
                      Unrealized securities gains                                            558        534
                      Other                                                                   50         29
                      -------------------------------------------------------------------------------------
                                                                                       $   3,842  $   3,460
                      -------------------------------------------------------------------------------------

                      The Company files a consolidated federal income tax return. Prior to 1996, the
                      Company was allowed to determine its bad debt deduction for tax purposes based on
                      either the experience method (the "bad debt reserve method") or the percentage of
                      taxable income method (limited to 8.0% of taxable income before such deduction). The
                      Company used the experience method in 1995 and 1994 since this method provided a more
                      favorable bad debt deduction.

                      The "Small Business Job Protection Act of 1996" repealed the bad debt reserve method
                      for thrifts effective January 1, 1996. The legislation suspends recapture of bad debt
                      reserves taken through 1987 (i.e., the base year reserve), but requires thrifts to
                      recapture or repay bad debt deductions taken after 1987 over 6 years beginning in
                      1996. As of December 31, 1995, PALFED's bad debt reserves subject to recapture, for
                      which deferred taxes have previously been provided, totalled $3.0 million. Thrifts
                      meeting certain home mortgage lending tests are allowed to defer repayment for an
                      additional 2 years. The Company qualified for the first year of the deferral period.

                      Under SFAS No. 109, "Accounting for Income Taxes", the Company is not required to
                      recognize a deferred tax liability with respect to the base year reserve, unless it
                      becomes apparent that this temporary difference will reverse in the foreseeable
                      future. This temporary difference will become taxable in the event the Company no
                      longer qualifies as a bank for federal income tax purposes. The cumulative amount of
                      this temporary difference for which the Company is not required to recognize a
                      deferred tax liability is equal to the amount of its tax base year reserve as of
                      December 31, 1987 of approximately $2.9 million.

                      During 1994, the Internal Revenue Service completed an examination of the Company's
                      consolidated federal income tax returns through 1991. The examination resulted in an
                      income tax refund of $1.2 million and interest on the refund of approximately
                      $800,000, net of related fees and expenses. Both the refund and related interest were
                      received in 1994. Subsequent to the completion of the IRS examination, Palmetto
                      Federal filed amended South Carolina state income tax returns and received refunds
                      and related interest of approximately $285,000 in 1994.
</TABLE>

34
<PAGE>
<TABLE>
<S>                   <C>                                                              <C>        <C>
                      The Bank is subject to various regulatory capital requirements administered by the
NOTE 8:               federal banking agencies. Failure to meet minimum capital requirements can initiate
REGULATORY MATTERS    certain mandatory and discretionary actions by regulators that, if undertaken, could
                      have a material adverse effect on the Company. Under capital adequacy guidelines and
                      the regulatory framework for prompt corrective action, Palmetto Federal must meet
                      specific capital guidelines that involve quantitative measures of the Bank's assets,
                      liabilities, and certain off-balance-sheet items as calculated under regulatory
                      accounting practices. The Bank's capital amounts and classification are also subject
                      to qualitative judgments by the regulators about components, risk weightings and
                      other factors.

                      As of December 31, 1996, the FDIC categorized the Bank as "well capitalized" under
                      the regulatory framework for prompt corrective action. To be categorized as well
                      capitalized, the Bank must maintain risk-based, core and tangible capital ratios of
                      10.0%, 6.0% and 5.0%, respectively. There are no conditions or events since that
                      notification that management believes have changed the Bank's classification.

                      The Bank's regulatory capital amounts and ratios are as follows as of the dates
                      indicated:
</TABLE>

<TABLE>
<CAPTION>
                                                                                                              To Be Well
                                                                                                             Capitalized
                                                                                                                   Under
                                                                                                                  Prompt
                                                                                            For Capital       Corrective
                                                                                               Adequacy           Action
                                                                                Actual         Purposes       Provisions
                                                                        --------------   --------------   --------------
                                                                         Amount  Ratio    Amount  Ratio    Amount  Ratio
                    ----------------------------------------------------------------------------------------------------
<S>                 <C>                                                 <C>      <C>     <C>      <C>     <C>      <C>
                    (in thousands)
                    DECEMBER 31, 1996
                    Risk-based Capital
                      (to risk weighted assets)                         $48,008  10.4%   $36,791   8.0%   $45,989  10.0%
                    Core Capital
                      (to adjusted tangible assets)                      43,361   6.6     19,726   3.0    39,449    6.0
                    Tangible Capital
                      (to tangible assets)                               43,361   6.6      9,862   1.5    32,873    5.0
                    DECEMBER 31, 1995
                    Risk-based Capital
                      (to risk weighted assets)                         $48,425  11.4%   $33,865   8.0%   $42,335  10.0%
                    Core Capital
                      (to adjusted total assets)                         43,375   6.8     19,172   3.0    38,345    6.0
                    Tangible Capital
                      (to tangible assets)                               43,375   6.8      9,586   1.5    31,954    5.0
                    ----------------------------------------------------------------------------------------------------

                    The payment of dividends by the Bank to PALFED is subject to substantial restrictions and would
                    require prior notice to and approval of the OTS.

NOTE 9:             The Company maintains a trusteed, noncontributory defined benefit pension plan which covers
EMPLOYEE BENEFIT    substantially all full-time employees with one year of service. The formula used to determine
PLANS               benefits paid to retired employees is based upon their length of service and their average
                    compensation during the final years of their employment. The plan's assets are invested primarily in
                    equity and bond mutual funds. The plan also owns 21,118 shares of PALFED common stock at December
                    31, 1996 and 1995 with a fair value of approximately $296,000 and $251,000, respectively. The
                    Company funds pension costs based upon the amount allowable or deductible for federal income tax
                    purposes. The actuarial method used in accounting for pension costs is the projected unit credit
                    method.
</TABLE>

                                                                              35
<PAGE>
<TABLE>
<S>                 <C>                                                 <C>      <C>     <C>      <C>     <C>      <C>
                    The following tables set forth the plan's funded status and certain amounts recognized in the
                    Company's consolidated financial statements at December 31, 1996, 1995 and 1994, respectively.
</TABLE>

<TABLE>
<CAPTION>
                                                                               1996       1995        1994
                      ------------------------------------------------------------------------------------

                      (in thousands)
<S>                   <C>                                                 <C>        <C>        <C>
                      Actuarial present value of accumulated benefits
                        including vested benefits of $1,714, $1,475 and
                        $1,403, respectively:                             $   1,828  $   1,604  $   1,479
                      ------------------------------------------------------------------------------------
                      Fair value of plan assets                           $   3,083  $   2,455  $   1,892
                      Projected benefit obligation                           (3,150)    (2,669)    (2,141)
                      Unrecognized prior service cost                          (348)      (368)      (388)
                      Unrecognized net loss (from past experiences
                        different from assumed)                                 775        781        814
                      Additional transition liability recognized (net of
                        amortization)                                             1          1          1
                      ------------------------------------------------------------------------------------
                      Prepaid pension costs                               $     361  $     200  $     178
                      ------------------------------------------------------------------------------------
                      Assumed rates used in actuarial computations:
                      Weighted average discount rate                           7.25%      7.25%      7.50%
                      Rate of increase in compensation                         4.50       4.50       5.00
                      Rate of increase in Social Security wage base            4.00       4.00       4.00
                      Expected return on plan assets                           8.50       8.00       6.00
                      ------------------------------------------------------------------------------------

                      For the years ended December 31                          1996       1995       1994
                      ------------------------------------------------------------------------------------
                      Service cost                                        $     271  $     205  $     246
                      Interest cost                                             202        172        136
                      Expected return on assets                                (311)      (155)      (107)
                      Net amortization and deferral                             100         23          6
                      ------------------------------------------------------------------------------------
                      Net pension expense                                 $     262  $     245  $     281
                      ------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S>                   <C>                                                 <C>        <C>        <C>
                      The Company maintains an Employee Savings and Stock Ownership Plan ("401(k) Plan")
                      for all full-time employees with one year of service who choose to participate. At
                      December 31, 1996, the 401(k) Plan owned 209,536 allocated shares and owned no
                      committed-to-be-released shares, unearned or suspense shares of PALFED common stock.
                      At December 31, 1996, there was no obligation to repurchase 401(k) Plan shares. The
                      Company's matching contribution varies according to the level of net income attained
                      by the Company. The Company's expense was $164,000, $126,000 and $90,000 for the
                      years ended December 31, 1996, 1995, and 1994, respectively.

                      The Company maintains an Executive Incentive Bonus Plan (the "Bonus Plan") for
                      certain officers who have been employed by the Company for at least one year.
                      Bonuses are awarded considering the individual's contribution to the Company's
                      performance. The Company accrued bonus expense of $750,000, $424,000 and $279,000
                      for the years ended December 31, 1996, 1995 and 1994, respectively, related to this
                      Bonus Plan.
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
NOTE 10:                The Company has operating leases for certain branch banking facilities and equipment.
COMMITMENTS AND         Future minimum rental commitments under these leases as of December 31, 1996, are
CONTINGENCIES           approximately as follows:

                        Year                                                                                 Amount
                        -------------------------------------------------------------------------------------------
<S>                     <C>                                                                             <C>
                        1997                                                                            $   294,000
                        1998                                                                                161,000
                        1999                                                                                161,000
                        2000                                                                                137,000
                        2001                                                                                 91,000
                        Thereafter                                                                          250,000
                        -------------------------------------------------------------------------------------------
                        Total minimum payments required                                                 $ 1,094,000
                        -------------------------------------------------------------------------------------------

                        Rental expense for the years ending December 31, 1996, 1995, and 1994 was approximately
                        $573,000, $454,000 and $473,000, respectively.

                        The Company has salary continuation agreements with nine officers which grant these
                        officers the right to receive three times their average annual compensation for the five
                        years preceding a change of control of the Company and a change of duties or salary for
                        such officers. The maximum contingent liability for salary continuation under these
                        agreements is approximately $2.9 million at December 31, 1996.

                        At December 31, 1996 and 1995, the Company had outstanding commitments to sell loans of
                        $10.6 million and $2.3 million, respectively.

                        Concurrent with the 1990 sale of the Woodside Plantation Country Club ("WPCC"), the Company
                        entered into an agreement with WPCC to purchase club memberships. This obligation to
                        purchase memberships, based on future lot sales, is subject to an annual limitation and
                        depends upon whether full or partial memberships are purchased. The maximum liability under
                        this contingency, assuming the annual limitation is met and partial memberships are
                        purchased, is approximately $1.2 million. In 1993, the Company sold the remaining lots and
                        other real estate at Woodside Plantation and the purchaser assumed the Company's
                        obligations under this agreement. The Company remains contingently liable under this
                        agreement.

                        The Company continues to have a significant concentration of risk at Woodside Plantation,
                        exclusive of loans to individual homeowners, comprised of acquisition and development
                        loans, real estate held for development, a 50% interest in a partnership and foreclosed
                        real estate. The total carrying value of these assets was $12.4 million and $13.9 million
                        at December 31, 1996 and 1995, respectively. Included in these assets are aggregate loans
                        of $6.7 million and $7.8 million at December 31, 1996 and 1995, respectively, to WPCC and
                        the purchaser of the remaining lots. The ability of these borrowers to repay their
                        indebtedness is primarily based upon the success of real estate sales at Woodside
                        Plantation. There are no assurances that real estate sales will be sufficient for these
                        borrowers to service their debt. During 1995, Palmetto Federal restructured the
                        indebtedness to the purchaser of the remaining lots. In addition, effective April 1, 1996,
                        Palmetto Federal modified its loans to WPCC from amortizing to interest only for one year.

                        PALFED has a significant concentration of customers in and around Aiken and Barnwell
                        Counties, South Carolina, the location of the U.S. Department of Energy's Savannah River
                        Site ("SRS"). Employment at SRS has decreased from 22,000 in 1993 to approximately 15,000
                        currently. SRS recently announced additional staff reductions of 1,500. Further reductions
                        at SRS could have a significant adverse effect on the local economy and the Company.
</TABLE>

                                                                              37
<PAGE>
<TABLE>
<S>                     <C>                                                                             <C>
                        The Company has granted options to purchase its common stock to certain officers and key
NOTE 11:                employees under the 1985 Incentive Stock Option Plan, the 1993 Stock Option Plan and the
STOCK OPTIONS AND       1995 Stock Option Plan. Substantially all outstanding options were issued at the market
STOCK GRANTS            value of PALFED common stock on the date of grant. The outstanding options become vested
                        over a period of either one, three, or five years from the date of issuance. An aggregate
                        of 250,000 and 100,000 shares have been authorized for issuance under the 1993 Stock Option
                        Plan and the 1995 Stock Option Plan, respectively, of which 50,616 and 61,725 shares,
                        respectively, remained available at December 31, 1996. The 1985 Incentive Stock Option Plan
                        terminated on September 24, 1995, although outstanding options remain exercisable according
                        to their terms. During the year ended December 31, 1996, the following options were
                        exercised: options issued under the 1985 Plan to purchase 1,250 shares at $12.80 per share,
                        14,500 shares at $5.75 per share and 5,478 shares at $6.50 per share; options issued under
                        the 1993 Plan to purchase 534 shares at $6.38 per share and 183 shares at $7.75 per share.
                        During the year ended December 31, 1995, options issued under the 1993 Plan to purchase 667
                        shares at $6.38 per share were exercised. During the year ended December 31, 1994, no
                        options were exercised.

                        The Company's Amended and Restated Directors Stock Plan provides for the grant of stock
                        options and shares of Company Stock to directors, consulting directors and advisory
                        directors who are not employees subject to certain restrictions. An aggregate of 250,000
                        shares of common stock are authorized for issuance of which 175,000 shares remained
                        available at December 31, 1996. On April 24, 1996, 36,000 options were granted at market
                        value, or $12.75 per share. On April 26, 1995, 13,000 shares and 39,000 options were
                        granted at market value, or $9.88 per share.

                        At December 31, 1996, the Company had the following options outstanding:
</TABLE>

<TABLE>
<CAPTION>
                                                 Outstanding     Exercisable     Option
                    Grant Date                       Options          Shares      Price         Expiration Date
<S>                 <C>                         <C>             <C>             <C>        <C>
                    -------------------------------------------------------------------------------------------
                    February 24, 1987                 23,750          23,750    $12.80     February 24, 1997
                    April 26, 1988                     6,875           6,875     11.80     April 26, 1998
                    February 20, 1992                 35,022          35,022      6.50     February 20, 1997
                    November 16, 1993                 64,533          64,533      6.38     November 16, 2003
                    November 15, 1994                 49,117          32,745      7.75     November 15, 2004
                    April 26, 1995                    36,000          36,000      9.88     April 26, 1998
                    November 14, 1995                 75,000          25,000     12.78     November 14, 2005
                    April 24, 1996                    36,000               0     12.75     April 24, 1999
                    April 24, 1996                    14,500               0      5.75     April 24, 2006
                    November 19, 1996                 50,000               0     14.50     November 19, 2006
                    -------------------------------------------------------------------------------------------

                    The Company's 1993 Restricted Stock Incentive Award Plan ("the Plan") provides for the
                    grant of shares of the Company's common stock to officers and other key employees subject
                    to certain restrictions. An aggregate of 200,000 shares of Common Stock are authorized for
                    issuance of which 69,445 shares remained available at December 31, 1996. During the years
                    ended December 31, 1996, 1995, and 1994, 106,345, 10,464, and 4,606 shares were granted
                    under the provisions of the Plan, respectively. On the dates of grants, the market value of
                    PALFED common stock was $12.75 per share in 1996, $7.38 per share in 1995 and $6.63 per
                    share in 1994.
</TABLE>

38
<PAGE>
<TABLE>
<S>                 <C>                         <C>             <C>             <C>        <C>
                    The Company has elected the disclosure-only provisions of SFAS No. 123, "Accounting for
                    Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the
                    stock option plans. Had compensation cost for the Company's stock option plans been
                    determined based on the fair value at the grant date for awards in 1996 and 1995,
                    consistent with the provisions of SFAS No. 123, the Company's net income and earnings per
                    share amounts would have been reduced to the pro forma amounts indicated below (in
                    thousands):
</TABLE>

<TABLE>
<CAPTION>
                                                                                                        1996       1995
<S>                     <C>                                                                        <C>        <C>
                        -----------------------------------------------------------------------------------------------
                        Net income -- as reported                                                  $     112  $   4,145
                        Net income (loss) -- pro forma                                             $    (180) $   4,056
                        Earnings per share -- as reported                                          $    0.02  $    0.80
                        Earnings (loss) per share -- pro forma                                     $   (0.03) $    0.79
                        -----------------------------------------------------------------------------------------------

                        The pro forma amounts reflected above are not representative of the effects on reported net
                        income in future years because, in general, the options granted typically do not vest for
                        several years and additional awards are generally made each year.

                        The fair value of each option grant is estimated on the date of grant using the Black-Scholes
                        option-pricing model with the following weighted average assumptions:
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     1996       1995
<S>                     <C>                                                                     <C>        <C>
                        --------------------------------------------------------------------------------------------
                        Expected dividend yield                                                     0.81%      0.81%
                        Expected stock price volatility                                            39.28%     53.15%
                        Risk-free interest rate                                                     5.97%      5.97%
                        Expected life of options                                                3.6 YEARS  4.0 years
                        --------------------------------------------------------------------------------------------

                        The weighted average fair value of options granted during 1996 and 1995 was $3.91 and $3.65
                        per share respectively.

NOTE 12:                The estimated fair values of the Company's financial instruments at December 31 are as
FINANCIAL INSTRUMENTS   follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                                         1996                  1995
                                                                         --------------------  --------------------
                                                                              FAIR   CARRYING       Fair   Carrying
                                                                             VALUE      VALUE      Value      Value
                        -------------------------------------------------------------------------------------------
                        (in thousands)
<S>                     <C>                                              <C>        <C>        <C>        <C>
                        FINANCIAL ASSETS:
                        Cash and cash equivalents                        $  20,407  $  20,407  $  21,325  $  21,325
                        Investment and mortgage-backed securities           83,229     82,707    119,120    117,843
                        Loans receivable and held-for-sale                 525,330    524,120    461,269    464,281
                        Accrued interest receivable                          3,835      3,835      4,256      4,256
                        FHLB stock                                          10,884     10,884     10,884     10,884
                        Mortgage servicing rights                              547        547        151        151
                        -------------------------------------------------------------------------------------------
                        FINANCIAL LIABILITIES:
                        Deposits                                         $ 539,593  $ 536,687  $ 499,070  $ 495,855
                        Accrued interest payable                             3,441      3,441        891        891
                        FHLB advances                                       68,346     68,400      1,886     91,500
                        -------------------------------------------------------------------------------------------
                        OFF-BALANCE-SHEET ASSETS (LIABILITIES):
                        Commitments to originate loans                   $    (252)            $    (135)
                        Unused lines of credit                                (520)                 (483)
                        Standby letters of credit                               (4)                   (3)
                        -------------------------------------------------------------------------------------------
</TABLE>

                                                                              39
<PAGE>
<TABLE>
<S>                     <C>                                              <C>        <C>        <C>        <C>
                        A summary of the notional amounts of the Company's financial instruments with
                        off-balance-sheet risk at December 31 is as follows:
</TABLE>

<TABLE>
<CAPTION>
                                                                                                   1996       1995
                        ---------------------------------------------------------------------------------------------
                        (in thousands)
<S>                     <C>                                                                      <C>        <C>
                        Commitments to originate loans                                           $  32,908  $  13,460
                        ---------------------------------------------------------------------------------------------
                        Unused lines of credit                                                   $  35,560  $  31,639
                        ---------------------------------------------------------------------------------------------
                        Standby letters of credit                                                $   1,004  $     713
                        ---------------------------------------------------------------------------------------------

                        The Company 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 and to reduce its own
                        exposure to fluctuations in interest rates. These financial instruments are for purposes
                        other than trading and include loan commitments, unused lines of credit, and standby letters
                        of credit. The instruments involve, to varying degrees, elements of credit and interest rate
                        risk in excess of the amount recognized in the financial statements.

                        The Company's exposure to credit loss in the event of nonperformance by the other party to
                        the financial instrument for loan commitments and standby letters of credit is represented by
                        the contractual amount of those instruments. The Bank uses the same credit policies in making
                        commitments and conditional obligations as it does for on-balance-sheet instruments. The
                        Bank's lending is concentrated in South Carolina, its primary market area.

                        Since many of the loan commitments may expire without being drawn upon, the total commitment
                        amount does not necessarily represent future cash requirements. The Bank evaluates each
                        customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is
                        based on management's credit evaluation of the counter-party. Collateral held varies but may
                        include real estate and improvements, marketable securities, accounts receivable, inventory,
                        equipment and personal property.

                        The credit risk associated with issuing letters of credit is essentially the same as that
                        associated with extending loan facilities to customers.

                        Palmetto Federal's risk with respect to mortgage servicing losses results from unrecoverable
                        advances of delinquent principal, interest and tax payments made on behalf of mortgagors. The
                        Bank's loan administration department controls the risk of this portfolio on an ongoing
                        basis. To date, the Bank has not suffered significant losses from its mortgage servicing
                        activities.

NOTE 13:                PALFED's statement of financial condition at December 31, 1996 and 1995 and related
FINANCIAL INFORMATION   statements of income and cash flows for the years ended December 31, 1996, 1995 and 1994 are
OF PALFED, INC.         as follows:
(PARENT ONLY)
</TABLE>

<TABLE>
<CAPTION>
                      STATEMENTS OF FINANCIAL CONDITION                                      1996       1995
                      --------------------------------------------------------------------------------------
                      (in thousands)
<S>                   <C>                                                               <C>        <C>
                      Cash and cash equivalents                                         $   1,593  $   1,590
                      Investment in and amounts due from banking subsidiary                49,233     49,026
                      Investment in and amounts due from other subsidiary                     864        699
                      Other assets                                                            133        170
                      --------------------------------------------------------------------------------------
                      TOTAL ASSETS                                                      $  51,823  $  51,485
                      --------------------------------------------------------------------------------------
                      Common stock                                                      $   5,231  $   5,142
                      Additional paid-in capital                                           28,115     26,904
                      Retained earnings                                                    20,320     20,626
                      Deferred compensation                                                (1,128)
                      Unrealized loss on debt securities, net                                (715)      (884)
                      Treasury stock                                                                    (303)
                      --------------------------------------------------------------------------------------
                      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $  51,823  $  51,485
                      --------------------------------------------------------------------------------------
</TABLE>

40
<PAGE>
<TABLE>
<CAPTION>
                        STATEMENTS OF INCOME                                               1996       1995       1994
                        ------------------------------------------------------------------------------------------------
                        (in thousands)
<S>                     <C>                                                              <C>        <C>        <C>
                        Income (expenses), net of related income taxes                   $      39  $      41  $    (130)
                        Equity in earnings of subsidiaries                                      73      4,104      3,884
                        ------------------------------------------------------------------------------------------------
                        Net income                                                       $     112  $   4,145  $   3,754
                        ------------------------------------------------------------------------------------------------

<CAPTION>

                        STATEMENTS OF CASH FLOWS                                           1996       1995       1994
                        ------------------------------------------------------------------------------------------------
                        (in thousands)
<S>                     <C>                                                              <C>        <C>        <C>
                        OPERATING ACTIVITIES:
                        CASH FLOWS FROM OPERATING ACTIVITIES:
                        Net income                                                       $     112  $   4,145  $   3,754
                        Less equity in earnings of subsidiaries                                (73)    (4,104)    (3,884)
                        Other, net                                                              (3)       (10)      (186)
                        ------------------------------------------------------------------------------------------------
                        NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                        36         31       (316)
                        ------------------------------------------------------------------------------------------------
                        INVESTING ACTIVITIES:
                        CASH FLOWS FROM INVESTING ACTIVITIES:
                        Additional investment in subsidiaries, net                                     (1,151)
                        Other, net                                                             150                     9
                        ------------------------------------------------------------------------------------------------
                        NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                       150     (1,151)         9
                        ------------------------------------------------------------------------------------------------
                        FINANCING ACTIVITIES:
                        CASH FLOWS FROM FINANCING ACTIVITIES:
                        Purchase of treasury stock                                                                  (480)
                        Payment of cash dividends                                             (418)
                        Other, net                                                             235        (29)        61
                        ------------------------------------------------------------------------------------------------
                        NET CASH USED BY FINANCING ACTIVITIES                                 (183)       (29)      (419)
                        ------------------------------------------------------------------------------------------------
                        Net increase (decrease) in cash and cash equivalents                     3     (1,149)      (726)
                        ------------------------------------------------------------------------------------------------
                        Cash and cash equivalents, beginning of year                         1,590      2,739      3,465
                        ------------------------------------------------------------------------------------------------
                        CASH AND CASH EQUIVALENTS, END OF YEAR                           $   1,593  $   1,590  $   2,739
                        ------------------------------------------------------------------------------------------------
                        SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                        CASH PAID DURING THE YEAR FOR:
                        Income taxes                                                     $   1,217  $   1,100
                        Supplemental schedule of noncash investing and financing
                          activities:
                        Issuance of common stock as compensation                                47        172  $      31
                        ------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S>                     <C>                                                 <C>          <C>        <C>        <C>
                                                                              41
</TABLE>
<PAGE>
<TABLE>
<S>                     <C>                                                 <C>          <C>        <C>        <C>
NOTE 14:                The following tables summarize the consolidated quarterly results of operations for each of the
CONSOLIDATED CONDENSED  years ended December 31, 1996 and 1995 (in thousands except per share data):
QUARTERLY RESULTS
OF OPERATIONS
(UNAUDITED)
<CAPTION>
                                                                                           Quarter ended
                                                                            --------------------------------------------
                                                                               March 31    June 30   Sept. 30    Dec. 31
                        ------------------------------------------------------------------------------------------------
<S>                     <C>                                                 <C>          <C>        <C>        <C>
                        1996
                        Total interest income                                $  12,315   $  12,413  $  12,764  $  13,243
                        Net interest income                                      5,053       5,405      5,735      6,025
                        Provision for estimated losses on loans                    339         247        313        255
                        Net income (loss)                                        1,092       1,131       (978)    (1,133)
                        Earnings (loss) per share                            $    0.21   $    0.22  $   (0.19) $   (0.22)
                        Average shares outstanding                               5,207       5,231      5,228      5,251
                        ------------------------------------------------------------------------------------------------
                        1995
                        Total interest income                                $  12,347   $  12,725  $  12,820  $  12,638
                        Net interest income                                      4,936       4,893      5,094      5,077
                        Provision for estimated losses on loans                    238         209        451        424
                        Net income                                                 965       1,021      1,068      1,091
                        Earnings per share                                   $    0.19   $    0.20  $    0.21  $    0.21
                        Average shares outstanding                               5,116       5,160      5,178      5,185
                        ------------------------------------------------------------------------------------------------

                        The 1996 third quarter includes a $3.3 million SAIF assessment ($2.2 million after tax). The
                        1996 fourth quarter includes a $2.4 million write-off of the core deposit intangible asset.
</TABLE>

42
<PAGE>

                                        PALMETTO
                             [LOGO]     FEDERAL
<PAGE>
OFFICE LOCATIONS
-------------------------------------------------------------------------

  PALMETTO FEDERAL

                              [MAP]
  SAVINGS BANK
  OF SOUTH CAROLINA

   22 Banking Offices
    8 Mortgage Lending Offices

AIKEN - MAIN OFFICE
107 Chesterfield Street South
MANAGER: W. LARRY RICKS
(803) 642-1400

AIKEN MORTGAGE CENTER
1359 Silver Bluff Road, Bldg C, Suite A-1
MANAGER: CHRISTINA H. HAMRICK
(803) 642-1441

AIKEN - OPERATIONS CENTER
237 Park Avenue
(803) 642-1340

SOUTH AIKEN
1799 Whiskey Road
MANAGER: BENNIE L. NEWMAN, JR.
(803) 642-1300

SOUTH AIKEN - KROGER
441 Silver Bluff Road
MANAGER: MELISSA L. CLARK
(803) 642-1350

AUGUSTA/MARTINEZ GA. MORTGAGE CENTER
4107 Columbia Road, Suite B
MANAGER: FRANK L. CUNNINGHAM III
(706) 863-3090

BARNWELL
1680 Jackson Street
MANAGER: JACQUELINE P. RAMSEY
(803) 259-5541

BEAUFORT
916 Bay Street
BRANCH SUPERVISOR: MARY ANN WASHINGTON
(803) 525-8400

BURTON
Highway 170 at Salem Road
MANAGER: RUMELL Y. LADSON
(803) 525-8400

BEAUFORT MORTGAGE CENTER
146 Sea Island Parkway
MANAGER: REID DAVIS
(803) 525-8400

COLUMBIA HARBISON WAL-MART
360 Harbison Boulevard
MANAGER: RHONDA J. HUGHEY
(803) 781-6160

COLUMBIA MORTGAGE CENTER
9308-B Two Notch Road
MANAGER: DORIS D. BLOCKER
(803) 736-0390

CHARLESTON - WEST ASHLEY
1545 Savannah Highway
MANAGER: D. TED HONNEY
(803) 852-7020

CHARLESTON - MEETING STREET
170 Meeting Street
BRANCH SUPERVISOR: DONNA L. ROBINSON
(803) 937-4140

CHARLESTON MORTGAGE CENTER
170 Meeting Street
(803) 937-4151

CLEARWATER
1 Midland Valley Plaza
MANAGER: CHERYL A. IAUKEA
(803) 593-4421

EDGEFIELD
201 Columbia Road
MANAGER: PATRICIA A. ALTMAN
(803) 637-5316

HAMPTON
406 First Street
MANAGER: PHYLLIS H. HARVEY
(803) 943-3021

HILTON HEAD
77 Pope Avenue
MANAGER: JOHN F. DAY
(803) 785-4249

HILTON HEAD MAIN STREET
200 Main Street
Opening March 1997

HILTON HEAD MORTGAGE CENTER
The Coastal Building
1036 Highway 278
(803) 785-7989

JOHNSTON
303 Lee Street
MANAGER: JOHN M. DELAUGHTER
(803) 275-3236

LADY'S ISLAND
146 Sea Island Parkway
MANAGER: M. ROBERT STEVENS, JR.
(803) 525-8400

LEXINGTON
216 E. Main Street
MANAGER: CLIFFORD B. SHEALY
(803) 957-9558

LEXINGTON MORTGAGE CENTER
216 E. Main Street
MANAGER: MARION H. MCDONALD
(803) 951-1977

MCCORMICK
407 East Gold Street
MANAGER: DOROTHY J. BANDY
(864) 465-2046

MT. PLEASANT
1210 Ben Sawyer Boulevard
MANAGER: PATRICIA AUSTIN
(803) 971-1117

NORTH AUGUSTA
432 West Avenue
MANAGER: KATHY S. GILLILAND
(803) 279-6250

NORTH AUGUSTA - KROGER
400 East Martintown Road at Crossroads Market
MANAGER: BEVERLY GUNN
(803) 279-050

NORTH AUGUSTA MORTGAGE CENTER
106-B East Martintown Road
MANAGER: FRANK L. CUNNINGHAM III
(803) 278-0183

RIDGELAND
312 North Jacob Smart Boulevard
MANAGER: HELEN RIVERS
(803) 726-8186

46
<PAGE>
CORPORATE INFORMATION
-------------------------------------------------------------------------

CORPORATE OFFICE
---------------

PALFED, INC.
107 CHESTERFIELD STREET SOUTH
P.O. BOX 1116
AIKEN, SOUTH CAROLINA 29802
(803) 642-1400

STOCK LISTING
------------

THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER THE COUNTER MARKET AND IS
QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PALM" AND LISTED IN THE
WALL STREET JOURNAL UNDER THE NAME "PALFED". THE FOLLOWING FIRMS ARE MARKET
MAKERS IN THE COMPANY'S COMMON STOCK:

HERZOG, HEINE, GEDULD, INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
MAYER & SCHWEITZER INC.
KEEFE, BRUYETTE & WOODS, INC.
SCOTT & STRINGFELLOW, INC.

FOX-PITT, KELTON, INC.
WHEAT FIRST SECURITIES INC.
DEAN WITTER REYNOLDS INC.
RAYMOND JAMES & ASSOCIATES, INC.
STERNE, AGEE & LEACH, INC.
INTERSTATE/JOHNSON LANE CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.

PRICE RANGE OF COMMON STOCK
---------------------------

<TABLE>
<CAPTION>
                                          1996                      1995
                                  HIGH          LOW         HIGH           LOW
----------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>           <C>
JANUARY - MARCH                  13 1/4       11 1/4       9 5/8             7
APRIL - JUNE                     13 1/2       11 7/8       11 1/4        8 5/8
JULY - SEPTEMBER                 14 3/4       11 5/8       12 1/4           11
OCTOBER - DECEMBER               15 1/4          13        13 1/4           11
----------------------------------------------------------------------------------
</TABLE>

TRANSFER AGENT
--------------

THE BANK OF NEW YORK
RECEIVE AND DELIVER DEPARTMENT-11W
P.O. BOX 11002
CHURCH STREET STATION
NEW YORK, NY 10286

FOR SHAREHOLDER INQUIRIES:
THE BANK OF NEW YORK
SHAREHOLDER RELATIONS DEPARTMENT - 11E
P.O. BOX 11258
CHURCH STREET STATION
NEW YORK, NY 10286

ANNUAL REPORT
--------------

ADDITIONAL COPIES OF THE COMPANY'S ANNUAL REPORT AND 1996 SEC FORM 10-K REPORT
(WITHOUT EXHIBITS) MAY BE OBTAINED WITHOUT COST UPON WRITTEN REQUEST TO:

PALFED, INC.
DARRELL R. RAINS
P.O. BOX 1116
AIKEN, SOUTH CAROLINA 29802

                                                                              47