<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C. 20549
                               ---------------------
                                    FORM 10-K

               [x] Annual Report Pursuant to Section 13 or 15(d)
              of the Securities Exchange Act of 1934 [Fee Required]

               [ ] Transition Report Pursuant to Section 13 or 15(d)
              of the Securities Exchange Act of 1934 [No Fee Required]

For the fiscal year ended                                 SEC Commission File
December 31, 1996                                             Number 0-15334

                                     PALFED, Inc.
               (Exact name of registrant as specified in its charter)

South Carolina                                                57-0821295
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                         Identification Number)

107 Chesterfield Street South, Aiken, South Carolina           29801
(Address of principal executive office)                     (Zip Code)

     Registrant's telephone number, including area code: (803) 642-1400
                              ----------------------
     Securities registered pursuant to Section 12(b) of the Act: None

            Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, $1.00 Par Value
                      (Title of Class)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes..[X].. No....[ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

    The aggregate market value of the registrant's outstanding Common Stock held
by non-affiliates of the registrant on March 24, 1997 was approximately
$76,848,000. There were 5,286,554 shares of Common Stock outstanding on March
24, 1997.

                 DOCUMENTS INCORPORATED BY REFERENCE

      1. Annual Report to Shareholders for the year ended December 31, 1996
         (Parts I, II and IV)

      2. Proxy Statement for the 1997 Annual Meeting of Shareholders
         (Part III).

                  Page 1 of____ sequentially numbered pages
                     The Index to Exhibits is on page 40.


<PAGE>

                                 PALFED, Inc.
                               and Subsidiaries

                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                          PAGE
                                                           NO.
                                                         -------
<C>       <S>                                            <C>
PART I
  Item 1.   Business.................................         1
  Item 2.   Properties...............................        30
  Item 3.   Legal Proceedings........................        30
  Item 4.   Submission of Matters to a Vote of
             Security Holders........................        30
PART II
  Item 5.   Market for Registrant's Common
             Equity and Related Shareholder Matters...       33
  Item 6.   Selected Financial Data...................       33
  Item 7.   Management's Discussion and Analysis of
             Financial Condition and Results of
             Operations...............................       33
  Item 8.   Financial Statements and Supplementary
             Data.....................................       34
  Item 9.   Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure...       34
PART III
  Item 10.  Directors and Executive Officers of the
             Registrant................................      34
  Item 11.  Executive Compensation.....................      34
  Item 12.  Security Ownership of Certain Beneficial
             Owners and Management.....................      35
  Item 13.  Certain Relationships and Related
             Transactions..............................      35
PART IV
  Item 14.  Exhibits, Financial Statement Schedules,
             and Reports on Form 8-K...................      35
SIGNATURES
</TABLE>


                                  (i)

<PAGE>

                                     PART I

ITEM 1. BUSINESS.

    PALFED, Inc. ("PALFED", together with its subsidiaries, the "Company"),
is a South Carolina corporation that was incorporated on March 7, 1986 to own
all the outstanding stock of Palmetto Federal Savings Bank of South Carolina
("Palmetto Federal" or the "Bank"). PALFED acquired all of the stock of
Palmetto Federal on January 27, 1987.

    As a savings and loan holding company, the primary business of PALFED is
to manage the business of Palmetto Federal and its other subsidiaries and
affiliates. Palmetto Federal is a federally-chartered stock savings bank
which was chartered in 1951 and converted from a federal mutual savings and
loan association to a federal stock savings bank in 1985. PALFED Investment
Services, Inc. ("PALFED Investment"), a wholly-owned subsidiary of PALFED,
offers retail securities brokerage services and consumer insurance products.
At December 31, 1996 the Company had total assets of approximately $665
million. At December 31, 1996, PALFED and its subsidiaries had approximately
262 full-time employees and 55 part-time employees.

    All aspects of the Company's businesses, including banking, are highly
competitive. The Company and its subsidiaries face substantial competition
from banking and nonbanking institutions, including money market mutual
funds, national and state banks, mutual savings banks, savings and loan
associations, mortgage banking companies, finance companies, insurance
companies, brokerage firms, credit unions and other types of financial
institutions located throughout the Southeast and the United States.

                       BANKING AND BANK-RELATED SERVICES

GENERAL

    Palmetto Federal primarily engages in attracting deposits from the
general public and, using these funds, loan repayments, other borrowings, and
proceeds from the sale of securitized mortgage loans, makes loans primarily
for the purchase, financing or improvement of real estate. Palmetto Federal
also engages in consumer and commercial lending and other fee generating
financial services. Palmetto Federal currently operates 22 banking offices,
all of which are located in south central and southern South Carolina. The
Bank also operates seven mortgage lending offices located in South Carolina
and one mortgage banking office located in Georgia. The Bank's deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") which is supervised by the Federal Deposit Insurance Corporation
("FDIC"). The operations of the Company and the Bank are subject to
regulation by the Office of Thrift Supervision ("OTS"), the FDIC and the
Federal Reserve Board ("FRB"). Palmetto Federal is a member of the Federal
Home Loan Bank System ("FHLBS").

LENDING ACTIVITIES

    General. A principal lending activity of Palmetto Federal is the
origination of single family residential mortgage loans, including
construction loans on single family and, to a lesser extent, multi-unit
dwellings and conventional mortgage loans on multi-unit dwellings and on
commercial and other type properties. Additionally, the Company originates
both short term construction and permanent loans secured by medical and
professional office buildings, strip shopping centers and motels, and makes
small business loans. In addition, Palmetto Federal offers mobile home,
automobile, home improvement and unsecured consumer loans. The Bank also
offers a home equity line of credit secured by the borrower's residence.
Although federal regulations allow the Company to originate loans nationwide,
the Company has originated substantially all of its loans in its primary
market areas of South Carolina and in the greater Augusta, Georgia area.


<PAGE>

    From 1991 through 1993, the Bank capped the aggregate levels of consumer,
commercial, commercial real estate, non-residential and land loans at the
March, 1991 levels in response to increased OTS risk-based capital
requirements and to lower the overall level of credit risk in its portfolio.
In 1994, the Bank discontinued this limit on the aggregate level of its
commercial and consumer loans and changed its lending strategy to increase
the origination of higher yielding consumer and commercial loans. These loans
typically involve more risk than associated with residential lending.
Although residential mortgage originations comprise the majority of
originations, a significant portion of originations during 1995 and 1996 were
commercial real estate loans. 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 increased the origination of larger commercial real
estate loans, including those loans greater than $1.0 million. The 1995
originations included eight commercial real estate loans of $1.0 million or
greater, totaling $13.1 million, compared to only one loan of this scope in
1994. The 1996 originations included 8 such loans, totaling $10.9 million.
Commercial mortgages outstanding increased from $128.1 million at December
31, 1995 to $145.7 million at December 31, 1996.

    The Bank operates under an investment policy which primarily is aimed at
underwriting residential mortgage loans in accordance with Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") underwriting guidelines. 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. Details of residential mortgage
originations are as follows:

<TABLE>
<CAPTION>
                                                  1996                    1995
                                                 -------------------------------
<S>                                              <C>                    <C>
                                                          (IN THOUSANDS)
Fixed rate loans originated for sale
  (principally loans with 30-year terms and
  FHA/VA loans)*.............................     $57,066             $  38,380
Fixed rate loans originated for portfolio
  (principally loans with 10, 15 and 20-year
   terms, construction loans and loans with
   balloon payments).........................      92,756                46,298
                                              -----------             ---------
Total fixed rate loans originated
   and converted.............................     149,822                84,678
Total adjustable rate loans originated.......      13,692                27,144
                                               ----------             ---------
Total residential mortgage originations
   and conversions...........................    $163,514            $  111,822
                                               ----------             ---------
                                               ----------             ---------
</TABLE>

* Loans originated for sale include $13.6 million and $5.4 million at
  December 31, 1996 and 1995, respectively, of adjustable rate and construction
  loans which converted to 30 year fixed rate mortgage loans held for sale.

    Compared with balances at December 31, 1995, net loans receivable in
1996 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. In 1996, the Bank continued to
expand its lending markets to reduce reliance on the Central Savannah
River Area ("CSRA") market area. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (hereinafter
referred to as "Management's Discussion and Analysis") included in the
Company's Annual Report to Shareholders for the year ended December 31,
1996 (the "1996 Annual Report") and incorporated herein by reference.

    Palmetto Federal reviews and annually revises, as necessary, its
underwriting and lending practices and loan policies in response to regulatory
changes. Underwriting guidelines, including loan to value ratios, are
established for each type of loan. The Bank's underwriting standards and
guidelines for each loan type are reviewed annually with any amendments or
revisions presented to the Board of Directors for approval. These guidelines are
in addition to the requirements of outside agencies and investors. The Bank's
lending policies are reviewed for compliance with applicable regulations and
rules, including Federal Truth-In-Lending, the Equal Credit Opportunity Act, the
Fair Credit Reporting

                                       2
<PAGE>

Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, and applicable state usury requirements.

    At December 31, 1996, the Bank held approximately $236.2 million in
permanent 1-4 single family first mortgage loans (including those loans held
for sale), $26.6 million of which exceeded an 80% loan to value ratio without
private mortgage insurance and $6.8 million of which exceeded a 90% loan to
value ratio. These higher loan to value ratio loans constitute increased risk
to the portfolio, but the Bank's loss experience for this category of loan
has not been significant.

    The following tables are a comparison of Palmetto Federal's loan
portfolio at the dates indicated. Loans held for sale are classified as
permanent residential mortgage loans.

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1996
                                                           -----------------------------------------------------------
                                                                                                              % OF
                                                                                                              LOAN
                                                            VARIABLE         FIXED             TOTAL        PORTFOLIO
                                                           ----------  ------------------  --------------  -----------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>                 <C>             <C>
Loans collateralized by real estate:
  Permanent residential mortgage.........................  $  139,895      $   96,301       $   236,196       43.0%
  Construction...........................................       7,767          47,049            54,816        10.0
  Second mortgage........................................      40,221          15,801            56,022        10.2
  Commercial.............................................      69,041          76,644           145,695        26.6
Loans collateralized by other property or unsecured:
  Consumer...............................................       6,797          28,106            34,903         6.4
  Commercial.............................................       9,907           6,302            16,209         2.9
Loans collateralized by savings accounts.................           0           4,725             4,725         0.9
                                                           ----------     -----------       -----------       -------
Total gross loans........................................  $  273,628      $  274,928        $  548,566       100.0%
                                                           ----------     -----------       -----------       -------
                                                           ----------     -----------       -----------       -------
                                                                 49.9%           50.1%            100.0%
                                                           ----------     -----------       -----------
                                                           ----------     -----------       -----------
Mortgage-backed securities...............................  $        0      $   59,977        $   59,977
                                                           ----------     -----------       -----------
                                                           ----------     -----------       -----------
                                                                    0%          100.0%            100.0%
                                                           ----------     -----------       -----------
                                                           ----------     -----------       -----------

</TABLE>
<TABLE>
<CAPTION>


                                                                              DECEMBER 31, 1995
                                                         -----------------------------------------------------------
                                                                                                            % OF
                                                                                                            LOAN
                                                          VARIABLE         FIXED             TOTAL        PORTFOLIO
                                                         ----------  ------------------  --------------  -----------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                      <C>         <C>                 <C>             <C>

Loans collateralized by real estate:
  Permanent residential mortgage.........................  $  149,622   $    58,049        $ 207,671        42.7%
  Construction...........................................      15,051        23,063           38,114         7.8
  Second mortgage........................................      29,027        23,286           52,313        10.8
  Commercial.............................................      71,817        56,234          128,051        26.3
Loans collateralized by other property or unsecured:
  Consumer...............................................       6,405        33,180           39,585         8.1
  Commercial.............................................       8,082         7,998           16,080         3.3
Loans collateralized by savings accounts.................           0         4,769            4,769         1.0
                                                           ----------   -----------      -----------     -------

Total gross loans........................................  $  280,004    $  206,579        $ 486,583       100.0%
                                                           ----------   -----------      -----------     -------
                                                           ----------   -----------      -----------     -------
                                                                 57.5%         42.5%           100.0%
                                                           ----------   -----------      -----------
                                                           ----------   -----------      -----------
Mortgage-backed securities...............................  $        0    $   77,843        $  77,843
                                                           ----------   -----------      -----------
                                                           ----------   -----------      -----------
                                                                    0%        100.0%           100.0%
                                                           ----------   -----------      -----------
                                                           ----------   -----------      -----------

</TABLE>

                                                    3
<PAGE>
<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1994
                                                           -----------------------------------------------------------
                                                                                                              % OF
                                                                                                              LOAN
                                                            VARIABLE         FIXED             TOTAL        PORTFOLIO
                                                           ----------  ------------------  --------------  -----------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>                 <C>             <C>
Loans collateralized by real estate:
  Permanent residential mortgage......................... $   115,450    $   90,854         $  206,304        44.2%
  Construction...........................................       7,747        25,911             33,658         7.2
  Second mortgage........................................      30,194        25,457             55,651        11.9
  Commercial.............................................      50,588        58,946            109,534        23.5
Loans collateralized by other property or unsecured:
  Consumer...............................................       3,978        38,554             42,532         9.1
  Commercial.............................................       8,304         6,873             15,177         3.3
Loans collateralized by savings accounts.................           0         3,784              3,784         0.8
                                                          -----------    ----------         ----------       ------
Total gross loans........................................ $   216,261    $  250,379         $  466,640       100.0%
                                                          -----------    ----------         ----------       ------
                                                          -----------    ----------         ----------       ------
                                                                 46.3%         53.7%             100.0%
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
Mortgage-backed securities............................... $         0    $  106,273         $  106,273
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
                                                                    0%        100.0%             100.0%
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
</TABLE>

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1993
                                                           -----------------------------------------------------------
                                                                                                              % OF
                                                                                                              LOAN
                                                            VARIABLE         FIXED             TOTAL        PORTFOLIO
                                                           ----------  ------------------  --------------  -----------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>                 <C>             <C>
Loans collateralized by real estate:
  Permanent residential mortgage........................  $  132,122    $   71,644         $  203,766        43.6%
  Construction..........................................       1,314        25,499             26,813         5.8
  Second mortgage.......................................      30,368        26,785             57,153        12.3
  Commercial............................................      61,090        49,197            110,287        23.7
Loans collateralized by other property or unsecured:
  Consumer..............................................       8,229        39,698             47,927        10.3
  Commercial............................................       9,008         7,516             16,524         3.6
Loans collateralized by savings accounts................           0         3,447              3,447         0.7
                                                          -----------    ----------         ----------      -----
Total gross loans.......................................  $  242,131    $  223,786         $  465,917       100.0%
                                                          -----------    ----------         ----------      -----
                                                          -----------    ----------         ----------      -----
                                                                52.0%         48.0              100.0%
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
Mortgage-backed securities..............................  $        0    $  106,563         $  106,563
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
                                                                   0%        100.0%             100.0%
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------

</TABLE>
                                                4
<PAGE>
<TABLE>
<CAPTION>
                                                                                  DECEMBER 31, 1992
                                                           -----------------------------------------------------------
                                                                                                              % OF
                                                                                                              LOAN
                                                            VARIABLE         FIXED             TOTAL        PORTFOLIO
                                                           ----------  ------------------  --------------  -----------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>                 <C>             <C>
Loans collateralized by real estate:
  Permanent residential mortgage.......................  $  119,198      $   76,385        $ 195,583          41.3%
  Construction.........................................       2,197          10,651           12,848           2.7
  Second mortgage......................................      30,195          29,689           59,884          12.6
  Commercial...........................................      63,061          67,797          130,858          27.6
Loans collateralized by other property or unsecured:
  Consumer.............................................       5,243          45,766           51,009          10.8
  Commercial...........................................      11,248           8,837           20,085           4.2
Loans collateralized by savings accounts...............           0           3,974            3,974           0.8
                                                          -----------    ----------         ----------      -------
Total gross loans......................................  $  231,142      $  243,099       $  474,241         100.0%
                                                          -----------    ----------         ----------      -------
                                                          -----------    ----------         ----------      -------
                                                               48.7%           51.3%           100.0%
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
Mortgage-backed securities.............................  $   36,695      $   88,434       $  125,129
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------
                                                               29.3%           70.7%           100.0%
                                                          -----------    ----------         ----------
                                                          -----------    ----------         ----------

</TABLE>

    LOAN MATURITIES.  The following table sets forth certain information at
December 31, 1996 regarding the dollar amount of loans maturing in Palmetto
Federal's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayment and no stated maturity and
overdrafts are reported as due by December 31, 1997.

<TABLE>
<CAPTION>
                                                                              PAYMENTS DUE WITHIN
                                                      --------------------------------------------------------------------
                                                                                                    MORE THAN
                                                        1 YEAR    1-2 YEARS  2-3 YEARS  3-5 YEARS    5 YEARS      TOTAL
                                                      ----------  ---------  ---------  ----------  ----------  ----------
                                                                                 (IN THOUSANDS)
<S>                                                     <C>         <C>        <C>        <C>         <C>         <C>
Real estate mortgage................................  $  120,134  $  58,538  $  58,538  $   91,400  $   98,052  $  426,662
Real estate construction............................      50,473      2,172      2,172           0           0      54,817
Installment, commercial, and loans collateralized by
  savings accounts..................................      27,202      9,196      9,196       9,913         329      55,836
                                                      ----------  ---------  ---------  ----------  ----------  ----------
Total...............................................  $  197,809  $  69,906  $  69,906  $  101,313  $   98,381  $  537,315
                                                      ----------  ---------  ---------  ----------  ----------  ----------
                                                      ----------  ---------  ---------  ----------  ----------  ----------
</TABLE>

                                                     5
<PAGE>

    The following table sets forth loans due after one year which have fixed
rates or floating or adjustable rates.

<TABLE>
<CAPTION>
                                                         DECEMBER 31, 1996
                                          ------------------------------------------------
                                                FLOATING OR
                                              ADJUSTABLE RATE            FIXED RATE
                                          -----------------------  -----------------------
                                                         % OF                     % OF
                                                      TOTAL LOAN               TOTAL LOAN
                                            AMOUNT     PORTFOLIO     AMOUNT     PORTFOLIO
                                          ----------  -----------  ----------  -----------
                                                      (DOLLARS IN THOUSANDS)
<S>                                      <C>         <C>          <C>         <C>
Real estate mortgage.................... $  172,546       32.11%  $  133,982       24.94%
Real estate construction................      2,121        0.39        2,222        0.41
Installment, commercial, and loans
  collateralized by savings accounts....      9,358        1.71       19,277        3.51
                                         ----------       -----   ----------       -----
Total................................... $  184,025       34.25%  $  155,481       28.94%
                                         ----------       -----   ----------       -----
                                         ----------       -----   ----------       -----
</TABLE>

    Construction Loans.  Palmetto Federal provides construction financing for
single family, multi-family and nonresidential commercial real estate.
Construction loans are generally made for periods of six months to one year.
This period may be extended subject to negotiation and the payment of an
extension fee. Typically, interest rates on construction loans for loan terms
over one year are tied to an indexed rate and are adjustable monthly or
quarterly during the term of the loan. The Bank's policies allow residential
construction loans to builders for both presold and "spec" homes for up to an
85% loan to value ratio. The Bank also makes a combined construction/permanent
loan to individuals which combines a construction loan with a permanent mortgage
loan for up to a 95% loan to value ratio. As of December 31, 1996, the Bank had
approximately $2.2 million of single family construction loans, including loans
in process, that exceeded an 80% loan to value ratio. At December 31, 1996,
total construction loans comprised approximately 10.0% or approximately $54.8
million of the Bank's loan portfolio. Included in the Bank's total construction
loans were approximately $40.9 million in single family residential construction
loans, of which approximately $26.9 million were loans to builders for "spec"
homes. The Bank's loss experience for this loan category has been minimal.

    Construction loans also involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction.

    Commercial Real Estate Loans.  Commercial real estate loans made by
Palmetto Federal are secured by office buildings, shopping centers,
multi-family apartment and condominium projects with more than four dwelling
units. Permanent commercial real estate loans are generally made for up to
85% of the appraised value of the properties securing the loan with interest
rates determined by market conditions. Generally, the majority of the Bank's
loan charge-offs have been in this loan category. As of December 31, 1996,
the Bank had approximately $145.7 million in commercial real estate loans,
which comprised approximately 26.6% of the Bank's loan portfolio.

    Certain risks are inherent with loan portfolios which contain commercial
real estate, multi-family, commercial business and consumer loans. While these
types of loans provide benefits to the Company's asset/liability management
programs and reduce exposure to interest rate changes, such loans may entail
significant additional credit risks compared to residential mortgage lending.
Commercial and multi-family mortgage lending generally involves greater risk
than single-family lending. Furthermore, the repayment of loans secured by
income-producing properties is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the property is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the Company's loans may be impaired. These risks can be
affected significantly by supply and demand in the market for the type of
property securing

                                       6

<PAGE>

the loan and by general economic conditions, and commercial and multi-family
loans may thus be subject, to a greater extent than single-family property
loans to adverse conditions in the economy. Commercial real estate and
multi-family loans typically involve larger loan balances to single borrowers
or groups of related borrowers than single family mortgage loans.

    Palmetto Federal also makes commercial real estate loans for land
acquisition, development and/or construction costs. Typically, such loans
with a term over one year are tied to an indexed rate and are adjustable
monthly or quarterly during the term of the loan. Generally, Palmetto
Federal's loan underwriting policies for acquisition, development and
construction project loans are the same as for permanent commercial real
estate loans, however, loans made to finance the sale of foreclosed property
may be made at higher loan to value ratios and favorable interest rates to
expedite the reduction of the Bank's foreclosed property. Certain land
acquisition, development and/or construction loans made prior to 1987 were in
an amount equal to 100% of the aggregate costs of the financed project,
including land acquisition costs, development costs, construction costs and
interest costs. Palmetto Federal generally does not require a developer to
obtain a completion bond guaranteeing the completion of the financed project
in the event that the developer, for any reason, is unable to perform. In any
instance in which it has not obtained a completion bond, however, Palmetto
Federal generally requires a personal guarantee by the developer.

    Second Mortgage Loans.  Second mortgage residential loans comprised
approximately $56.0 million or 10.4% of the Bank's loan portfolio at December
31, 1996. The Bank's second mortgage loans consist of approximately $20.8
million in term loans primarily for home improvements and approximately $35.2
million in home equity line of credit loans. These loans typically have a
maximum loan to value ratio of 90%.

    Consumer and Mobile Home Loans.  At December 31, 1996, consumer loans
constituted 6.4% or approximately $34.9 million of Palmetto Federal's loan
portfolio, compared to 8.1% or approximately $39.6 million of the Banks's loan
portfolio at December 31, 1995. The consumer loan portfolio is made up of mobile
home, automobile and unsecured loans. The Bank originated approximately $24.7
million in consumer loans in 1996, compared to $31.2 million in 1995. Automobile
loans represented 14.9% or approximately $5.2 million of the Bank's consumer
loan portfolio at December 31, 1996. Palmetto Federal also offers Personal Cash
Line, which is an unsecured consumer loan. At December 31, 1996, this revolving
line of credit represented 7.1% of Palmetto Federal's consumer loan portfolio.
Consumer loans have historically tended to have a higher rate of default than
residential mortgage loans.

    Mobile home loans represented 52.5% and 56.1%, respectively, of Palmetto
Federal's consumer loan portfolio at December 31, 1996 and 1995. During 1996,
the Bank originated approximately $724,000 in mobile home loans, compared to
$1.7 million in 1995. Mobile home loans historically have a higher rate of
default than other types of consumer loans, but generally provide a higher yield
than other types of loans. In 1996, mobile home loan chargeoffs increased by
$514,000 and the Bank repossessed 51 mobile homes. The Bank tightened loan
underwriting standards on this type of loan and its mobile home loan portfolio
declined by $3.8 million in 1996 to $18.4 million at year end. The Bank makes
loans for new mobile homes for up to 90% of the purchase price of
the home, not to exceed 120% of dealer's cost, and for used mobile homes at the
lesser of NADA value or 80% of the purchase price.

    Loan Servicing.  Palmetto Federal ordinarily retains the servicing of its
loans for which it generally receives a fee payable monthly of one-quarter to
one-half of one percent per year of the unpaid principal balance of each loan.
The Bank's servicing fees were $846,000, $898,000 and $816,000 in 1996, 1995 and
1994, respectively. During 1992 Palmetto Federal sold approximately $150 million
in mortgage servicing rights. The only servicing rights sold in 1993 related to
an existing commitment from the 1992 sale. The Bank sold no significant
servicing rights in 1994, 1995 or 1996.

    Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights", which requires that the right to service mortgage loans for others be
recognized as an asset, whether that servicing right is acquired or originated.
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 related income taxes. See
Note

                                       7
<PAGE>

1 of the Consolidated Financial Statements, included in the Company's 1996
Annual Report and incorporated herein by reference.

    Loan Fees.  It is the general policy of Palmetto Federal to issue loan
commitments for a fee to qualified borrowers for a specified time period. These
commitments are generally for a period of 60 days. With management approval
commitments may be extended for up to six months. Palmetto Federal had
commitments to originate loans in a principal amount of approximately $32.9
million at December 31, 1996.

    In addition to interest earned on loans and fees for issuing loan
commitments, Palmetto Federal receives loan fees for originating loans. Loan
origination fees are a percentage of the principal amount of the mortgage loan
and are charged to the borrower by Palmetto Federal for creation of the loan.
Loan fees, as well as certain narrowly defined origination costs, are deferred
and amortized as an adjustment to the yield over the life of the related loan.
The net deferred fees are reflected in interest income over the appropriate
amortization period. In the case of adjustable rate mortgages, a substantial
portion of the net deferred fee on each individual loan is recognized as income
over the first adjustment period. Any remaining net deferred fees or costs
associated with loans that are sold are recognized as adjustments to the gains
or losses on the sales of such loans. Therefore, for loans originated and held
by Palmetto Federal, the loan origination fees are not separately identified in
results of operations, nor are the fees being recognized as income immediately
upon closing of the loans but are included in net interest income as an
adjustment of yield.

LOAN DELINQUENCIES AND CLASSIFIED ASSETS

    Loan Delinquencies.

    Palmetto Federal's collection procedures provide that when a loan becomes 15
days delinquent the borrower is contacted by mail and payment requested. If the
delinquency continues, subsequent efforts are made to contact and request
payment from the delinquent borrower. In certain instances Palmetto Federal may
develop a repayment schedule with the borrower to enable the borrower to
restructure his or her financial affairs.

    The accrual of interest income on loans in excess of 90 days past due is
generally suspended and previously recognized interest income reversed.
Additionally, the Bank discontinues the accrual of interest on any loan when
it determines the collection of interest is less than probable. If a
nonaccrual loan is restructured, the Company's policy is that the loan may
accrue interest only if the Bank's evaluation of the borrower's financial
condition supports full repayment of the restructured loan. If a loan
continues in a delinquent status for an additional 60 to 90 days, Palmetto
Federal will initiate foreclosure proceedings. All property acquired as the
result of foreclosure or by deed in lieu of foreclosure is classified as
"real estate acquired in settlement of loans" until such time as it is sold
or otherwise disposed of by Palmetto Federal.

    On January 1, 1995, the Company adopted 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 this new standard, 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. The minimum
nonpayment period before management considers a loan to be impaired is 90
days. The types and characteristics of loans that are measured using SFAS No.
114 include individual loans greater than $500,000 or a group of related
loans to a single borrower aggregating more than $500,000. These loans are
typically collateral dependent commercial real estate loans. All other loans
generally are measured under net realizable value techniques or, as in the
case of small homogeneous loans, under a methodology which includes loan
classifications and historical charge-offs. Impaired loans typically are not
charged off until foreclosure on the collateral property. Occasionally, an
impaired loan is partially charged off as part of a loan restructuring.
Nonaccrual loans are typically 90 days or more delinquent and may include
loans within the scope of SFAS No. 114. Impaired loans may include accruing
loans which have a specific valuation allowance or which have been
restructured. Also under this standard, in-substance foreclosed loans
continue to be measured at the fair value of the collateral, however, these
loans are classified as loans receivable rather than as foreclosed real
estate, as was the case previously. Therefore, in-substance foreclosures of
$3.2 million at December 31, 1994 have been reclassified from investment in
real estate to loans receivable. See Notes 1 and 3 of the Consolidated
Financial Statements, included in the Company's 1996 Annual Report and
incorporated herein by reference.

                                       8

<PAGE>

    The amounts and categories of Palmetto Federal's nonperforming assets
(nonaccrual loans and foreclosed real estate ("REO")) and restructured loans,
changes in the components of nonperforming assets and restructured loans, and
additional information concerning the Bank's nonperforming assets and
restructured loans is set forth in "Management's Discussion and Analysis
--Nonperforming Assets and Restructured Loans," included in the Company's 1996
Annual Report and incorporated herein by reference.

    The additional interest income that would have been earned during the year
ended December 31, 1996 if the restructured loans noted above had been current
in accordance with their original terms and had been outstanding throughout the
year ended December 31, 1996 was approximately $160,000. The amount of interest
income on the restructured loans included in net earnings for the year ended
December 31, 1996 was approximately $208,000. Although restructured loans
include loans which are considered to be 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 with
terms that either extend the maturity or reduce the stated interest rate.

    Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrowers'
ability to comply with present repayment terms. These loans are not included in
nonperforming assets. At December 31, 1996, potential problem loans totaled
approximately $14.5 million.

    Management of Palmetto Federal establishes an allowance for possible loan
losses each year based on its estimate of losses in the loan portfolio. The loan
loss allowance is charged against Palmetto Federal earnings in the year in which
the allowance is established. Loan charge-offs are charged against the loan loss
allowance. At December 31, 1996, the loan loss allowance was $7.0 million or
approximately 1.4% of total loans. Additional information concerning Palmetto
Federal's loan loss allowances for 1996 is set forth in "Management's Discussion
and Analysis--Nonperforming Assets and Restructured Loans," appearing in the
Company's 1996 Annual Report and incorporated herein by reference.

    The determination of the adequacy of the Bank's allowance for loan losses
is based upon management's assessment of risk elements in the portfolio,
factors affecting loan quality and assumptions about the economic environment
in which the Bank operates. The Bank utilizes a loan classification system in
assessing the overall quality of its loan portfolio to determine an adequate
allowance for the level of loan losses, with specific emphasis on the Bank's
larger loans. This system involves an ongoing review of the Bank's
commercial, real estate and consumer loan portfolios and includes factors
such as the cash flow and financial status of the borrower, the existence and
the value of the collateral and general economic conditions. This system is
dependent upon management's estimates and judgments and there can be no
assurance that the Bank will not have to increase its allowance for possible
loan losses in the future as a result of adverse markets for real estate and
economic conditions generally in the Bank's primary market areas, future
increases in nonperforming assets or for other reasons which would adversely
affect the Bank's results of operations. In addition, the Bank's principal
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and the carrying
value of its other nonperforming assets, including foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowance
for loan losses based on their judgments at the time of their examination.
The following table describes the Bank's allocation of its allowance for
estimated loan losses.

                                       9

<PAGE>

<TABLE>
<CAPTION>
                                               1996                    1995                    1994                    1993
                                      ----------------------  ----------------------  ----------------------  ----------------------
             ALLOCATION                            % LOANS                 % LOANS                 % LOANS                 % LOANS
          OF ALLOWANCE FOR                        TO TOTAL                TO TOTAL                TO TOTAL                TO TOTAL
            LOAN LOSSES:               AMOUNT       LOANS      AMOUNT       LOANS      AMOUNT       LOANS      AMOUNT       LOANS
------------------------------------  ---------  -----------  ---------  -----------  ---------  -----------  ---------  -----------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                   <C>        <C>          <C>        <C>          <C>        <C>          <C>        <C>
Loans collateralized by real estate:
  Permanent residential.............  $     596        41.9%  $   2,141        42.7%  $   1,545        44.5%  $   2,509        43.6%
  Construction......................       --          10.2         564         7.8         539         7.3         442         5.8
  Second mortgage...................        177        10.4         780        10.8         832        12.0         941        12.3
  Commercial........................      3,333        27.1       4,037        26.3       4,148        22.9       4,712        23.7
Loans collateralized by other
  property or unsecured:
  Consumer..........................      2,554         6.5         585         8.1         695         9.2         800        10.3
  Commercial........................        323         3.0         238         3.3         397         3.3         422         3.6
  Savings accounts..................       --           0.9          72         1.0          57         0.8          57         0.7
                                      ---------       -----   ---------       -----   ---------       -----   ---------       -----
Total allowance.....................  $   6,983       100.0%  $   8,417       100.0%  $   8,213       100.0%  $   9,883       100.0%
                                      ---------       -----   ---------       -----   ---------       -----   ---------       -----
                                      ---------       -----   ---------       -----   ---------       -----   ---------       -----
</TABLE>

<TABLE>
<CAPTION>
                                               1992
                                      ----------------------
             ALLOCATION                            % LOANS
          OF ALLOWANCE FOR                        TO TOTAL
            LOAN LOSSES:               AMOUNT       LOANS
------------------------------------  ---------  -----------
<S>                                   <C>        <C>
Loans collateralized by real estate:
  Permanent residential.............  $   1,961        41.1%
  Construction......................        196         2.7
  Second mortgage...................        912        12.7
  Commercial........................      3,986        27.7
Loans collateralized by other
  property or unsecured:
  Consumer..........................        812        10.8
  Commercial........................        305         4.2
  Savings accounts..................         60         0.8
                                      ---------       -----
Total allowance.....................  $   8,232       100.0%
                                      ---------       -----
                                      ---------       -----
</TABLE>

    Criticized Assets. OTS regulations require thrifts to monitor and classify
their assets to establish a mechanism of early identification of problem loans
and to calculate and provide for prudent valuation allowances. Institutions are
also required to classify their own assets and to establish prudent general
allowances for loan losses. An institution also is required to set aside
adequate valuation allowances to the extent an affiliate possesses assets
requiring classification and poses a risk to the institution. OTS regulations
also require institutions to establish loss allowances for off-balance sheet
items when a loss becomes probable and estimable. The determination of the
individual asset classification 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 for the portion of the asset so
classified. For the portion of assets classified as loss, the OTS permits
institutions either to establish specific allowances for losses of 100% of the
amount classified or to charge-off such amount. 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 loans have some credit deficiencies as
potential weaknesses that if not corrected could increase the risk of financial
loss. The Bank's total criticized assets include its nonperforming assets and
restructured loans as well as its potential problem loans. 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          0          0
Loss.............................       1,220      1,462      1,822
                                    ---------  ---------  ---------
                                    $  32,564  $  36,779  $  43,010
                                    ---------  ---------  ---------
                                    ---------  ---------  ---------
</TABLE>

                                       10
<PAGE>

INVESTMENT ACTIVITIES

    The Company invests in mortgage-backed and related securities. Included in
the Company's securities portfolio are mortgage-backed securities which are
insured or guaranteed by FNMA, FHLMC or Government National Mortgage Association
("GNMA"). Mortgage-backed securities increase the quality of the Company's
assets by virtue of the guarantees that back them, require less capital under
risk-based capital rules than nonguaranteed mortgage loans, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company. The returns and other information concerning such
securities are outlined below.

<TABLE>
<CAPTION>
                                         YEAR ENDED DECEMBER 31,
                                     -------------------------------
                                       1996       1995       1994
                                     ---------  ---------  ---------
                                         (DOLLARS IN THOUSANDS)
                                     <C>        <C>        <C>
Average yield for period...........       6.67%      6.61%      5.85%
Average rate at end of period......       6.91%      6.76%      6.72%
Interest income earned.............  $   4,337  $   6,335  $   6,237
Average balance for the period.....     64,077     95,803    106,602
Fair value at end of period........     60,514     79,181    101,909
Amortized cost at end of period....     59,899     77,736    108,621
Net unrealized gain (loss).........  $     615  $   1,445  $  (6,712)

</TABLE>

    Through an investment policy approved by its Board of Directors, Palmetto
Federal invests funds necessary to comply with liquidity regulations and other
funds not needed currently for loans in short-term investments. At December 31,
1996, Palmetto Federal held investments in United States Treasury and agency
securities with a fair value of approximately $22.7 million. In 1996 the Bank
received proceeds of $74.8 million from the sale of loans, investment and
mortgaged-backed securities. For additional information, see "Management's
Discussion and Analysis--Investment and Mortgage-backed Securities" and Note 2
of the Consolidated Financial Statements, included in the Company's 1996 Annual
Report and incorporated herein by reference.

                                       11

<PAGE>

    The following table sets forth information for Palmetto Federal with respect
to yields on loans, yields on investments and cost of funds on deposits and
borrowings for the periods indicated.

<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                               ----------------------------------------------------
                                                 1996       1995       1994       1993       1992
                                              ---------  ---------  ---------  ---------  ---------
<S>                                           <C>        <C>        <C>        <C>        <C>
Weighted average yields on:
  Loans receivable............................   8.90%      8.90%      8.49%      8.48%      9.26%
  Mortgage-backed securities..................   6.77       6.61       5.85       6.58       7.15
  Investment portfolio........................   5.96       5.85       5.40       3.99       5.45
  All interest-earning assets.................   8.46       8.24       7.73       7.76       8.54
Weighted average rate paid on:
  Retail savings deposits.....................   2.59       2.66       2.66       2.87       3.74
  Brokered time deposits......................     --         --       9.55       6.98       9.18
  Retail time deposits........................   5.79       5.80       4.94       5.27       6.19
  Interest-bearing demand deposits............   2.44       2.40       2.09       2.64       3.70
  FHLB advances and other borrowed money......   5.92       6.58       5.72       6.20       6.79
  All interest-bearing liabilities............   4.89       5.10       4.36       4.81       5.80
Net interest margin (difference between
  average rates on all interest-earning
  assets and interest-bearing liabilities)....   3.57       3.14       3.37       2.95       2.74
Net yield (net interest income as a
  percentage of average interest
  earning assets).............................   3.70%      3.26%      3.37%      2.79%      2.54%

</TABLE>

    The following table sets forth information for the Bank with respect to
weighted average contractual yields on loans, yields on investments and the cost
of funds on deposits and borrowings at December 31:

<TABLE>
<CAPTION>
                                                 1996       1995       1994       1993       1992
                                              ---------  ---------  ---------  ---------  ---------
<S>                                           <C>        <C>        <C>        <C>        <C>
Weighted average yields on:
  Loans receivable............................   8.73%      8.87%      8.34%      8.25%      8.90%
  Mortgage-backed securities..................   6.91       6.76       6.72       6.88       6.46
  Investment portfolio........................   6.24       5.50       5.72       4.73       5.34
  All interest-earning assets.................   8.41       8.20       7.80       7.78       8.14
Weighted average rate paid on:
  Retail savings deposits.....................   2.72       2.65       2.71       2.71       3.04
  Brokered time deposits......................     --         --         --       9.38       8.31
  Retail time deposits........................   5.82       6.07       4.90       4.92       5.69
  Interest bearing demand deposits............   2.67       2.42       2.10       2.39       2.46
  FHLB advances & other borrowed money........   5.94       6.56       6.72       5.98       6.46
  All interest-bearing liabilities............   4.92       5.22       4.73       4.45       5.27
Net interest margin...........................   3.49%      2.98%      3.07%      3.33%      2.87%

</TABLE>

                                       12

<PAGE>

The tables below set forth the book value of the Company's investments at the
dates indicated, the weighted average yields on investments for the years
ended on the dates indicated and the periods to maturity from December 31,
1996.

<TABLE>
<CAPTION>
                                                                                   AT DECEMBER 31,
                                                           ----------------------------------------------------------------
                                                                   1996                  1995                  1994
                                                           --------------------  --------------------  --------------------
                                                                                (DOLLARS IN THOUSANDS)
                                                           ----------------------------------------------------------------
                                                                       MARKET                MARKET                MARKET
                                                             COST       VALUE      COST       VALUE      COST       VALUE
                                                           ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                        <C>        <C>        <C>        <C>        <C>        <C>
U.S. Treasury and agency obligations:
  held-to-maturity.......................................  $   6,962  $   6,947  $   8,940  $   8,879  $  39,105  $  36,011
U.S. Treasury and agency obligations:
  available-for-sale.....................................     15,964     15,768     31,230     31,060      4,988      4,884
Corporate obligations....................................          0          0          0          0      1,998      1,825
Other investments........................................          0          0          0          0          3         62
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Total....................................................  $  22,926  $  22,715  $  40,170  $  39,939  $  46,094  $  42,782
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Weighted average yield on investments for the year.......       5.59%                 5.53%                 5.30%
                                                           ---------             ---------             ---------
                                                           ---------             ---------             ---------
</TABLE>

<TABLE>
<CAPTION>
                                                  PERIODS TO MATURITY FROM DECEMBER 31, 1996
                                  --------------------------------------------------------------------------
                                                HELD TO MATURITY                     AVAILABLE FOR SALE
                                  ---------------------------------------------  ---------------------------
                                                                     WEIGHTED                     WEIGHTED
                                                COST                  AVERAGE         COST         AVERAGE
                                           (IN THOUSANDS)              YIELD     (IN THOUSANDS)     YIELD
                                  --------------------------------  -----------  --------------  -----------
<S>                               <C>                               <C>          <C>             <C>
U.S. Treasury and agency
  obligations:
     1 year or less.............           $     0                      --%        $     0             0%
     1-5 years..................             3,967                    6.04          15,561          5.36
     5-10 years.................             2,995                    6.73               0             0
    after 10 years..............                 0                      --             403          7.44
Corporate obligations:
    1 year or less..............                 0                      --               0            --
    1-5 years...................                 0                      --               0            --
    5-10 years .................                 0                      --               0            --
    after 10 years..............                 0                      --               0            --
Other investments:
    1 year or less                               0                      --               0            --
    1-5 years                                    0                      --               0            --
    5-10 years                                   0                      --               0            --
after 10 years..................                 0                      --               0            --
                                           -------                    ----         -------         -----
Total...........................            $6,962                   6.34%       $  15,964          5.41%
                                           -------                    ----         -------         -----
                                           -------                    ----         -------         -----

</TABLE>

                                       13

<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 effect
of interest rate changes. The Company's Asset/ Liability Committee sets loan
and deposit rates, reviews the interest sensitivity gap of the Bank and sets
policies and strategies to improve the interest rate risk exposure of the
portfolio and to increase the level of net interest income. Additional
information concerning the Bank's asset and liability management is included
in "Management's Discussion and Analysis--Asset/Liability Management,"
appearing in the Company's 1996 Annual Report and incorporated herein by
reference.

    The following static gap table sets forth in summary form the repricing
attributes of Palmetto Federal's interest-earning assets and interest-bearing
liabilities. Static gap is a simple measure of the difference between
interest-sensitive assets and interest-sensitive liabilities repricing for a
particular time period. A negative gap position indicates that cumulative
interest-sensitive assets are less than cumulative interest-sensitive
liabilities and indicates that net income would decrease if market rates
increased. The time periods in the table represent the time before an asset
or liability matures or can be repriced.

<TABLE>
<CAPTION>
                                                                                                      MORE
                                0 TO 3       3 TO 6       6 TO 12         1 TO 3         3 TO 5      THAN 5
                                MONTHS       MONTHS       MONTHS          YEARS          YEARS        YEARS       TOTAL
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
<S>                           <C>          <C>          <C>          <C>               <C>         <C>          <C>
                                                                 (DOLLARS IN THOUSANDS)
Interest-Sensitive Assets
Balloon and adjustable rate
  loans.....................  $   103,936  $    54,206  $    71,129  $         19,729  $        0  $         0  $  249,000
Fixed rate mortgage and
  mortgage-backed
  securities................       33,618       20,680       28,575            80,763      63,051       67,640     294,327
Consumer and commercial
  loans.....................       15,914        3,970        5,714            17,308       9,329          310      52,545
Investments.................        8,893        3,844         (310)            2,938       8,973        3,398      27,736
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Total Interest-Sensitive
  Assets....................      162,361       82,700      105,108           120,738      81,353       71,348     623,608
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Interest-Sensitive
  Liabilities
Regular savings.............       39,245            0            0                 0           0            0      39,245
IFA accounts................       10,521            0            0                 0           0            0      10,521
NOW accounts................       77,703          876        1,750             7,002       7,002       11,669     106,002
Fixed maturity deposits.....      153,524       38,532       77,064            94,712      16,801            0     380,633
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Total Deposits (excluding
  accrued interest).........      280,993       39,408       78,814           101,714      23,803       11,669     536,401
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
FHLB advances and other
  borrowed money............       50,400       10,000            0             8,000           0            0      68,400
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Total Interest-Sensitive
  Liabilities...............      331,393       49,408       78,814           109,714      23,803       11,669     604,801
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Interest Sensitivity Gap....     (169,032)      33,292       26,294            11,024      57,550       59,679  $   18,807
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Cumulative Gap..............  $  (169,032) $  (135,740) $  (109,446) $        (98,422) $  (40,872) $    18,807
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
                              -----------  -----------  -----------  ----------------  ----------  -----------  ----------
Ratio of cumulative gap to
  total interest-sensitive
  assets....................       (27.11)%     (21.77)%     (17.55)%          (15.78)%     (6.55)%      (3.02)%
</TABLE>

                                       14



<PAGE>
SOURCES OF FUNDS

    GENERAL. 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. Loan repayments are a
relatively stable source of funds, while deposit flows are significantly
influenced by general interest rates and economic conditions.

    The following table sets forth the average amount of and the average rate
paid on the following deposits.

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                   ---------------------------------------------------------------------------------------------------
                                   1996                                  1995                           1994
                   ------------------------------------  ------------------------------------  -----------------------
                                          WEIGHTED                              WEIGHTED                    WEIGHTED
                                           AVERAGE                               AVERAGE                     AVERAGE
                        AMOUNT              RATE              AMOUNT              RATE           AMOUNT       RATE
                   -----------------  -----------------  -----------------  -----------------  ----------  -----------
                                                         (DOLLARS IN THOUSANDS)
<S>                <C>                <C>                <C>                <C>                <C>         <C>
Savings            $32,381            2.59%              $31,074            2.66%
  deposits.......                                                                              $   31,409        2.66%
Time deposits....  374,934            5.79               365,020            5.80                  325,360        4.96
Interest-bearing
  demand deposits
  (including
  non-interest-
  bearing demand
  deposits)......  106,611            1.77                98,666            1.71                  115,615        1.56
                   -----------------                     -----------------                     ----------
Total deposits...  $513,926           4.75%              $494,760           4.79%              $  472,384        4.36%
                   -----------------                     -----------------                     ----------
                   -----------------                     -----------------                     ----------
</TABLE>

     Deposit Activities. The primary categories of deposits for Palmetto Federal
are time deposits and various types of short-term money market and checking
(NOW) accounts and other savings alternatives that are responsive to market
conditions. The ability of Palmetto Federal to attract and maintain deposits
and Palmetto Federal's cost of funds have been, and will continue to be,
significantly affected by money market conditions. See "Management's
Discussion and Analysis--Asset/Liability Management," included in the
Company's 1996 Annual Report and incorporated herein by reference. Palmetto
Federal currently does not use brokered deposits as a source of funds.

                                      15

<PAGE>

     The following table sets forth deposit account balances, excluding
accrued interest payable, by account type, original term and weighted average
interest rate at the date indicated.

<TABLE>
<CAPTION>
                                                                        AT DECEMBER 31, 1996
                                                     -----------------------------------------------------
                                                                                   WEIGHTED    PERCENTAGE
  TYPE OF                                                                          AVERAGE      OF TOTAL
  ACCOUNT                                                       AMOUNT          INTEREST RATE   DEPOSITS
---------------------------------------------------  -------------------------  -------------  -----------
                                                                        (IN THOUSANDS)
<S>                                                  <C>                        <C>             <C>
NOW accounts.......................................  $105,252                          1.85%        19.61%
Money market deposit accounts......................  11,553                            6.02          2.15
Passbook and commercial savings....................  35,203                            2.72          6.56
Time Deposits
Jumbo certificates.................................  51,721                            6.02          9.64
Other time deposits:
   60 day..........................................  17,982                            3.48          3.35
   91 day..........................................   6,019                            4.90          1.12
   6--10 month.....................................  91,039                            5.41         16.96
   12 to 15 month..................................  79,879                            5.64         14.88
   18 to 25 month..................................  61,473                            6.14         11.46
   30 to 48 month..................................  27,239                            6.38          5.08
   60 month or more................................  47,820                            6.99          8.91
Other..............................................  1,507                             5.46          0.28
                                                     -------------------------       ------    -----------
Total..............................................  $536,687                          4.78%       100.00%
                                                     -------------------------       ------    -----------
                                                     -------------------------       ------    -----------
</TABLE>

    The following table sets forth the time deposits of Palmetto Federal
classified by rates as of the dates indicated.

<TABLE>
<CAPTION>
                                                                            AT DECEMBER 31,
                                                                  ------------------------------------
RATE                                                                  1996         1995        1994
----------------------------------------------------------------  ------------  ----------  ----------
<S>                                                               <C>           <C>         <C>
Less than 4.00%.................................................  $     16,985  $   20,943  $   67,689
  4.01--6.00%...................................................       254,986     165,733     201,388
  6.01--8.00%...................................................       101,219     165,057      52,195
Above 8.00%.....................................................        11,488      11,460      20,088
                                                                  ------------  ----------  ----------
                                                                  $    384,678  $  363,193  $  341,360
                                                                  ------------  ----------  ----------
                                                                  ------------  ----------  ----------
</TABLE>

                                           16

<PAGE>

    The following table sets forth the amount and scheduled maturities of
time deposits at December 31, 1996.

<TABLE>
<CAPTION>
                                                                             AMOUNT DUE
                                                     ----------------------------------------------------------
                                                       LESS THAN                            AFTER
                                                       ONE YEAR     1-2 YEARS  2-3 YEARS   3 YEARS     TOTAL
                                                     -------------  ---------  ---------  ---------  ----------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                  <C>            <C>        <C>        <C>        <C>

Less than 5.25%....................................  $      64,560  $   1,432  $     330  $      16  $   66,338
 5.25--7.00%.......................................        172,465     67,601     20,695      14,769    275,530
 7.01--9.00%.......................................         26,762      3,485      2,289       2,566     35,102
 9.01--11.00%......................................          2,223      5,011        474           0      7,708
                                                     -------------  ---------  ---------  ---------  ----------
Total scheduled maturities.........................  $     266,010  $  77,529  $  23,788  $  17,351  $  384,678
                                                     -------------  ---------  ---------  ---------  ----------
                                                     -------------  ---------  ---------  ---------  ----------
</TABLE>

    The following table sets forth the maturities of time certificates in
amounts of $100,000 or more.

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31, 1996
                                                                        -----------------------------------------------------------
                                                                         3 MONTHS     3 TO 6     6 TO 12      OVER
                                                                          OR LESS     MONTHS     MONTHS     12 MONTHS       TOTAL
                                                                        -----------  ---------  ---------  -----------    ---------
                                                                                            (DOLLARS IN THOUSANDS)
<S>                                                                     <C>          <C>        <C>        <C>            <C>
                                                                         $12,563     $  10,525   $   6,351  $  18,765     $  48,204
                                                                        -----------  ---------  ---------  -----------    ---------
                                                                        -----------  ---------  ---------  -----------    ---------
</TABLE>

    BORROWING ACTIVITIES.  At December 31, 1996, Palmetto Federal had
advances totaling approximately $68.4 million from the Federal Home Loan Bank
of Atlanta ("FHLBA") at rates from 5.30% to 6.95% payable at various dates
through September 1998. The short-term borrowings by Palmetto Federal at the
end of and during the periods indicated and the maximum amount outstanding at
any month-end during each period are set forth in the following table.

<TABLE>

<CAPTION>
                                                                                           AT DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1996       1995       1994
                                                                                   ---------  ---------  ---------
                                                                                       (DOLLARS IN THOUSANDS)
<S>                                                                                <C>        <C>        <C>
Total short-term borrowings at the end of period:
FHLBA advances...................................................................  $  57,900  $  81,500  $  98,200
Weighted average interest rate at end of period:
FHLBA advances...................................................................       6.01%      6.59%      6.38%
Average amounts outstanding:
FHLBA advances...................................................................  $  57,215  $  82,135  $  88,792
Maximum amount outstanding at any month:
FHLBA advances...................................................................  $  77,300  $  90,200  $  98,200
</TABLE>

                                        17

<PAGE>

PALFED INVESTMENT SERVICES

    PALFED Investment Services, Inc., formerly PALFED Financial Services,
Inc. ("PALFED Investment"), a wholly-owned subsidiary of PALFED, offers
retail securities brokerage services and sells tax-deferred annuities and
consumer insurance products. Net pre-tax income of PALFED Investment in 1996
was approximately $327,000 on revenues of $817,000, compared to pre-tax income
of $300,000 and revenues of $757,000 in 1995. In 1996 PALFED Investment opened
an office in Charleston, South Carolina to complement the retail offices in
that market.

    PALFED Investment sells certain tax deferred annuities through Family
Financial Life Insurance Company ("Family Financial"), a Louisiana insurance
company that is directly or indirectly controlled by service corporations or
subsidiaries of savings institutions and their holding companies. PALFED
Investment also sells annuities through other insurance companies.
Additionally, Palmetto Federal sells credit life and mortgage insurance
through Family Financial. PALFED Investment owns, directly or indirectly,
approximately 19 percent of the outstanding stock of Family Financial with an
investment in Family Financial stock of approximately $653,000. PALFED
Investment received approximately $29,000 in dividends and distributions from
Family Financial in 1996. W. Barry Adams, Executive Vice President of
Palmetto Federal and Senior Vice President of PALFED Investment, serves as a
director of Family Financial.

EFFECTS OF PURCHASE ACCOUNTING

    Palmetto Federal acquired First Federal Savings and Loan Association of
Beaufort, South Carolina ("First Federal") in August, 1982. This acquisition,
accounted for using the purchase method of accounting, increased the assets
and liabilities of Palmetto Federal by approximately $107 million each and
added seven branches to its system, two of which have since been closed. In
December 1993, the Company changed its method of amortizing goodwill by
adopting the provisions of SFAS No. 72, "Accounting For Certain Acquisitions
of Banking or Thrift Institutions", effective January 1, 1993. SFAS 72
(issued after the First Federal acquisition) requires goodwill to be
amortized over the estimated life of the interest-earning assets acquired
using the level yield method. The Company believes the change in accounting
principle is preferable because it provides a better matching of the
amortization of goodwill with the amortization of purchased discount on the
acquired interest-earning assets from the First Federal acquisition. The
change in accounting principle resulted in a $10.5 million noncash charge to
1993 earnings, reflecting the cumulative effect of this change for the
periods prior to January 1, 1993. This change also reduced the amount of
goodwill amortization recognized in 1993 by approximately $649,000.
Management reviews the amortization periods (estimated lives) of the
intangible assets periodically and makes adjustments as needed.

    The Company was amortizing the core deposit intangible asset of $5.4
million acquired in the First Federal acquisition on a straight-line basis
over 25 years. At September 30, 1996, this core deposit intangible 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, concluded that the
asset was impaired and wrote-off the remaining balance in December 1996.

                                      18

<PAGE>

    The following table sets forth the actual effect on the Company's
operations for 1982 through 1996 of the First Federal acquisition and the
sale or repayment of loans acquired in such acquisition. The table also
reflects the pro forma effect on future periods' results of operations of the
accretion and amortization of the valuation adjustments recorded in
connection with Palmetto Federal's acquisition of First Federal on the basis
of certain assumptions as to the fair value of the assets and liabilities and
an assumption that there will be no sales of or prepayments on the acquired
loans. If these assumptions are not realized, the actual effects of the
accretions and amortization of these valuation adjustments will vary.

<TABLE>
<CAPTION>
                                                    INCREASE (DECREASE) IN NET INCOME
                                        ----------------------------------------------------------
                                                        AMORTIZATION   AMORTIZATION
                                          ACCRETION          OF          OF OTHER
                                           OF LOAN      INTANGIBLES    PREMIUMS AND       NET
ACTUAL                                    DISCOUNTS     AND GOODWILL     DISCOUNTS       EFFECT
--------------------------------------  -------------  --------------  -------------  ------------
<S>                                     <C>            <C>             <C>            <C>
1982--1992.........................     $   25,109,356  $  (9,270,431) $    214,388  $  16,053,313
1993...............................            125,545    (10,761,947)       12,396    (10,624,006)
1994...............................             57,915       (260,825)       12,396       (190,514)
1995...............................             77,765       (281,391)       12,396       (191,230)
1996...............................             35,524     (2,650,406)       12,396     (2,602,486)

Pro Forma
--------------------------------------
1997...............................             27,724              0        12,396         40,120
1998...............................              8,530              0        12,396         20,926
1999...............................             19,803              0        12,396         32,199
2000--2007.........................             54,838              0        21,840         76,678
                                        -------------  --------------  -------------  ------------
Total.................................  $  25,517,000  $  (23,225,000) $     323,000  $  2,615,000
                                        -------------  --------------  -------------  ------------
                                        -------------  --------------  -------------  ------------
</TABLE>

      The 1996 amortization of intangibles and goodwill includes the $2.4
million write-off of the remaining core deposit intangible asset.

                                              19

<PAGE>

                            REAL ESTATE DEVELOPMENT

    Palmetto Service Corporation ("PSC"), a wholly-owned subsidiary of Palmetto
Federal, has engaged in real estate development activities since 1980, but
currently is not engaged in any new real estate development activities. Woodside
Development Company of Aiken, Inc. ("WDC"), a wholly-owned subsidiary of PSC,
was the original developer of the Woodside Plantation development. Effective
November 1993, PSC transferred to WDC certain real estate properties in projects
it previously developed. PSC currently provides real estate appraisal services
in the Bank's market areas, engages in real estate brokerage services, and has
an investment in a real estate partnership. At December 31, 1996, Palmetto
Federal's investment in PSC was approximately $6.3 million and it had extensions
of credits (including intercompany receivables and accounts payable) of
approximately $225,000 to PSC and WDC.

    At December 31, 1996, PSC and WDC had a total investment as set forth below
in the following real estate developments and partnerships:

<TABLE>
<CAPTION>

<S>                                            <C>
Woodside Plantation.........................   $4,483,000
The Rapids..................................      915,000
Other developments..........................      459,000
Real estate partnership.....................      457,000
                                               ----------
                                               $6,314,000
                                               ----------
                                               ----------
</TABLE>

    Woodside Plantation.  Woodside Plantation is a single family planned unit
development of over 2,000 acres that includes a country club, two eighteen hole
golf courses and over 1,800 single family lots as well as developed outparcels.
Since the project's inception in 1986 through December 31, 1993, WDC developed
913 homesites and sold 693 homesites and certain outparcels at Woodside
Plantation providing revenues after closing costs of approximately $27.3
million. In December 1990, WDC sold the Woodside Plantation clubhouse, related
golf courses, tennis and swimming facilities and amenities to Woodside
Plantation Country Club, Inc. ("WPCC"), a subsidiary of Club Corporation of
America, for approximately $6.8 million. Concurrent with the sale of the club
and related amenities, WDC entered into a membership agreement with WPCC to
purchase club memberships. In October 1993, WDC sold the assets of Woodside
Cable, an operating division of WDC that provided cable television services, for
approximately $1.1 million.

    In December 1993, WDC sold the remaining developed lots at Woodside
Plantation, together with seven outparcels, the development and sales offices at
Woodside Plantation, and the stock of Woodside Realty, Inc., a wholly-owned
subsidiary of WDC that provided real estate brokerage services for Woodside
Plantation. In addition, the purchaser, Woodside Development Limited Partnership
(the "Purchaser"), assumed WDC's liabilities related to the obligation to
purchase memberships at Woodside Plantation Country Club. The Purchaser also
entered into a two year option agreement to acquire from WDC approximately 1,000
acres of undeveloped land at Woodside Plantation. Palmetto Federal provided
nonrecourse financing to the Purchaser of the developed lots and other assets of
WDC in an aggregate amount of approximately $3.6 million. In addition, Palmetto
Federal subsequently provided the Purchaser a $500,000 construction loan to
build townhouses at Woodside Plantation and six separate construction loans in
an aggregate amount of approximately $976,000 for further construction at
Woodside Plantation.

    Due to slower than anticipated lot sales, the Purchaser was unable to
service its acquisition debt and completed a restructuring of the
indebtedness to the Bank in September 1995. The restructuring included the
following terms: (1) the Company acquired 35 lots and reduced principal on
the Purchaser's outstanding loans by $492,000; (2) the Company agreed to pay
up to $330,000 toward joint marketing efforts over three years related to the
35 lots it received; (3) the Company granted a two year extension until
December 31, 1997 of the Purchaser's option to purchase the remaining
undeveloped acreage at Woodside Plantation; and (4) the Company paid $184,500
to WPCC under the membership agreement. The Company paid $110,000 and $98,000
toward joint marketing in 1995 and 1996, respectively. There are no
assurances the Purchaser will exercise its option to acquire any of the
undeveloped acreage at Woodside Plantation and the Purchaser may exercise the
option to acquire only a portion of the optioned acreage.

                                       20
<PAGE>

    The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners at Woodside
Plantation, comprised of real estate held for development, acquisition and
development loans, foreclosed real estate and a 50 percent interest in a
partnership. The carrying values of these components were as follows at December
31:

<TABLE>
<CAPTION>
                                                                          1996         1995         1994
                                                                       ---------     --------     --------
<S>                                                                    <C>           <C>          <C>
                                                                                  (IN THOUSANDS)
Undeveloped land: 1,000 acres........................................  $ 3,733       $ 3,733      $ 3,733
2 outparcels.........................................................      750           750          750
WPCC loans...........................................................    4,393         4,454        4,584
Loans to Woodside Development Limited Partnership....................    2,308         3,311        3,100
Lots received in loan 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          698
                                                                       -------       -------      -------
                                                                       $12,499       $13,878      $12,865
                                                                       -------       -------      -------
                                                                       -------       -------      -------
</TABLE>

    The ability of WPCC to repay its loans to the Bank also is based in part on
real estate sales at Woodside Plantation, which provides additional memberships
for the Woodside Plantation County Club. Effective April 1, 1996, the Bank
modified its loans to WPCC from amortizing to interest only for one year. See
Note 10 of the Consolidated Financial Statements, including in the Company's
1996 Annual Report and incorporated herein by reference.

    The Rapids. PSC developed The Rapids project, a planned unit development of
single family homesites located in North Augusta, South Carolina. In 1991, PSC
sold part of the land and completed development of all of the 115 homesites it
planned to develop at this project. Since the project's inception in 1986
through December 31, 1996, PSC has sold 77 homesites and 4 outparcels providing
revenues after closing costs of $3.7 million. As of December 31, 1996, WDC has
38 homesites and two outparcels remaining held for sale at this project at a
carrying value of $915,000. At December 31, 1996, Palmetto Federal had two
outstanding construction loans to PSC for the construction of "spec" homes on
two of the homesites at this project. The Company recently sold one of these
homes and may build two additional speculative homes to facilitate the sale of
these lots.

    Real Estate Partnerships.  During 1996, PSC sold its interest in one real
estate partnership. At December 31, 1996, PSC had an investment in one real
estate partnership totaling $211,000. In 1996 that partnership had a net loss of
approximately $1,400. The Bank had one outstanding loan to that partnership of
$246,000 at December 31, 1996.

                                       21

<PAGE>

                                   REGULATION

General

    The Company is a savings and loan holding company subject to regulation,
examination, supervision and reporting requirements of the OTS. As a savings
association, Palmetto Federal is subject to extensive regulation by the OTS.
The lending activities and other investments of Palmetto Federal must comply
with various federal regulatory requirements, including regulations that
require the maintenance of reserves against deposits, limiting the nature of
loans and interest that may be charged thereon and restricting investments
and other activities. In addition, federal and state regulatory agencies also
have the authority to prevent a savings association from paying a dividend or
engaging in any other activity that, in the opinion of the regulators, would
constitute an unsafe or unsound practice. The OTS and FDIC periodically
examine Palmetto Federal for compliance with various regulatory requirements,
and Palmetto Federal must file reports with the OTS describing its activities
and financial condition. Palmetto Federal is also subject to examination by
the FDIC and must meet certain reserve requirements promulgated by the FRB.
This supervision and regulation is intended primarily for the protection of
depositors and the federal deposit insurance fund. The regulatory structure
gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company and its operations.

    The Company also is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which include
the filing of annual, quarterly and other reports with the Securities and
Exchange Commission ("SEC").

Federal Savings and Loan Holding Company Regulation

    As the owner of all of the stock of Palmetto Federal, the Company is a
savings and loan holding company subject to regulation by the OTS under the Home
Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company
owning only one savings association, the Company generally is allowed to engage
and invest in a broad range of business activities not permitted to commercial
bank holding companies or multiple savings and loan holding companies; provided
that Palmetto Federal continues to qualify as a "Qualified Thrift Lender." See
"Regulation of Palmetto Federal--Qualified Thrift Lender ("QTL") Test." In the
event of any acquisition by the Company of another insured institution
subsidiary, except for a supervisory acquisition, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage.

    The Company is prohibited from directly or indirectly acquiring control of
any savings institution or savings and loan holding company without prior
approval from the OTS or from acquiring more than 5% of any voting stock of any
savings institution or savings and loan holding company which is not a
subsidiary. No entity can acquire more than 10% of the stock of the Company
without prior OTS approval (unless the acquisition is for investment purposes
only and for not more than 24.9% of the Company's stock, and the required
filings are made with the OTS). The HOLA provides that no company may acquire
"control" of a savings association without the prior approval of the OTS.
"Control" is generally denoted by a greater than 25% ownership interest in the
savings association or its holding company. Any company that acquires such
control becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS.

Regulation of Palmetto Federal

    Supervisory Agreement. In connection with the 1992 OTS Report of
Examination, which noted certain deficiencies and concerns regarding Woodside
Plantation, the level of criticized assets and capital levels, the OTS
exercised its discretion to treat Palmetto Federal as an institution
requiring more than normal supervision under the provisions of OTS Regulatory
Bulletin ("RB") 3a-1. Effective March 23, 1993, Palmetto Federal entered into
a Supervisory Agreement with the OTS to ensure the correction of deficiencies
noted by the OTS in the 1992 Examination. The Supervisory Agreement contained
provisions related to the management and reduction of Palmetto Federal's loans

                                       22

<PAGE>

to and investments in Woodside Plantation; adoption and implementation of
procedures and policies regarding the identification and reporting of
troubled debt restructuring and accrual of interest on delinquent loans;
preparation of detailed plans for disposing of troubled assets; preparation
of strategic plans and capital maintenance plans for the Bank; and
maintenance of a $7.2 million level of general valuation allowances. The Bank
submitted to the OTS within the time periods provided in the Supervisory
Agreement the budgets, strategic plans and appraisals mandated by the
Supervisory Agreement, and adopted and implemented the policies and
procedures required by the Supervisory Agreement.

    Following the 1994 OTS Examination, the OTS terminated the restrictions of
RB 3a-1 in August 1994. In December 1994, the OTS terminated the remaining
provisions of the Supervisory Agreement, subject to the Bank's continuing the
policies and procedures that encompassed the intent of the Supervisory Agreement
and continuing to adhere to the projections contained in the Bank's plans
previously submitted to the OTS. Both actions by the OTS significantly reduced
the level of regulatory restrictions on the Bank's operations. Additionally, the
termination of the RB 3a-1 restrictions lowered the FDIC insurance premium rate
paid by the Bank.

    Regulatory Capital Requirements. OTS regulations (the "Regulatory Capital
Regulations") specify capital standards for thrifts consisting of three
components, a "core capital" requirement, a "tangible capital" requirement and a
"risk-based capital" requirement. The Regulatory Capital Regulations require
savings associations to maintain core capital in an amount not less than 3% of
adjusted total assets (the "leverage ratio") and to maintain tangible capital in
an amount not less than 1.5% of adjusted total assets. Under the Regulatory
Capital Regulations, thrifts are required to maintain capital equal to 8% of
risk-weighted assets. The OTS requires assets to be weighted on the basis of
risk and assigned a weighing factor of between 0% and 100%. Approximately
one-half of risk-based capital must consist of core capital and one-half may
consist of other preferred stock, a portion of general loan loss reserves and
other hybrid capital instruments such as convertible and subordinated
debentures. In determining compliance with the Regulatory Capital Regulations,
all of a savings association's investments in and extensions of credit to any
subsidiary engaged in activities not permissible for a national bank are
deducted from the savings association's capital. For additional information
concerning the Bank's compliance with the Regulation Capital Regulations, see
Note 8 of the Consolidated Financial Statements, included in the Company's 1996
Annual Report and incorporated herein by reference.

    Included in the calculations of the Bank's capital requirements are
judgments and estimates of management. These judgments and estimates are subject
to review and scrutiny by the OTS and FDIC.

    Prompt Corrective Action.  The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") required each federal banking regulator to
adopt a system of prompt corrective action, which provides for certain
mandatory supervisory actions as well as additional discretionary supervisory
actions if an institution's capital falls below certain levels. Under these
regulations, each depository institution must be classified into one of five
capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized) based on such institution's capitalization with respect to
the capital measures established by the applicable regulatory agency. An
institution is deemed to be (i) "well-capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a core capital ratio of 6.0%
or more, has a tangible capital ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure. All institutions are prohibited from making any capital
distributions or paying a management fee to any controlling person if such
action would cause the institution to fall into one of the undercapitalized
categories. The OTS at its discretion may reclassify a savings association's
capital category to the next lowest level (but not to the "critically
undercapitalized" level) if it deems that association to be in an unsafe and
unsound condition or if the savings association has received and not
corrected a less than satisfactory rating for asset quality, management,
earnings or liquidity in its most recent regulatory examination. The
regulation also requires the regulators to take certain specified actions for
institutions that are determined to fall within any of the three categories
below the "adequately capitalized" level. These actions range from
prohibiting an institution from making any capital distributions or paying
management fees if the action would cause the institution to fall into the
"undercapitalized category" to the appointment of a conservator or receiver
for an institution that becomes "critically undercapitalized". Management
believes Palmetto Federal is presently considered "well capitalized" under
the FDIC's prompt corrective action guidelines.

    FDICIA directed the OTS and other federal banking agencies to revise
their risk-based capital standards to ensure that the standards (i) take
adequate account of interest rate risk, concentration of credit risk and the
risks of

                                       23
<PAGE>

nontraditional activities, and (ii) reflect the actual performance and
expected risk of loss of multifamily mortgages. Institutions with an
"above-normal" degree of interest rate risk are required to maintain an
additional amount of capital. In March 1995, the OTS delayed indefinitely the
implementation of the interest rate risk component of the risk-based capital
standard, which had been scheduled to be effective September 30, 1994.

    Safety and Soundness Standards.  Federal banking regulations prescribe
for all insured depository institutions and their holding companies standards
relating to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, asset quality, earnings, compensation, fees and benefits and
such other operational and managerial standards as the agency deems
appropriate. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholders. In addition, the regulations authorize, but do not require, an
agency to order an institution that has been given notice by an agency that
it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If an institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted compliance
plan, the agency must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to
which an undercapitalized association is subject under the "prompt corrective
action" provisions of FDICIA. If an institution fails to comply with such an
order, the agency may seek to enforce such order in judicial proceedings and
to impose civil money penalties. The federal bank regulatory agencies also
proposed guidelines for asset quality and earnings standards.

    Liquidity Requirements.  Palmetto Federal is
required to maintain average daily balances of liquid assets
(cash, certain time deposits, bankers' acceptances, highly rated corporate
debt and commercial paper, securities of certain mutual funds and specified
U.S. government, state or federal agency obligations) equal to not less than
a specified percentage (currently 5%) of the average daily balance during the
preceding calendar month of its net withdrawable accounts plus short-term
borrowings. Member institutions are also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%)
of the average daily balance during the preceding calendar month of the total
of their net withdrawable accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet liquidity
requirements. At December 31, 1996 the long-term liquidity ratio of Palmetto
Federal was 7.9% and the Bank was in compliance with its short-term liquidity
requirement.

    Loans to One Borrower.  With certain exceptions, the statutory provision
limiting the ability of national banks to make loans to a single borrower is
now applicable to savings associations in the same manner and to the same
extent as it applies to national banks. In general, national banks may make
loans to one borrower equal to 15% of the bank's unimpaired capital and
unimpaired surplus, plus an additional 10% of capital and surplus for loans
secured by readily marketable collateral. At December 31, 1996, the current
limit of 15% of capital and surplus equated to a limit of approximately $8.4
million.

    Equity Risk Investments.  In addition to the Regulatory Capital
Requirements, Palmetto Federal is subject to an "equity risk" regulation
which limits the aggregate amount of its equity risk investments, which are
defined to include investments in real estate, service corporations,
operating subsidiaries and equity securities, as well as land loans and
nonresidential construction loans with loan-to-value ratios greater than 80%.
The regulation also imposes certain qualitative restrictions on otherwise
permissible investments in equity securities. Under the regulation, the
equity risk investments of thrift institutions which meet their minimum
regulatory capital requirements and have "tangible capital" (i.e., equity
capital, as determined in accordance with generally accepted accounting
principles, minus goodwill and other intangible assets, plus qualifying
subordinated debt and qualifying nonpermanent preferred stock) equal to or
greater than 6% of total assets may make aggregate equity risk investments in
an amount up to three times their tangible capital. A thrift institution that
meets its regulatory capital requirements and has tangible capital of less
than 6% of total assets may make aggregate equity risk investments in an
amount equal to the greater of 3% of total assets or two and one-half times
tangible capital. Regulatory approval is required if an institution's equity
risk investments exceed the foregoing limitations or for any equity risk
investments by institutions which fail to meet their minimum Regulatory
Capital Requirements. At December 31, 1996, Palmetto Federal's level of
equity risk investments complied with the foregoing requirements.

                                       24
<PAGE>

    Qualified Thrift Lender ("QTL") Test. All savings associations are required
to qualify as a qualified thrift lender ("QTL") to avoid certain restrictions on
their operations. If Palmetto Federal should in the future fail to maintain its
status as a QTL (in three of four calendar quarters in two of every three
years), Palmetto Federal would be subject to certain penalties, including
conversion to a bank charter or compliance with the restrictions imposed for
noncompliance.

    Under current OTS regulations implementing the QTL Test, Palmetto Federal
either must qualify as a domestic building and loan association under the
Internal Revenue Code or maintain at least 65% of portfolio assets in certain
investments ("Qualified Thrift Investments"). Qualified Thrift Inestments must
equal or exceed 65% of portfolio assets on a monthly average basis in nine out
of every twelve months, and include (i) domestic residential or manufactured
housing loans, (ii) home equity loans, (iii) mortgage-backed securities backed
by residential or manufactured housing collateral, (iv) obligations issued by
the federal deposit insurance agencies, and (v) shares of stock issued by any
federal home loan bank. Part of the regulatory relief provisions of the SAIF
recapitalization legislation liberalized the lending authority of thrifts and
amended the QTL Test to count education, small business and credit card loans in
the same manner as mortgage loans for satisfying the QTL Test and to expand the
amount of consumer loans that count as Qualified Thrift Investments. At December
31, 1996, approximately 66.7% of Palmetto Federal's portfolio assets were
invested in Qualified Thrift Investments.

    Community Reinvestment.  Under the Community Reinvestment Act (the
"CRA"), Palmetto Federal has an affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the
types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. In its most recent CRA examination of Palmetto Federal in 1993,
the OTS assigned the Bank an "Outstanding" regulatory evaluation for the
Bank's fulfillment of the requirements of the CRA.

    Dividends. OTS regulations limit the payment of dividends on common stock
by Palmetto Federal to PALFED. Interest on deposit accounts must be paid
prior to payment of dividends on common stock. Income appropriated to bad
debt reserves and deducted for federal income tax purposes cannot be used to
pay cash dividends without the payment of federal income taxes by Palmetto
Federal on the amount of such income removed from reserves at the then
current income tax rate. Under regulations enforced by the OTS, Palmetto
Federal is not permitted to pay dividends on its common stock if its
regulatory capital would thereby be reduced below the amount required for the
liquidation account or the Regulatory Capital Requirements prescribed for
institutions insured by the FDIC. Under OTS regulations, the ability of a
savings association to make capital distributions, such as dividends, is tied
to an institution's capital or "Tier" ranking. Payment of dividends by the
Bank to the Company is subject to certain restrictions and would require
prior notice to and approval of the OTS. In 1995 and 1996 Palmetto Federal
did not pay or declare any dividends to PALFED.

    Transactions with Affiliates.  Transactions between Palmetto Federal and
an affiliate are subject to Sections 23A and 23B of the Federal Reserve Act,
as amended (the "FRA"). FRA Section 23A limits the aggregate amount of
certain transactions with any single affiliate to 10% of the capital and
surplus of the financial institution and the aggregate amount of such
transactions with all affiliates to 20% of the institution's capital and
surplus. Certain transactions with affiliates, such as loans to affiliates or
guaranties, acceptances and letters of credit issued on behalf of affiliates,
are required to be collateralized by collateral in an amount and of a type
described in the statute. The purchase of low quality assets from affiliates
is generally prohibited. FRA Section 23B requires all transactions with
affiliates, including loans and asset purchases, to be on arms-length terms.
In addition, thrifts may not (i) make any loan or other extension of credit
to an affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies; and (ii) purchase or invest in
securities issued by an affiliate, other than securities of a subsidiary. The
OTS may for reasons of safety and soundness impose more stringent
restrictions on savings associations than those set forth in Sections 23A and
23B.

    Palmetto Federal's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk
of repayment. Regulation

                                       25
<PAGE>



O also places individual and aggregate limits on the amount of loans
the FRA may make to such persons based, in part, on its capital position.
Additional OTS restrictions, in part, require that a savings association retain
detailed records of transactions with affiliates and in certain circumstances,
to notify the OTS prior to any transactions with affiliates.

Deposit Insurance

    Deposits of Palmetto Federal are insured by the FDIC and are subject to the
deposit insurance assessments of the SAIF. Under the FDIC's risk-based premium
system, the Palmetto Federal's deposit insurance premium generally depends upon
the amount of Palmetto Federal's deposits and the risk that Palmetto Federal
poses to the SAIF. Under these risk-related insurance regulations, an
institution is classified according to capital and supervisory factors.
Institutions are assigned to one of three capital groups: "well capitalized,"
"adequately capitalized" or "under capitalized." Within each capital group,
institutions are assigned to one of three supervisory subgroups. There are nine
combinations of groups and subgroups (or assessment risk classifications) to
which varying assessment rates are applicable.

    Deposit insurance premiums for members of both the Bank Insurance Fund
("BIF") and the SAIF were established for each fund to achieve a 1.25%
designated ratio of reserves to insured deposits. The BIF reached the 1.25%
reserve level in 1995 and in August 1995, the FDIC reduced the premiums for BIF
member banks. The Deposit Insurance Funds Act of 1996, signed by the President
on September 30, 1996, recapitalized the SAIF through a special assessment to
bring it up to the same reserve level as the BIF. The Bank's $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. For the semi-annual period beginning January 1,
1997, the assessments imposed on all FDIC deposits for deposit insurance have an
effective rate ranging from 0 to 27 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
Palmetto Federal has been notified that its SAIF assessment rate is 3 cents for
the period from January 1, 1997 to June 30, 1997.

    The SAIF recapitalization legislation also provides that the assessment
base for the bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation
would be expanded to include deposits of both BIF-insured and SAIF-insured
institutions. Previously, the thrifts paid the entire cost of these bond
payments. In addition to the deposit insurance premiums, 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.

    In addition to deposit insurance premiums, savings institutions also must
bear a portion of the administrative costs of the OTS through an assessment
based on the level of total assets of each insured institution.

Federal Home Loan Bank System

    Palmetto Federal continues to be a member of the FHLBS, which consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLBA, Palmetto
Federal is required to acquire and hold shares of capital stock in the FHLBA in
an amount at least equal to the greater of 1.0% of its residential mortgage
loans or 5% of outstanding FHLBA advances. Palmetto Federal was in compliance
with this requirement with an investment in FHLBA stock at December 31, 1996 of
approximately $10.9 million valued at cost. On January 3, 1997, the FHLBA
redeemed approximately $7.0 million of the Company's FHLBA stock which was in
excess of the Bank's required minimum amount.

    The FHLBA serves as a reserve or central bank for member institutions within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLBS. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLBA. Long-term advances may be made only for the purpose of
providing funds for financing residential housing. As of December 31, 1996
Palmetto Federal had approximately $68.4 million in advances from the FHLBA.

                                       26

<PAGE>

Federal Reserve System

    Pursuant to regulations of the FRB, a thrift institution must maintain
average daily reserves equal to a percentage of deposits specified by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1996 Palmetto Federal met its
reserve requirement of $1.4 million.

                 CERTAIN RESTRICTIONS ON ACQUISITION OF PALFED

Regulatory Restrictions

    Federal laws and regulations contain a number of provisions which affect the
direct or indirect acquisition of savings institutions such as Palmetto Federal
and, consequently, The OTS regulations generally require prior approval of the
OTS for acquisitions of control of savings institutions or savings and loan
holding companies. Control is conclusively presumed to exist if, among other
things, a person acquires more than 25% of any class of voting stock of the
institution or holding company or controls in any manner the election of a
majority of the directors of the insured institution or the holding company.
Control is rebuttably presumed to exist if, among other things, a person
acquires more than ten percent of any class of voting stock (or 25% of any class
of stock) and is subject to any of certain specified "control factors". See
"Regulation--Federal Savings and Loan Holding Company Regulation."

Restrictions in the Articles of Incorporation and Bylaws

    Several provisions of PALFED's Articles of Incorporation and Bylaws
concerning matters of corporate governance and certain rights of shareholders
might be deemed to have a potential "antitakeover" effect. These provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors, but which individual shareholders of
PALFED may deem to be in their best interest or in which shareholders may
receive a substantial premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current Board of Directors and management more
difficult.

    Board of Directors.  The Board of Directors of PALFED is divided into
three classes, each of which contains approximately one-third of the
aggregate number of the members of the Board. Each class serves a staggered
term, with approximately one-third of the total number of directors being
elected each year. A classified board of directors could make it more
difficult for shareholders, including those holding a majority of the
outstanding shares, to force an immediate change in the composition of a
majority of the board of directors. Since the terms of only one-third of the
incumbent directors expire each year, it requires at least two annual
elections for the shareholders to change a majority, whereas a majority of a
non-classified board may be changed in one year.

    Cumulative Voting.  The Articles of Incorporation of PALFED prohibit
cumulative voting for the election of directors.

    Business Combination Provision. PALFED's Articles of Incorporation
provide that PALFED may engage in certain "Business Combination" transactions
(as defined) with an "Interested Shareholder" (as defined) only if approved
by the holders of not less than 80% of the outstanding PALFED stock, unless
(i) the Business Combination is approved by a majority of the "Continuing
Directors" or (ii) the consideration to be received by the shareholders of
PALFED satisfies certain "fair price" criteria. If either of the above two
exemptions to the 80% shareholder vote required is present, the shareholder
vote required to approve the Business Combination will be lower. The primary
purpose of this supermajority shareholder vote requirement for a Business
Combination is to discourage attempts by other corporations or groups to
acquire control of PALFED through the acquisition of a substantial number of
shares followed by a forced merger. In such a situation shareholders may not
receive a fair price for their shares as determined through arms-length
negotiations. This provision is designed to prevent a purchaser from
utilizing two-tier pricing and similar tactics in an

                                       27
<PAGE>

attempt to take over PALFED, and helps to assure that all shareholders of
PALFED will be treated equally if a merger or other business combination is
effected.

    Authorized Shares.  The Articles of Incorporation authorize the issuance
of 10,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Shareholders of PALFED do not have preemptive rights to subscribe for or to
purchase additional shares of PALFED stock which may be issued. The Board of
Directors has sole authority to determine the terms of any one or more series
of the preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for
a series of preferred stock, the Board has the power to issue a series of
preferred stock to persons friendly to management in order to attempt to
block a post-tender offer merger or other transaction by which a third party
seeks control, and thereby assist management to retain its position.

Anti-Takeover Effects of Management Contracts and Stock Plans

    Certain provisions of the Company's executive salary continuation
agreements, stock option plans, restricted stock grant plan, and the Employee
Savings and Stock Ownership Plan, particularly those pertaining to payments,
benefits and acceleration of vesting periods in the event of a change in
control, may discourage a takeover attempt as a result of the increased cost
to be incurred by the Company and the amount of Common Stock which would be
controlled directly by the directors, officers and employees of the Company
and its subsidiaries and indirectly through the Company's stock plans.

South Carolina Control Share Acquisition Act

    Sections 35-2-101 through 35-2-111 of the Code of Laws of South Carolina
1976 (the "Control Share Acquisition Act" or the "Act") provide that if a
person acquires in one or a series of related transactions an amount of stock
equal to one-fifth or more of all of the voting power of a corporation
subject to the Act in a "control share acquisition" (as defined in the Act),
such shares have only such voting rights as are accorded them by resolution
adopted by the majority of shareholders of the corporation. As a South
Carolina corporation, PALFED is subject to the Control Share Acquisition Act.

    Under the Control Share Acquisition Act, "control shares" are shares that
except for the Act would have voting power that would entitle a person
immediately after acquisition of such shares to exercise or direct voting
power in the election of directors within any of the following ranges of
voting power, (1) one-fifth or more but less than one-third of all voting
power, (2) one-third or more but less than a majority of all voting power, or
(3) a majority or more of all voting power. Pursuant to the Act, a person who
makes a control share acquisition may deliver to a corporation subject to the
Act an acquiring person statement which sets forth (i) the identity of the
acquiring person, (ii) a statement that the acquiring person statement is
given pursuant to the Act, (iii) the number of shares owned by the acquiring
person, and each other member of the acquiring person group, and (iv) the
range of voting power (more than one-fifth but less than one-third, more than
one-third but less than a majority, or a majority or more) under which the
control share acquisition falls. Upon receipt of an acquiring person
statement, then the voting rights to be accorded the control shares must be
presented at the next annual or special meeting of shareholders.

                                       28
<PAGE>

                                    TAXATION

    PALFED and its subsidiaries file consolidated federal income tax returns on
a December 31 tax year. Prior to 1996, savings institutions, such as Palmetto
Federal, that met certain definitional tests and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), were 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 and 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 previously have been provided, totalled
$3.0 million. Thrifts meeting certain home mortgage lending tests may defer
repayment for an additional 2 years, and the Company believes it will qualify
for this additional 2-year deferral. As a result, all thrifts, including the
Bank, will be required to change from the reserve method to either the specific
chargeoff method (available to all thrifts) or the experience method (available
only to thrifts that qualify as "small banks," i.e., under $500 million in
assets measured on a controlled group basis) to compute the tax bad debt
deduction.

    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. Subsequent to the
completion of the IRS examination, Palmetto Federal filed amended South Carolina
state income tax returns and received funds and related interest of
approximately $285,000 in 1994.

    PALFED and its subsidiaries are subject to South Carolina and Georgia state
income taxes which are imposed at a rate of 6% of taxable income. Both South
Carolina and Georgia taxable income are computed in the same manner as federal
taxable income with certain modifications.

    Accounting for Income Taxes.  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. See Notes 1 and 7 to the Company's Consolidated
Financial Statements, included in the Company's 1996 Annual Report and
incorporated herein by reference.

                                       29
<PAGE>

Item 2. Properties.

    The Company's corporate headquarters is located at 107 Chesterfield Street
South, Aiken, South Carolina. Palmetto Federal has an operations center in Aiken
and operates 22 full service banking offices. The Bank's mortgage lending
division operates eight mortgage lending offices in Aiken, Beaufort, Charleston,
Columbia, Hilton Head Island, North Augusta, and Lexington, South Carolina, and
in Martinez, Georgia. A list of the Company's properties is set forth on page
46 of the Company's 1996 Annual Report and is incorporated herein by
reference.

    The Bank owns its headquarters and operations center and 12 of its 21 branch
banking offices. The Bank leases its branches that are located in Kroger
Supermarkets in North Augusta and Aiken, its branch located in a Wal-Mart
Superstore in Columbia, and its branches in Beaufort, Burton, Charleston and
Mount Pleasant. The Bank also leases one of its branches in Hilton Head Island.

    In 1996, the Bank opened 3 new banking offices in Lexington, Charleston and
Mount Pleasant, South Carolina and one mortgage office in Columbia, South
Carolina. The Bank purchased its Lexington office for approximately $300,000 and
is leasing the other new offices. The Company's capital expenditures for its
four new offices opened in 1996 were $398,000, principally for computers, office
equipment and furniture.

    Data Processing Systems.  Palmetto Federal owns and leases data processing
equipment consisting of computers, terminals and communications equipment.
Palmetto Federal also owns personal computers used for new account setup,
accounting spreadsheets, personnel records, and word processing. Palmetto
Federal conducts in-house data processing of its deposits and loans on a
mainframe computer through the use of applications software licensed by a third
party vendor. The system, which operates in both an on-line, real-time
environment as well as a proof-of-deposit environment, supports teller terminals
and video display terminals located in Palmetto Federal offices and branches. In
1996, the Company upgraded its branch network computer equipment and software
for approximately $240,000.

    At December 31, 1996, the net book value of premises and equipment owned by
the Company was approximately $6.0 million. The information set forth in
Notes 1 and 10 of the Company's Consolidated Financial Statements, included
in the Company's 1996 Annual Report, is incorporated herein by reference.

Item 3. Legal Proceedings.

    The Bank is periodically involved as plaintiff or defendant in various legal
actions incident to its business, none of which are believed by management to be
material to the financial condition of the Company or its subsidiaries.

    On August 3, 1995, the Company and Palmetto Federal filed suit against the
United States in the U.S. Court of Federal Claims seeking damages arising out of
the breach of agreements with the Federal Home Loan Bank Board for the inclusion
of supervisory goodwill in Palmetto Federal's regulatory capital. The suit
relates to the 1982 acquisition by Palmetto Federal of First Federal and the
supervisory goodwill arising from that acquisition. No prediction can be made as
to whether the suit will be successful, or if successful, what damages might be
awarded.

Item 4. Submission of Matters to a Vote of Security Holders.

    No matter was submitted by the Company to a vote of its shareholders during
the fourth quarter ended December 31, 1996.

                                       30
<PAGE>

Executive Officers of PALFED and its Subsidiaries

    The executive officers of PALFED and its subsidiaries are as follows:

<TABLE>
<CAPTION>
                                POSITION(S) WITH
NAME                   AGE      PALFED OR PALMETTO FEDERAL
-------------------    ---      ---------------------------------------------
<S>                    <C>      <C>

W. Barry Adams          48      Executive Vice President,
                                Community Banking and Marketing,
                                of Palmetto Federal, Senior Vice
                                President of PALFED Investment

Patrick D. Cunning      49      Director, Executive Vice President,
                                Asset Management, of Palmetto Federal,
                                President of PSC and WDC

Joe W. DeVore           63      Executive Vice President and Senior
                                Lending Officer of Palmetto Federal

Howard M. Hickey, Jr.   49      Executive Vice President, General Counsel
                                and Corporate Secretary

Holly Z. Johnson        40      Executive Vice President, Director of Human
                                Affairs and Training, of Palmetto Federal

Darrell R. Rains        40      Executive Vice President, Treasurer and Chief
                                Financial Officer

Michael B. Smith        40      Senior Vice President and Controller

John C. Troutman        57      President and Chief Executive Officer

</TABLE>

    Messrs. Troutman, Rains, Hickey and Smith serve in the same capacity for
Palmetto Federal as they do for PALFED.

    W. Barry Adams was named an Executive Vice President, Community Banking and
Marketing, of Palmetto Federal in 1992. From 1984 to 1992 he was a Senior Vice
President, Deposit Services, of Palmetto Federal. Mr. Adams joined Palmetto
Federal in 1974.

    Patrick D. Cunning is an Executive Vice President of Palmetto Federal and
serves as President of Woodside Development Company of Aiken, Inc. and Palmetto
Service Corporation. Prior to being named President of Palmetto Service
Corporation, Mr. Cunning was Chief Appraiser and Vice President of Palmetto
Service Corporation, which he joined in 1975.

    Joe W. DeVore was named Executive Vice President and Senior Lending Officer
of Palmetto Federal in January 1995. Mr. DeVore previously served as Senior Vice
President and Senior Lending Officer of Palmetto Federal since June 1990. Prior
to being named Senior Lending Officer, Mr. DeVore was Senior Vice President,
Consumer/Commercial Lending of Palmetto Federal. He joined Palmetto Federal in
December 1981.

                                       31

<PAGE>

    Howard M. Hickey, Jr. has served as General Counsel of PALFED since 1986 and
as Secretary of PALFED since April 1988. Mr. Hickey joined Palmetto Federal in
1986 as a Vice President and General Counsel, was named Senior Vice President in
1988, and was named an Executive Vice President, Regulatory Affairs, Compliance
and Security in 1992.

    Holly Z. Johnson was named Executive Vice President of Human Affairs and
Training of Palmetto Federal in January 1997. She previously had served as a
Senior Vice President since January 1994. Ms. Johnson joined Palmetto Federal in
1986 as Director of Human Resources, was named Assistant Vice President in 1987
and was named Vice President in 1990.

    Darrell R. Rains serves as Executive Vice President, Chief Financial Officer
and Treasurer of PALFED. Prior to being named an Executive Vice President in
1992, Mr. Rains had served as Senior Vice President and Chief Financial Officer
of PALFED since April 1990 and as Treasurer of PALFED since 1989. Mr. Rains
joined Palmetto Federal in June 1984.

    Michael B. Smith has served as Senior Vice President since January 1994. Mr.
Smith joined PALFED in April 1989 as Vice President and Controller. From
December 1987 to April 1989, he was an agency accountant with the Federal Home
Loan Bank of Atlanta.

    John C. Troutman became the President and Chief Executive Officer of PALFED
and Palmetto Federal on March 1, 1993. Prior to 1993, he held a number of
positions with Citizens and Southern National Bank (now NationsBank), most
recently as the Southeast Florida Commercial Division Manager for NationsBank.
From 1989 to 1992 he was Regional Executive Vice President, East Coast of
Florida for Citizens and Southern National Bank of Florida.

                                       32

<PAGE>

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.

    PALFED's Common Stock is traded in the over-the-counter market and is quoted
in the Nasdaq National Market under the symbol "PALM". As of February 12, 1997,
there were approximately 579 shareholders of record. The following table sets
forth the high and low closing prices of the Company's Common Stock for the
periods indicated as reported on the Nasdaq National Market System.

<TABLE>
<CAPTION>
                                            PRICE RANGE OF COMMON STOCK
                                            ---------------------------
                                              HIGH               LOW
                                            ---------         ---------
<S>                                         <C>               <C>
1996    First Quarter                         $13.25            $11.25
        Second Quarter                         13.50             11.88
        Third Quarter                          14.75             11.63
        Fourth Quarter                         15.25             13.00

1995    First Quarter                         $ 9.63            $ 7.00
        Second Quarter                         11.25              8.63
        Third Quarter                          12.25             11.00
        Fourth Quarter                         13.25             11.00

</TABLE>

    The Company's ability to pay dividends is limited only by certain
requirements generally imposed on South Carolina corporations. Under South
Carolina law, corporations generally may pay dividends only out of unreserved
and unrestricted earned surplus. In 1996, the Company paid a quarterly cash
dividend of $0.02 per share and aggregate cash dividends of $418,000. In
January, 1997 the Company increased the quarterly cash dividend to $0.03 per
share.

    Payment of dividends by the Bank to the Company is subject to certain
restrictions and would require prior notice to and approval of the OTS.

Item 6. Selected Financial Data.

    The selected financial data set forth under "Selected Financial Data"
appearing on page 6 of the Company's 1996 Annual Report is incorporated herein
by reference in response to the information required by this Item.

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

    The information set forth under "Management's Discussion and Analysis"
appearing on pages 7 through 17 of the Company's 1996 Annual Report is
incorporated herein by reference in response to the information required by this
Item.

                                       33
<PAGE>

Item 8. Financial Statements and Supplementary Data.

    The Consolidated Financial Statements of PALFED, Inc. and Subsidiaries,
together with a report thereon of Coopers & Lybrand L.L.P. dated February 22,
1997, which report includes an explanatory paragraph concerning changes in the
Company's methods of accounting for impaired loans and mortgage servicing rights
in 1995, appearing on pages 18 to 42 of the Company's 1996 Annual Report are
incorporated herein by reference in response to the information required by this
Item.

Item 9. Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure.

    PALFED has not, within the twenty-four months preceding its financial
statements as of December 31, 1996, filed or been required to file a Form 8-K
(i) reporting a change of accountants, or (ii) reporting a disagreement on any
matter of accounting principles or practices or financial statement disclosure.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

    Information concerning the directors of PALFED and the executive officers
who are directors of PALFED is set forth in PALFED's Proxy Statement for the
1997 Annual Meeting of Shareholders to be held on April 22, 1997 (the "1997
Proxy Statement") under the caption entitled "Election of Directors--
Information as to Nominees and Other Directors" and is incorporated herein by
reference in response to the information required by this Item.

    Information concerning executive officers of PALFED is contained in a
separate section entitled "Executive Officers of PALFED and its Subsidiaries" in
Part I of this Report and is incorporated herein by reference in response to the
information required by this Item.

    The information concerning compliance with section 16(a) of the Exchange Act
appearing on page 5 of the 1997 Proxy Statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated herein by reference
in response to the information required by this Item.

Item 11. Executive Compensation.

    The information set forth at pages 12 to 17 in the 1997 Proxy Statement
under the heading entitled "Executive Compensation and Other Information" is
incorporated herein by reference in response to the information required by this
Item.

    Pursuant to Item 402(a)(9) of Regulation S-K, as promulgated by the SEC, the
material appearing in the 1997 Proxy Statement on pages 8 to 11 under the
headings "Compensation Committee Report" and "Shareholder Return" shall not be
deemed to be "soliciting material" to be "filed" with the SEC or to be subject
to Regulations 14A or 14C, other than as provided in Item 402, or to the
liabilities of Section 18 of the Exchange Act, and no general incorporation of
such material by reference, whether made before or after the date hereof, shall
be deemed to specifically request that it be treated as soliciting material or
specifically incorporate it by reference into a filing under the Securities Act
of 1933, as amended, or the Exchange Act within the meaning of Item 402(a)(9).

                                       34
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management.

    Information concerning the security ownership of the Company's Common Stock
is set forth in the 1997 Proxy Statement under the heading "Security Ownership
of Certain Beneficial Owners and Management" and is incorporated herein by
reference in response to the information required by this Item.

Item 13. Certain Relationships and Related Transactions.

    The information set forth under the caption "Transactions with Officers and
Directors" on pages 17 and 18 in the 1997 Proxy Statement is incorporated herein
by reference in response to the information required by this Item.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

    (a) Documents.

    The consolidated financial statements of PALFED, Inc. and Subsidiaries
contained in the Company's 1996 Annual Report incorporated by reference in this
report are listed below in response to the information required by this item:

<TABLE>
<CAPTION>
                                                          PAGE
                                                         ------
<S>                                                      <C>

(1) Financial Statements:

Report of Independent Accountants...................       18
Consolidated Statements of Financial Condition......       19
Consolidated Statements of Income...................       20
Consolidated Statements of Shareholders' Equity.....       21
Consolidated Statements of Cash Flows...............       22
Notes to Consolidated Financial Statements..........       24

</TABLE>

(2) Financial Statement Schedules:

    All schedules have been omitted as the required information is either
inapplicable or shown in the consolidated financial statements or notes thereto.

                                       35

<PAGE>

(3) Exhibits:

<TABLE>
<CAPTION>

<S>     <C>
 3.1    Restated Articles of Incorporation of PALFED, Inc.(1)

 3.2    Bylaws of PALFED, Inc., as amended.(2)

10.1*   Amended and Restated Incentive Stock Option Plan.(3)

10.2*   PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)

10.3*   PALFED, Inc. Amended and Restated Director Stock Plan.(5)

10.4*   PALFED, Inc. 1993 Stock Option Plan.(6)

10.5*   PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)

10.6*   PALFED, Inc. 1995 Stock Option Plan (8)

10.7    Membership Agreement dated December 27, 1990 between Woodside Development Company of
        Aiken, Inc. and Woodside Plantation Country Club, Inc. for the purchase of club
        memberships.(9)

10.8    Option Agreement dated December 30, 1993 by and between Woodside Development Company
        of Aiken, Inc. and Woodside Development Limited Partnership.(10)

10.9*   Form of Executive Salary Continuation Agreement dated as of November 1, 1996 among
        PALFED, Inc., Palmetto Federal Savings Bank of South Carolina and each of the
        following officers: John C. Troutman, W. Barry Adams, Patrick D. Cunning, Joe W.
        DeVore, Howard M. Hickey, Jr., Holly Z. Johnson, John Mullen, III, Darrell R. Rains
        and Michael B. Smith.(11)

11      Statement Regarding Computation of Per Share Earnings.

13      Annual Report to Shareholders for the year ended December 31, 1996 (except for those
        portions which are expressly incorporated by reference in this filing) is furnished
        for the information of the SEC and is not to be deemed "filed" as part of this filing.

21      Subsidiaries of the Registrant.

23      Consent of Independent Certified Public Accountants.

27      Financial Data Schedule

99.1    Annual Report on Form 11-K for PALFED, Inc. Employee Savings and Stock Ownership Plan
        (to be filed by amendment).
</TABLE>

------------------------
*   Indicates management contract or compensatory plan or arrangement.

(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's Registration
    Statement on Form S-2, File Number 33-65338, filed with the Commission on
    July 1, 1993.

(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's Current Report
    on Form 8-K dated October 21, 1996, filed with the Commission on October 22,
    1996.

(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
    Statement on Form S-8, File Number 33-23667, filed with the Commission on
    August 10, 1988.

(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65482,
    filed with the Commission on September 16, 1994.

                                       36

<PAGE>

------------------------
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-93276,
    filed with the Commission on May 20, 1996.

(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65484,
    filed with the Commission on May 20, 1996.

(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65480,
    filed with the Commission on May 20, 1996.

(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
    Statement on Form S-8, File Number 333-00615, filed with the Commission on
    February 1, 1996.

(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's Annual Report
    on Form 10-K for the year ended December 31, 1990, as amended by Form 8,
    filed with the Commission on May 24, 1993.

(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual Report on Form
     10-K for the year ended December 31, 1993, filed with the Commission on
     March 31, 1994.

(11) Incorporated by reference to Exhibit 10.1 to PALFED's Quarterly Report on
     Form 10-Q for the quarter ended September 30, 1996, filed with the
     Commission on November 14, 1996.

     (b) Reports on Form 8-K.

     The Company filed the following reports on Form 8-K during the fourth
quarter ended December 31, 1996:

     (i) Form 8-K dated October 21, 1996 reporting the adoption of amendments to
the Company's Bylaws; and

     (ii) Form 8-K dated November 20, 1996 reporting the receipt of a
shareholder proposal for inclusion in the Company's proxy statement for the
1997 Annual Meeting of Shareholders.

                                       37

<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

    PALFED, INC.

    By: /s/ John C. Troutman                               March 25, 1997
        --------------------------------
        John C. Troutman, President
        and Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

    By: /s/ Albert H. Peters, Jr.                          March 25, 1997
        --------------------------------
        Albert H. Peters, Jr.
        Chairman of the Board

    By: /s/ John C. Troutman                               March 25, 1997
        --------------------------------
        John C. Troutman, President
        and Chief Executive Officer

    By: /s/ Darrell R. Rains                               March 25, 1997
        --------------------------------
        Darrell R. Rains, Executive Vice
        President, Treasurer and Chief
        Financial Officer

    By: /s/ Michael B. Smith                               March 25, 1997
        --------------------------------
        Michael B. Smith, Senior
        Vice President and Controller

    By: /s/ William F. Cochrane                            March 25, 1997
        --------------------------------
        William F. Cochrane,
        Director

    By: /s/ Patrick D. Cunning                             March 25, 1997
        --------------------------------
        Patrick D. Cunning,
        Director

                      (Signatures continued on next page)

                                       38

<PAGE>

    By: /s/ Edward Larry Hutto                             March 25, 1997
        --------------------------------
        Edward Larry Hutto,
        Director

    By:                                                    March 25, 1997
        --------------------------------
        Harold D. Kingsmore,
        Director

    By: /s/ R. Bruce McBratney                             March 25, 1997
        --------------------------------
        R. Bruce McBratney,
        Director

    By: /s/ Ambrose L. Schwallie                             March 25, 1997
        --------------------------------
        Ambrose L. Schwallie,
        Director

    By: /s/ Charles E. Simons, III                           March 25, 1997
        --------------------------------
        Charles E. Simons, III,
        Director



                                     * * *




                                       39

<PAGE>

<TABLE>
<CAPTION>
                                                                                         SEQUENTIALLY
                                                                                          NUMBERED
                               INDEX TO EXHIBITS                                            PAGE
                               -----------------                                        -----------
<S>     <C>                                                                              <C>
 3.1    Restated Articles of Incorporation of PALFED, Inc.(1)

 3.2    Bylaws of PALFED, Inc., as amended.(2)

10.1*   Amended and Restated Incentive Stock Option Plan.(3)

10.2*   PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)

10.3*   PALFED, Inc. Amended and Restated Director Stock Plan.(5)

10.4*   PALFED, Inc. 1993 Stock Option Plan.(6)

10.5*   PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)

10.6*   PALFED, Inc. 1995 Stock Option Plan (8)

10.7    Membership Agreement dated December 27, 1990 between Woodside
        Development Company of Aiken, Inc. and Woodside Plantation Country Club,
        Inc. for the purchase of club memberships.(9)

10.8    Option Agreement dated December 30, 1993 by and between Woodside
        Development Company of Aiken, Inc. and Woodside Development Limited
        Partnership.(10)

10.9*   Form of Executive Salary Continuation Agreement dated as of November
        1, 1996 among PALFED, Inc., Palmetto Federal Savings Bank of South
        Carolina and each of the following officers: John C. Troutman, W. Barry
        Adams, Patrick D. Cunning, Joe W. DeVore, Howard M. Hickey, Jr., Holly
        Z. Johnson, John Mullen, III, Darrell R. Rains and Michael B. Smith.(11)

11      Statement Regarding Computation of Per Share Earnings.

13      Annual Report to Shareholders for the year ended December 31, 1996
        (except for those portions which are expressly incorporated by reference
        in this filing) is furnished for the information of the SEC and is not
        to be deemed "filed" as part of this filing.

21      Subsidiaries of the Registrant.

23      Consent of Independent Certified Public Accountants.

27      Financial Data Schedule

99.1    Annual Report on Form 11-K for PALFED, Inc. Employee Savings and Stock
        Ownership Plan (to be filed by amendment).
</TABLE>

------------------------
*   Indicates management contract or compensatory plan or arrangement.

(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's Registration
    Statement on Form S-2, File Number 33-65338, filed with the Commission on
    July 1, 1993.

(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's Current Report
    on Form 8-K dated October 21, 1996, filed with the Commission on October 22,
    1996.

                                       40

<PAGE>

------------------------

(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
    Statement on Form S-8, File Number 33-23667, filed with the Commission on
    August 10, 1988.

(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65482,
    filed with the Commission on September 16, 1994.

(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-93276,
    filed with the Commission on May 20, 1996.

(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65484,
    filed with the Commission on May 20, 1996.

(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
    Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65480,
    filed with the Commission on May 20, 1996.

(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
    Statement on Form S-8, File Number 333-00615, filed with the Commission on
    February 1, 1996.

(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's Annual Report
    on Form 10-K for the year ended December 31, 1990, as amended by Form 8,
    filed with the Commission on May 24, 1993.

(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual Report on Form
    10-K for the year ended December 31, 1993, filed with the Commission on
    March 31, 1994.

(11) Incorporated by reference to Exhibit 10.1 to PALFED's Quarterly Report on
    Form 10-Q for the quarter ended September 30, 1996, filed with the
    Commission on November 14, 1996.



                                       41