<PAGE>
 
                                  EXHIBIT 13

                                 Annual Report
<PAGE>
 
                                 ANNUAL REPORT

                              September 30, 1997



                     FIRST PALMETTO FINANCIAL CORPORATION
<PAGE>
 
                               TABLE of CONTENTS


<TABLE>
<CAPTION>
 
<S>                                                                                       <C>

Letter to Stockholders                                                                        1


FIRST PALMETTO FINANCIAL CORPORATION
------------------------------------

 The Company                                                                                  2
 
 Selected Consolidated Financial and Other Data                                             2-3
 
 Management's Discussion and Analysis of Financial Condition and Results of Operations     4-15
 
 Consolidated Financial Statements
   Consolidated Statements of Financial Condition                                            16
   Consolidated Statements of Income                                                         17
   Consolidated Statements of Stockholders' Equity                                           18
   Consolidated Statements of Cash Flows                                                  19-20
   Notes to Consolidated Financial Statements                                             21-41
 
 Independent Auditors' Report                                                                42
 
 Board of Directors and Executive Officers                                                   43
 
 Corporate Information                                                                       44
 
 Common Stock Information                                                                    45
</TABLE>
<PAGE>
 
Dear First Palmetto Stockholder:


We are happy to report to you that First Palmetto again had a very successful
year.  Our earnings were a record $3.33 million or $4.80 per share.  This is
compared to our previous year's earnings of $2 million or $2.90 per share.  You
may recall from the previous year's report, however, that those earnings were
impacted by a one-time recapitalization fee charged by the F.D.I.C. that had an
$813,000 negative effect on earnings.


Financial highlights for fiscal 1997 were:


     Assets increased to $372.9 million from $344.5 million, an increase of
     8.2%.

     Loans increased to $252.3 million from $227.2 million, an increase of 11%.

     Our dividend paid was $1.90 per share up from $1.60 per share paid in the
     previous year.


We have continued our ongoing process of looking for opportunities for growth
and during the fiscal 1997, we opened our new office in Lexington.  We also
acquired a new office location in North Myrtle Beach which was opened December
1, 1997.

We have continued our commitment to staying in the forefront technologically and
we completed and opened our new operations center at the corner of Broad and
DeKalb streets in Camden.  These new quarters will give us the space and ability
to continue to fulfill our intention to insure your institution is ready to meet
the technological challenges of the next century.

We have been able to maintain high quality in our asset portfolio and our
nonperforming assets at September 30, 1997, were $1.31 million or .35% of total
assets compared to $1.46 million or .43% of total assets at September 30, 1996.
Our loan loss reserves were $3.0 million at September 30, 1997, compared to $2.4
million at September 30, 1996.

We are very pleased with the financial condition and the results of operations
of First Palmetto and look forward to the continuing successful operations of
your Bank.  The staff and directors of First Palmetto are committed to share
enhancement by providing excellent service to our customers and by staying
actively involved in the communities we serve.



                                        Very truly yours,

                                        Samuel R. Small, President and
                                        Chief Executive Officer

                                       1
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION


THE COMPANY


   First Palmetto Financial Corporation ("First Palmetto") is a holding company
organized to provide ownership for First Palmetto Savings Bank, F.S.B. (the
"Bank"), a wholly owned subsidiary.  The Bank is a federally chartered stock
savings bank.  The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") and the Bank is regulated by the Office of Thrift
Supervision ("OTS").  The Bank's business is conducted through its home office
located in Camden, South Carolina and through fifteen branch offices in other
South Carolina locations of Beaufort, Bishopville, Camden, Columbia, Darlington,
Elgin, Irmo, Kershaw, Lancaster, Lexington, Lugoff, Manning, Pageland and
Pontiac.

   The Bank is engaged in the business of attracting deposits from the general
public and investing in loans secured by first liens on single and multi-family
residences, condominiums, commercial properties, and on other improved real
estate.  The Bank originates loans secured by first liens on land to be
developed into lots ready for construction of single family homes.  The Bank
also invests in unsecured and secured home improvement loans, automobile loans,
equity loans on residential real estate, interest-bearing bank deposits, U.S.
Government and agency obligations, mortgage-backed securities and other
investments as permitted by applicable laws and regulations.

   First Palmetto's results of operations depend primarily on its net interest
income,  which is the difference between the interest income it receives from
its loan and investment portfolios and its cost of funds.  Other significant
sources of income are service charges on deposit accounts and loan servicing
fees.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

   The following tables present selected consolidated financial information and
other data for First Palmetto at the dates and for the periods indicated.


Consolidated Financial Condition Data
<TABLE>
<CAPTION>
 
                                                       At September 30,
                                       ------------------------------------------------
                                         1997      1996      1995      1994      1993
                                       --------  --------  --------  --------  --------
                                                        (In thousands)
<S>                                    <C>       <C>       <C>       <C>       <C>
Assets                                 $372,948  $344,547  $323,183  $278,056  $226,370
Loans, net                              252,336   227,209   198,373   163,649   158,551
Cash and investment securities (a)       74,030    70,519    71,807    72,826    34,232
Mortgage-backed securities               32,367    33,010    39,410    31,159    25,466
Deposits                                320,769   288,157   267,313   225,417   189,334
Federal Home Loan Bank
  ("FHLB") advances                      27,233    32,550    33,367    31,000    17,000
Stockholders' equity, substantially
  restricted                             22,855    20,208    19,345    17,804    16,429
</TABLE>
(a) Includes cash and due from banks, interest-bearing deposits in other banks,
    certificates of deposit in other banks, available-for-sale securities and
    investment securities.

                                       2
<PAGE>
 
                      FIRST PALMETTO FINANCIAL CORPORATION



   Summary of Operations-The following table summarizes First Palmetto's results
of operations for the periods indicated:
<TABLE>
<CAPTION>
 
                                                     Years Ended September 30,
                                          ------------------------------------------------
                                              1997      1996      1995      1994      1993
                                          --------  --------  --------  --------  --------
                                                           (In thousands)
<S>                                       <C>       <C>       <C>       <C>       <C>
Interest income                           $27,902   $26,016   $22,794   $16,890   $15,497
Interest expense                           15,025    14,186    12,483     8,213     7,376
                                          -------   -------   -------   -------   -------
Net interest income                        12,877    11,830    10,311     8,677     8,121
Provision for loan losses                   1,428       885       482       523       720
                                          -------   -------   -------   -------   -------
Net interest income after provision
  for loan losses                          11,449    10,945     9,829     8,154     7,401
Other income                                2,636     2,255     1,934     1,651     1,466
Other expense                               8,846     9,993     8,105     6,597     5,958
                                          -------   -------   -------   -------   -------
Income before income taxes                  5,239     3,207     3,658     3,208     2,909
Income taxes                                1,909     1,195     1,300     1,184     1,137
Cumulative effect of change
 in accounting principle                        -         -         -       243         -
                                          -------   -------   -------   -------   -------
Net income                                $ 3,330   $ 2,012   $ 2,358   $ 2,267   $ 1,772
                                          =======   =======   =======   =======   =======
 
Financial Ratios
<CAPTION> 

                                                     Years Ended September 30,
                                          -----------------------------------------------
                                             1997      1996      1995      1994      1993
                                          -------   -------   -------   -------   -------
<S>                                       <C>       <C>       <C>       <C>       <C>
Return on assets (net income divided
 
  by average total assets)                    .93%      .61%      .78%      .90%      .81%
 
Return on equity (net income divided
  by average equity)                        15.68%    10.33%    13.17%    13.25%    11.27%
 
Equity-to-assets ratio (average equity
  divided by average total assets)           6.00%     5.87%     5.90%     6.79%     7.17%
 
Net income per share                      $  4.80   $  2.90   $  3.40   $  3.36   $  2.65
 
Book value per share                      $ 32.28   $ 29.16   $ 27.90   $ 25.68   $ 24.51
 
Dividends per share                       $  1.90   $  1.60   $  1.40   $  1.25   $  1.10
</TABLE>

                                       3
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS of OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1996

   Net income for the fiscal year ended September 30, 1997, was $3.3 million as
compared to $2.0 million for the preceding fiscal year.  Net income increased by
$1.3 million or 65.5%.

   The primary reason for the increase in net income was a one-time special
assessment by the FDIC during the fiscal year ending September 30, 1996, in the
amount of $1.3 million ($813,000 net of income tax) to recapitalize the Savings
Association Insurance Fund (SAIF).  This one-time charge resulted in total
insurance premiums for the 1996 fiscal year in the amount of $1.8 million as
compared to $289,000 for the current fiscal year.

   Net interest income for fiscal 1997 equaled $12.9 million as compared to
$11.8 million for the fiscal year ended September 30, 1996.  The increase of
8.9% amounted to $1.1 million.  Other income for fiscal 1997 was $2.6 million as
compared to $2.3 million for fiscal 1996 while other expense for the respective
fiscal years were $8.8 million and $10.0 million.  A more detailed discussion of
the comparative years follows.

   Net interest income increased by $1.1 million or 8.9%.  The primary reason
for the increase in net interest income was an increase in average interest-
earning assets for fiscal 1997 of approximately $23.7 million.  The yield on
interest-earning assets was relatively constant, decreasing only .03%.  Average
cost of funds increased during the year from 4.82% during the year ended
September 30, 1996 to 4.83% during the year ended September 30, 1997.  Interest
rate spread decreased to 3.51% as compared to 3.55% for the previous year.

   Total interest income for fiscal 1997 was $27.9 million, up $1.9 million or
7.2% from $26.0 million for fiscal 1996.  The primary reason for the increase
was an increase in average interest-earning assets due to an increase in loan
demand mainly in commercial real estate and in 1-4 family real estate loans.
The average yield on interest earning assets decreased slightly to 8.34% for
fiscal 1997 versus 8.37% for fiscal year 1996.

   Total interest expense for fiscal 1997 was $15.0 million compared to $14.2
million for fiscal 1996.  The increase of $839,000 represented a 5.9% increase
in interest expense.  The increase in interest expense was primarily due to the
increase in average interest-bearing liabilities as a result of deposits
received by offering highly competitive rates in targeted markets.  Cost of
funds remained stable at 4.83% for the 1997 period as compared to 4.82% for the
1996 period.  Average interest-bearing liabilities were $311.0 million at
September 30, 1997 as compared to $294.2 million at September 30, 1996.

                                       4
<PAGE>
 
Average Balances, Interest and Average Yields
---------------------------------------------


  The following table sets forth certain information relating to First
Palmetto's average balance sheets and reflects the average yields on assets and
average costs of liabilities for the periods indicated and the average yields
earned and rates paid at September 30, 1997.  Such yields and costs are derived
by dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
 
 
                                                                     Years Ended September 30,
                             -----------------------------------------------------------------------------------------
                                         1997                          1996                          1995             
                                       --------                      --------                      --------           
                                                 Average                       Average                       Average  
                             Average              Yield/   Average              Yield/   Average              Yield/  
                             Balance   Interest    Cost    Balance   Interest    Cost    Balance   Interest    Cost   
                             --------  --------  --------  --------  --------  --------  --------  --------  -------- 
                                                                      (Dollars in thousands)                          
<S>                          <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>      
Interest-earning assets:                                                                                              
                                                                                                                      
 Loans (1)                   $240,224   $21,576     8.98%  $212,955   $19,477     9.15%  $178,475   $15,949     8.94% 
 Interest-earning deposits     15,411     1,000     6.49      9,619       694     7.21      7,856       485     6.17  
 Investment securities (2)     46,632     3,163     6.78     51,882     3,411     6.57     58,997     3,684     6.24  
                                                                                                                      
 Mortgage-backed securities    32,249     2,163     6.71     36,365     2,434     6.69     39,604     2,676     6.76  
                             --------   -------     ----   --------   -------     ----   --------   -------     ----  
                                                                                                                      
  Total interest-earning                                                                                              
   assets                     334,516    27,902     8.34    310,821    26,016     8.37    284,932    22,794     8.00  
                                        -------     ----              -------     ----              -------     ----  
                                                                                                                      
Noninterest-earning assets     19,061                        21,127                        18,286                     
                             --------                      --------                      --------                     
  Total assets               $353,577                      $331,948                      $303,218                     
                             ========                      ========                      ========                     

<CAPTION> 
                                   At September      
                                       1997          
                             ----------------------    
                                                 
                             Balance           Rate     
                             --------          ----     
                             (Dollars in Thousands)
<S>                           <C>              <C> 
Interest-earning assets:      $252,336         8.84%                      
                                18,484         5.39                        
 Loans (1)                      48,825         6.63                        
 Interest-earning deposits      32,367         6.70                        
 Investment securities (2)    --------         ----                        
                               352,012         8.13                        
 Mortgage-backed securities                    ----                        
                                                                    
  Total interest-earning        20,936                              
   assets                     --------                              
                              $372,948                              
Noninterest-earning assets    ========                               
                             
  Total assets               

</TABLE> 

(1) Average balances include non-accrual loans.
(2) Includes available-for-sale securities.

                                       5
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                             Years Ended September 30,
                             -------------------------------------------------------------------------------------------------------

                                         1997                          1996                          1995
                                       --------                      --------                      --------
                                                 Average                       Average                       Average  
                                                                                                                      
                                                                                                                      
                             Average              Yield/   Average              Yield/   Average              Yield/  
                             Balance   Interest    Cost    Balance   Interest    Cost    Balance   Interest    Cost   
                             --------  --------  --------  --------  --------  --------  --------  --------  -------- 
                                                                  (Dollars in thousands)                              
<S>                          <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>      
Interest-bearing                                                                                                      
 liabilities:                                                                                                         
                                                                                                                      
  Interest-bearing demand                                                                                             
   deposits (1)              $ 56,923   $ 1,487     2.61%  $ 54,503   $ 1,378     2.53%  $ 45,956   $ 1,233     2.68% 
  Savings deposits             22,151       562     2.54     23,181       586     2.53     22,939       641     2.79  
  Time deposits               203,052    11,369     5.60    183,357    10,365     5.65    165,717     8,505     5.13  
                                                                                                                      
  FHLB borrowings              28,906     1,607     5.56     33,202     1,857     5.59     37,314     2,104     5.64  
                             --------   -------     ----   --------  --------  -------   --------  --------  -------  
   Total interest-bearing                                                                                             
    liabilities               311,032    15,025     4.83    294,243    14,186     4.82    271,926    12,483     4.59  
                             --------   -------     ----   --------  --------  -------   --------  --------  -------  
Noninterest-bearing                                                                                                   
 liabilities:                                                                                                         
  Noninterest demand                                                                                                  
   deposits                    19,886                        15,585                        10,864                  -  
  Other                         2,149                         2,645                         2,524                  -  
                             --------                      --------                      --------                     
   Total liabilities          333,067                       312,473                       285,314                     
Stockholders' equity           20,510                        19,475                        17,904                     
                             --------                      --------                      --------                     
   Total liabilities and                                                                                              
    stockholders' equity     $353,577                      $331,948                      $303,218                     
                             ========                      ========                      ========                     
Net interest income                     $12,877                       $11,830                       $10,311           
                                        =======                      ========                      ========           
                                                                                                                      
Interest rate spread                                3.51%                         3.55%                         3.41% 
                                                    ====                       =======                       =======  
                            
Net yield on average        
 interest-earning           
                            
 assets                                             3.85%                         3.81%                         3.62%
                                                    ====                       =======                       =======
                            
Ratio of average            
 interest-earning           
 assets to average          
  interest-bearing          
                            
 liabilities                                        1.08%                         1.06%                         1.05%
                                                    ====                       =======                       =======

                                      At September  
                                          1997      
                                 ---------------------
                                                      
                                 Balance         Rate 
                                 -------         ---- 
                                (Dollars in thousands)                          
<S>                              <C>             <C>  
Interest-bearing                                      
 liabilities:                                         
                                             
  Interest-bearing demand                    
   deposits (1)                  $ 57,222        2.72% 
  Savings deposits                 22,038        2.54  
  Time deposits                   218,964        5.65  
                                                       
  FHLB borrowings                  27,233        5.81  
                                 --------        ----  
   Total interest-bearing                              
    liabilities                   325,457        4.92  
                                 --------        ----  
Noninterest-bearing                              
 liabilities:                                    
  Noninterest demand                             
   deposits                        22,545        
  Other                             1,882        
                                 --------        
   Total liabilities              349,884        
Stockholders' equity               23,064        
                                 --------        
   Total liabilities and                         
    stockholders' equity         $372,948        
                                 ========        
Net interest income                              
                                                 
                                                 
Interest rate spread                       3.21% 
                                           ====   
                            
Net yield on average        
 interest-earning           
 assets                     
                            
                            
Ratio of average            
 interest-earning           
 assets to average          
  interest-bearing         
 liabilities               
                           
 </TABLE> 
          
  (1)  Includes NOW's and MMDA 
                                 

                                       6
<PAGE>
 
 Rate/Volume Analysis   
 --------------------   
   The following table sets forth certain information regarding changes in First
Palmetto's interest income and interest expense for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume (change
in volume multiplied by the prior year's rate); (2) changes in rates (change in 
rate multiplied by the prior year's volume); and (3) changes in rate-volume 
(change in rate multiplied by the change in volume). The combined effect of 
changes in rate-volume has been allocated proportionately to changes in volume 
and rate.
<TABLE> 
<CAPTION> 

                                                            Years Ended September 30,
                                      ----------------------------------------------------------------------
                                              1997 vs. 1996                         1996 vs. 1995
                                      ------------------------------        --------------------------------
                                         Increase (Decrease)                      Increase (Decrease)
                                               Due to                                   Due to
                                      ------------------------------        --------------------------------
                                       Volume       Rate      Total         Volume      Rate        Total
                                      ---------  ----------  -------        -------  ------------  -------
                                                              (In thousands)
<S>                                   <C>          <C>      <C>             <C>         <C>         <C>
Interest income:                                                                                  
 Loans                                  $2,472      $(373)  $2,099          $3,119      $409        $3,528
 Investment securities                    (350)       102     (248)           (457)      184          (273)
 Mortgage-backed securities               (275)         4     (271)           (218)      (24)         (242)
 Other                                     397        (91)     306             118        91           209
                                        ------      -----   ------          ------      ----        ------
                                                                                                  
Total interest-earning assets            2,244       (358)   1,886           2,562       660         3,222
                                        ------      -----   ------          ------      ----        ------
                                                                                                  
                                                                                                  
Interest expense:                                                                                 
 Deposits                                  999         90    1,089           1,286       664         1,950
 FHLB advances                            (239)       (11)    (250)           (230)      (17)         (247)
                                        ------      -----   ------          ------      ----        ------
                                                                                                  
Total interest-bearing liabilities         760         79      839           1,056       647         1,703
                                        ------      -----   ------          ------      ----        ------
                                                                                                  
Net interest income                     $1,484      $(437)  $1,047          $1,506      $ 13        $1,519
                                        ======      =====   ======          ======      ====        ======
</TABLE>

                                       7
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION


   The provision for loan losses for fiscal 1997 was $1.4 million compared to
$885,000 for the preceding year.  The increased provision for loan losses
resulted from the higher level of loans outstanding and the continuing shift in
the loan mix from lower risk residential lending to higher risk consumer and
commercial lending.  Net charge-offs to the allowance for loan losses were
$783,000 during the fiscal year ended September 30, 1997, as compared to
$321,000 for the year ended September 30, 1996.  The balance in the allowance
for loan losses at September 30, 1997 was $3.0 million compared to $2.4 million
at September 30, 1996.  The allowance for loan losses as a percentage of loans
was 1.18% and 1.04% at September 30, 1997 and 1996, respectively.  Management
continually reviews the adequacy of the allowance for loan losses, considering
such factors as reviews of delinquent loans and other loans with problems,
composition of the Bank's loan portfolio, history of charge-offs, general
economic conditions that may affect borrowers ability to repay and the value of
collateral.

   Other income for fiscal 1997 was $2.6 million as compared to $2.3 million for
fiscal 1996.  Other income remained relatively stable with the increase being
primarily attributable to gain on sale of investments in the amount of $254,000.

   Other expenses for fiscal 1997 was $8.8 million compared to $10.0 million for
fiscal 1996, a decrease of $1.2 million or 11.5%.  The primary decrease was in
federal insurance premiums.  During the year ended September 30, 1996, the Bank
was assessed by the FDIC a one-time special assessment of $1.3 million.  This
assessment was made in order to recapitalize the SAIF.  Deposit insurance
premiums during the 1997 year were lower as a result of the recapitalization of
the SAIF.  Insurance, telephone, postage, supplies and other increased primarily
due to increased expenses as a result of the opening of the Lexington branch in
fiscal 1997.  Tabular comparisons of broad expense categories for fiscal 1997
compared to fiscal 1996 are as follows:
<TABLE>
<CAPTION>
 
 
                                                      Years Ended
                                                      September 30,
                                                   -------------------
                                                      1997       1996
                                                   -----------  ------
                                                     (In thousands)
<S>                                                <C>          <C>
   Compensation and related benefits                    $3,979  $3,658
   Occupancy and data processing fees                    2,130   1,848
   Federal deposit and other insurance premiums            367   1,877
   Amortization of intangible assets                       579     769
   Telephone, postage, supplies and other                1,791   1,841
                                                        ------  ------
      Totals                                            $8,846  $9,993
                                                        ======  ======
 
</TABLE>

   The effective tax rate was 36.4% for the year ended September 30, 1997 as
compared to 37.3% for the year ended September 30, 1996.  See Note 12 to the
Notes to Consolidated Financial Statements.



RESULTS of OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, COMPARED
with the FISCAL YEAR ENDED SEPTEMBER 30, 1995



   Net income for the fiscal year ended September 30, 1996, was $2.0 million as
compared to $2.4 million for the preceding fiscal year.  Net income decreased by
$346,000 or 14.7%.


   The reason for the decrease in net income was one-time special assessment by
the FDIC in the amount of $1.3 million ($813,000 net of income tax).  This one-
time charge resulted in total federal deposit insurance premiums for the fiscal
year in the amount of $1.8 million as compared to $618,000 for the preceding
fiscal year.

                                       8
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

   Net interest income for fiscal 1996 equaled $11.8 million as compared to
$10.3 million for the fiscal year ended September 30, 1995.  The increase of
14.6% amounted to $1.5 million.  Other income for each of the respective years
was $2.3 million as compared to $1.9 million while other expense for the
respective fiscal years was $10.0 million and $8.1 million.  A more detailed
discussion of the comparative years is as follows:

   Net interest income increased by $1.5 million or 14.6%.  The primary reasons
for the increase in net interest income was an increase in average interest-
earning assets for fiscal 1996 by approximately $26.0 million and an increase in
yield on interest-earning assets.  The increase in yield on interest-earning
assets was primarily a result of the Bank's mix of assets moving into higher
interest-earning categories.  Average cost of funds increased during the year
from 4.59% during the year ended September 30, 1995 to 4.82% during the year
ended September 30, 1996.  The interest rate spread increased to 3.55% as
compared to 3.41% for the previous year.

   Total interest income for fiscal 1996 was $26.0 million, up $3.2 million or
14.0% from $22.8 million for fiscal 1995.  The primary reason for the increase
was an increase in average interest-earning assets due to an increase in loan
demand mainly in commercial real estate and in 1-4 family real estate loans.
The average yield on interest-earning assets increased to 8.37% for fiscal 1996
versus 8.00% for fiscal year 1995.

   Total interest expense for fiscal 1996 was $14.2 million compared to $12.5
million for fiscal 1995. The increase of $1.7 million represented a 13.6%
increase in interest expense. The increase in interest expense was primarily due
to the increase in average interest-bearing liabilities as a result of deposits
received by offering highly competitive rates in targeted markets. Cost of funds
increased to 4.82% for the 1996 period as compared to 4.59% for the 1995 period.
Average interest-bearing liabilities were $294.2 million for fiscal 1996 as
compared to $271.9 million for fiscal 1995.

   The provision for loan losses for fiscal 1996 was $885,000 compared to
$482,000 for the preceding year.  The increased provision for loan losses
resulted from the higher level of loans outstanding and the continuing shift in
the loan mix from lower risk residential lending to higher risk consumer and
commercial lending.  Net charge-offs to the allowance for loan losses were
$321,000 during the fiscal year ended September 30, 1996, as compared to
$337,000 for the year ended September 30, 1995.  The balance in the allowance
for loan losses at September 30, 1996 was $2.4 million compared to $1.8 million
at September 30, 1995.  The allowance for loan losses as a percentage of loans
was 1.04% and .91% at September 30, 1996 and 1995, respectively. Management
continually reviews the adequacy of the allowance for loan losses, considering
such factors as reviews of delinquent loans and other loans with problems,
composition of the Bank's loan portfolio, general economic conditions that may
affect borrowers' ability to repay and the value of collateral.

   Other income for fiscal 1996 was $2.3 million as compared to $1.9 million for
fiscal 1995.  Service charges increased to $1.2 million, from $948,000, due to a
change in the fee schedule for deposits and the increase in number of checking
and NOW accounts.  The increase in miscellaneous income included $239,000
received as a deposit premium on the sale of a branch.

                                       9
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

   Other expense for fiscal 1996 was $10.0 million compared to $8.1 million for
fiscal 1995, an increase of $1.9 million or 23.5%.  The primary increase was in
federal insurance premiums.  On September 30, 1996 the Bank was assessed by the
FDIC a one-time special assessment of $1.3 million.  This assessment was made in
order to recapitalize the SAIF.  Insurance, telephone, postage, supplies and
other increased primarily due to increased expenses as a result of the opening
of a new branch in fiscal 1996 and having expenses for three other branches
purchased during fiscal 1995 for the entire fiscal 1996 year.  Tabular
comparisons of expense categories for fiscal 1996 compared to fiscal 1995 were
as follows:
<TABLE>
<CAPTION>
 
  
                                                           Years Ended
                                                           September 30,
                                                        -------------------
                                                           1996       1995
                                                        -----------  ------
                                                          (In thousands)
<S>                                                     <C>          <C>
   Compensation and related benefits                         $3,658  $3,544
   Occupancy and data processing fees                         1,848   1,680
   Federal deposit and other insurance premiums               1,877     689
   Insurance, telephone, postage, supplies and other          2,610   2,192
                                                             ------  ------
      Totals                                                 $9,993  $8,105
                                                             ======  ======
 
</TABLE>

   The effective tax rate was 37.3% for the year ended September 30, 1996 as
compared to 35.5% for the year ended September 30, 1995.  See Note 12 to the
Notes to Consolidated Financial Statements.

FINANCIAL CONDITION

   Total assets at September 30, 1997, were $372.9 million as compared to $344.5
million at September 30, 1996, an increase of $28.2 million or 8.19%.

   Loans receivable at September 30, 1997, increased by $25.1 million to $252.3
million as compared to $227.2 million at the previous year-end.  The increase
was primarily as a result of the employment of several loan officers whose
primary function is the production of consumer and commercial loans and the
entry into new markets as a result of branching efforts.

   Deposits increased $32.6 million to $320.8 million at September 30, 1997,
compared to $288.2 million at the previous year end as First Palmetto targeted
several markets for growth by offering highly competitive rates.

   Stockholders' equity increased to $22.9 million at September 30, 1997
compared to $20.2 million at September 30, 1996.  Increases were $3.3 million
from net income, the sale of common stock for $600,000 and an increase in
unrealized gains on available-for-sale securities in the amount of $33,000.
Decreases were cash dividends of approximately $1.3 million.

                                       10
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

CAPITAL RESOURCES

   Regulatory Capital Requirements.  Under OTS regulations savings associations
   -------------------------------                                             
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital equal to at least 3% of adjusted total assets and a
combination of core and "supplementary" capital equal to at least 8% of "risk-
weighted" assets.  For purposes of the regulations, core capital is defined as
common stockholders' equity, noncumulative perpetual preferred stock and related
surplus, minority interest in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
qualifying intangibles.  Core capital is generally reduced by the amount of the
savings association's intangible assets for which no market exists.  Limited
exceptions to the deduction of intangible assets are provided for mortgage
servicing rights and certain qualifying intangibles.  Tangible capital is given
the same definition as core capital but does not include qualifying intangibles
and is reduced by the amount of all the savings association's intangible assets
with only a limited exception for mortgage servicing rights.  Both core and
tangible capital are to be further reduced by an amount equal to a savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks.

   At September 30, 1997, the Bank's tangible capital ratio was 5.15%, core
capital ratio was 5.32% and its risk-based capital ratio was 10.39%.  At that
date, the Bank had $670,000 of qualifying intangibles and $181,000 of
investments in and extensions of credit to subsidiaries engaged in activities
not permissible for national banks.

ASSET and LIABILITY MANAGEMENT and INTEREST RATE SENSITIVITY

   First Palmetto manages the different maturity and repricing characteristics
of its interest-earning asset and interest-bearing liability portfolios to
achieve a desired interest rate sensitivity position and thereby limiting its
exposure to interest rate risk.  The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent to interest rate movements.

   An important measure of interest rate risk is the Asset/Liability Gap ratio.
The difference between the amount of interest-earning assets and interest-
bearing liabilities to be repriced during a specified time period is referred to
as the asset/liability gap position.  Key assumptions for determining the period
for repricing are as follows:  (1) fixed rate loans and mortgage-backed
securities are generally amortized adjusted by market based prepayment rates;
(2) adjustable rate loans and mortgage-backed securities are repriced on their
respective adjustment dates; (3) loans with call features are amortized without
any prepayment assumption with the balance repricing at the call date; (4)
investment securities are repriced at maturity; (5) NOW, money market and
savings are repriced using market based decay rates; (6) time deposits are
repriced at maturity; (7) fixed rate borrowings are repriced at maturity
adjusted for contractual principal repayments; and (8) adjustable rate
borrowings are repriced on their adjustment dates.  Management believes these
assumptions are reasonable based upon First Palmetto's historical experience.

   First Palmetto's liability sensitive cumulative gap position for one year at
September 30, 1997 was (5.96%).  A liability sensitive gap indicates that over
the course of a year an upward movement in rates will negatively impact net
interest income (and consequently operating results) since liabilities will
reprice faster than assets.  Conversely, a liability sensitive gap in a
declining interest rate environment will positively impact net interest income
(and consequently operating results) since liabilities will reprice faster than
assets.

                                       11
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

  The following table presents First Palmetto's asset/liability gap ratios as of
September 30, 1997.
<TABLE>
<CAPTION>
 
                                                                Six months
At September 30, 1997                           Six months       to one      One to      Three to   Over five
                                                  or less         year     three years  five years    years     Total
                                              ---------------  ----------  -----------  ----------  --------  ---------
                                                                        (Dollars in thousands)
<S>                                           <C>              <C>         <C>          <C>         <C>       <C>
Interest-earning assets
 Loans and mortgage-backed
  securities (1)                                      $111,584     $60,292      $66,309     $28,404   $21,123   $287,712
 Investment securities (2)                               7,885       8,930       23,965       8,045         -     48,825
 Other interest-earning assets (3)                      18,484           -            -           -         -     18,484
                                                      --------    --------      -------     -------   -------   --------
   Total interest-earning assets                       137,953      69,222       90,274      36,449    21,123    355,021
                                                      --------    --------      -------     -------   -------   --------
 
 
Interest-bearing liabilities
 Interest-bearing deposits                             137,880      78,895       54,483       8,597    18,369    298,224
 Borrowings                                              5,200       6,367        9,666       6,000         -     27,233
                                                      --------    --------      -------     -------   -------   --------
   Total interest-bearing liabilities                  143,080      85,262       64,149      14,597    18,369    325,457
                                                      --------    --------      -------     -------   -------   --------
                                          
 Sensitivity gap
  Period                                               $(5,127)   $(16,040)     $26,125     $21,852    $2,754    $29,564
                                                      ========    ========      =======     =======   =======   ========  
  Cumulative                                          $ (5,127)   $(21,167)     $ 4,958     $26,810   $29,564    $29,564
                                                      ========    ========      =======     =======   =======   ========  

 Gap as a percentage of
  interest-earning assets
  Period                                                 (1.44)%     (4.52)%       7.36%       6.16%     0.78%      8.34%
                                                      ========    ========      =======     =======   =======   ========  
  Cumulative                                             (1.44)%     (5.96)%       1.40%       7.56%     8.34%      8.34%
                                                      ========    ========      =======     =======   =======   ========  
</TABLE> 

  (1)  Excludes the allowance for loan losses.

  (2)  Includes available-for-sale securities.

  (3)  Includes interest-earning deposits and certificates of deposit in other
       banks.

                                       12
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION



    To reduce First Palmetto's exposure to interest rate risk, management has
implemented the following strategies:


(1) Originate for its own portfolio only adjustable rate mortgages and longer-
    term amortizing loans with call provisions of five years or less (unless
    specific exceptions are made).

(2) Originate fixed rate mortgages according to the specifications of the
    Federal Home Loan Mortgage Corporation, and selling them in the secondary
    mortgage market.

(3) Increase commercial real estate and consumer lending activities in order to
    increase outstanding loans with shorter maturities or adjustable rates so as
    to increase the interest rate sensitivity of First Palmetto's loan
    portfolio.

(4) Invest in securities with maturities of five years or less.

(5) Extend the lives of liabilities through the use of Federal Home Loan Bank
    advances or other extended maturity obligations.

(6) Offer premium rates on certificates of deposit with matures greater than
    twelve months.

    Senior management oversees implementation of the strategies noted above. It
reviews national and local market economic data and interest rate projections.
Senior management also regularly reviews the relationship between interest
sensitive assets and interest sensitive liabilities and reports to the full
Board of Directors on the progress of First Palmetto's attempt to reduce the
mismatch existing between them.

MARKET RISK

   Market risk is the risk of loss from adverse changes in market prices and
rates.  The Bank's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities.  Management actively
monitors and manages its interest rate risk exposure.  Although the Bank manages
other risks, as in credit quality and liquidity risk, in the normal course of
business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the Bank's
financial condition and results of operations.  Other types of market risks,
such as foreign currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Bank's business activities.

   The Bank's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings.  A sudden and substantial increase in
interest rates may adversely impact the Bank's earnings to the extent that the
interest rates on interest-earning assets and interest-bearing liabilities do
not change at the same speed, to the same extent or on the same basis.  The Bank
monitors the impact of changes in interest rates on its net interest income
using several tools.  One measure of the Bank's exposure to differential changes
in interest rates between assets and liabilities is shown in the Bank's
asset/liability gap ratio table.  Another measure, required to be performed by
OTS-regulated institutions, is the test specified by OTS Thrift Bulletin No. 13,
"Interest Rate Risk Management" ("TB-13").  This test measures the impact on net
interest income and net portfolio value on an immediate change in interest rates
in 100 basis point increments.  Net portfolio value is defined as the net
present value of assets, liabilities and off-balance sheet contracts.  At
September 30, 1997, the Bank's TB-13 calculations, based on the information and
assumptions produced for the analysis, suggested that a 200 basis point increase
in rates would reduce net interest income over a twelve-month period by $1.1
million and reduce net portfolio value by 6% while a 200 basis point decline in
rates would increase net interest income over a twelve-month period by $860,000
and would have no effect on net portfolio value.

                                       13
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

   Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results.  Further, the computations do not contemplate
any actions the Bank could undertake in response to changes in interest rates.

IMPACT OF INFLATION

   First Palmetto does not believe that inflation has had a material effect on
its operations during the last three fiscal years.  Increases in personnel
costs, supplies, occupancy, data processing fees or other operating expenses
should the current rates of inflation increase materially could affect First
Palmetto's operations, however, in the past First Palmetto has generally been
able to increase net yields and other items of income sufficient to meet
negative impacts of increasing costs.

IMPACT OF CHANGING PRICES

   First Palmetto provides financial and related services and its assets and
liabilities are monetary in nature, therefore First Palmetto is not directly
subject to impact from changes in prices of production materials.  Interest
rates, which have a more significant impact on financial institutions
performance, do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services, which would be more directly
affected by  inflation.

LIQUIDITY

   First Palmetto's primary sources of liquidity are deposits and loan principal
and interest repayments.  Additionally, First Palmetto has historically
generated funds through the sale in the secondary market of mortgage loans.
During the current year funds were made available primarily from the increase of
deposits of $32.6 million, the sale of loans on the secondary market in the
amount of $11.8 million, from the maturities of investment securities in the
amount of $20.0 million, and from principal collections of mortgage-backed
securities of $5.2 million.  These funds were used to fund net loans of $38.8
million, repay FHLB advances $12.3 million and to purchase investment securities
in the amount of $21.1 million.

   These and other factors resulted in cash and cash equivalents increasing $2.3
million during the year ended September 30, 1997.

   The Bank, as a member of the Federal Home Loan Bank System, is required by
regulation to maintain a daily average balance of liquid assets equal to a
certain percentage of net withdrawable savings and current borrowings.  The
Bank's liquidity ratio at September 30, 1997 is in excess of regulatory
requirements of 5% and will remain so in the upcoming fiscal year.

NEW ACCOUNTING STANDARDS

   Earnings per Share.  In February, 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share."  SFAS 128 applies to entities with publicly traded
common stock or potential common stock and is effective for financial statements
for periods ending after December 15, 1997, including interim periods.  SFAS 128
simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion 15, "Earnings Per Share."  It replaces the presentation of
primary EPS with a presentation of basic EPS.  It also requires dual
presentation of basic

                                       14
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

and diluted EPS on the face of the income statement for all companies with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.  The Bank's present computation of diluted EPS under
APB Opinion 15 is applied against a materiality test of 3 percent.  For
financial statements issued by the Bank after December 15, 1997, the materiality
test will no longer apply and the Bank will report basic and diluted EPS for
each period presented as well as the further reconciliations required by SFAS
128.  Although earlier application is not permitted, SFAS 128 will require
restatement of all prior-period EPS data presented.

   Disclosure of Information about Capital Structure.  In February, 1997, the
FASB also issued SFAS No. 129, "Disclosure of Information about Capital
Structure."  The purpose of SFAS 129 is to consolidate existing disclosure
requirements for ease of retrieval.  SFAS 129 contains no change in disclosure
requirements for companies, such as the Bank, that were subject to the
previously existing requirements.  It applies to all entities and is effective
for financial statements issued for periods ending after December 15, 1997.

   Reporting Comprehensive Income.  In June, 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income."  The purpose of SFAS 130 is to address
concerns over the practice of reporting elements of comprehensive income
directly in equity.  This SFAS requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with the
other financial statements.  This statement is effective for periods beginning
after December 15, 1997, and is not expected to have a material impact on the
Bank.  Comparative financial statements are required to be reclassified to
reflect the provisions of this statement.  The Bank will adopt the provisions of
this SFAS for fiscal year 1998.

   Disclosures about Segments of an Enterprise and Related Information.  In
June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."  This statement applies to all public
entities.  The provisions of SFAS 131 require certain disclosures regarding
material industry segments within an entity.  This statement is effective for
periods beginning after December 15, 1997.  SFAS 131 is not expected to have a
material impact on the Bank.

YEAR 2000 CONSIDERATIONS

   Many existing computer programs use only two digits to identify a year in the
date field.  These programs were designed and developed without considering the
impact of the upcoming change in the century.  If uncorrected, many computer
applications could fail or create erroneous results by or at the Year 2000.  The
Year 2000 issue affects virtually all companies and organizations.

   The Bank uses an outside service bureau to process customer service records
and monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations.  Based on
conversations with the service bureau, the Bank does not expect that the cost of
addressing any Year 2000 issue will be a material event or uncertainty that
would cause its reported financial information not to be necessarily indicative
of future operating results or future financial condition, or that the costs or
consequences of incomplete or untimely resolution of any Year 2000 issue
represent a known material event or uncertainty that is reasonably likely to
affect its future financial results, or cause its reported financial information
not to be necessarily indicative of future operating results or future financial
condition.

                                       15
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                Consolidated Statements of Financial Condition
                         September 30, 1997 and 1996
<TABLE>
<CAPTION>
 
 
ASSETS                                                          1997       1996
                                                              ---------  ---------
                                                             (Dollars in thousands)
<S>                                                           <C>        <C>
Cash and due from banks                                       $  6,721   $  8,867
Interest-bearing deposits in other banks                        18,085     13,649
Certificates of deposit in other banks                             399        399
Available-for-sale securities (cost of $422 and $595 at
  September 30, 1997 and 1996, respectively)                       907        997
Investment securities (market value of $48,430 and
  $47,096 at September 30, 1997 and 1996, respectively)         47,918     46,607
Mortgage-backed securities held for investment
  (market value of $32,693 and $32,788 at
  September 30, 1997 and 1996, respectively)                    32,367     33,010
Loans, net of allowance for loan losses of
  $3,009 in 1997 and $2,364 in 1996                            252,336    227,209
Accrued interest receivable                                      2,726      2,380
Real estate acquired in settlement of loans                        332        480
Stock in the Federal Home Loan Bank (FHLB)                       2,030      2,122
Premises and equipment                                           6,071      5,117
Intangible assets                                                2,044      2,623
Prepaid expenses and other assets                                1,012      1,087
                                                              --------   --------
            Total assets                                      $372,948   $344,547
                                                              ========   ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Deposits                                                      $320,769   $288,157
FHLB advances                                                   27,233     32,550
Accrued expenses and other liabilities                           2,091      3,632
                                                              --------   --------
            Total liabilities                                  350,093    324,339
                                                              --------   --------
 
Stockholders' equity
  Preferred stock, $.01 par value, 500,000 shares
    authorized, none issued and outstanding                          -          -
  Common stock, $.01 par value, 1,500,000 shares
    authorized, 748,014 shares issued                                7          7
  Additional paid-in capital                                     6,680      6,080
  Retained earnings, substantially restricted                   16,488     14,474
  Unrealized gain on available-for-sale securities                 305        272
  Treasury stock, at cost (40,004 shares in 1997 and 1996)        (625)      (625)
                                                              --------   --------
            Total stockholders' equity                          22,855     20,208
                                                              --------   --------
 
Commitments
 
            Total liabilities and stockholders' equity        $372,948   $344,547
                                                              ========   ========
 
</TABLE>

          See accompanying notes to consolidated financial statements

                                       16
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                       Consolidated Statements of Income
                Years ended September 30, 1997, 1996, and 1995

<TABLE>
<CAPTION>
 
 
                                                                1997               1996               1995
                                                          -----------------  -----------------  ----------------
Interest income:                                          (Dollars in thousands, except earnings per share data)
<S>                                                       <C>                <C>                <C>
 Loans                                                              $21,576            $19,477           $15,949
 Investment securities                                                3,163              3,411             3,684
 Mortgage-backed securities                                           2,163              2,434             2,676
 Other                                                                1,000                694               485
                                                                    -------            -------           -------
   Total interest income                                             27,902             26,016            22,794
                                                                    -------            -------           -------
 
Interest expense:
 Deposits                                                            13,418             12,329            10,379
 FHLB advances                                                        1,607              1,857             2,104
                                                                    -------            -------           -------
   Total interest expense                                            15,025             14,186            12,483
                                                                    -------            -------           -------
   Net interest income                                               12,877             11,830            10,311
 
Provision for loan losses                                             1,428                885               482
                                                                    -------            -------           -------
   Net interest income after provision for loan losses               11,449             10,945             9,829
                                                                    -------            -------           -------
 
Other income:
 Service charges                                                      1,205              1,167               948
 Loan servicing                                                         524                513               555
 Gain on sales of loans                                                 173                103                39
 Gain on sale of investments                                            254                  -                 -
 Gain on sale of fixed assets                                             -                  -               203
 Miscellaneous                                                          480                472               189
                                                                    -------            -------           -------
   Total other income                                                 2,636              2,255             1,934
                                                                    -------            -------           -------
 
Other expense:
 Compensation and related benefits                                    3,979              3,658             3,544
 Net occupancy                                                        1,233              1,027               898
 Data processing fees                                                   897                821               782
 Federal deposit and other insurance premiums                           367              1,877               689
 Telephone, postage, and supplies                                       709                655               582
 Amortization of intangible assets                                      579                769               441
 Miscellaneous                                                        1,082              1,186             1,169
                                                                    -------            -------           -------
   Total other expense                                                8,846              9,993             8,105
                                                                    -------            -------           -------
 
 Income before income taxes                                           5,239              3,207             3,658
 
Income taxes                                                          1,909              1,195             1,300
                                                                    -------            -------           -------
   Net income                                                       $ 3,330            $ 2,012           $ 2,358
                                                                    =======            =======           =======
 
Earnings per share:
 
   Net income                                                       $  4.80            $  2.90           $  3.40
                                                                    =======            =======           =======

Weighted average number of shares outstanding                       693,174            693,044           693,378
                                                                    =======            =======           =======
</TABLE> 

          See accompanying notes to consolidated financial statments

                                       17
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                Consolidated Statements of Stockholders' Equity
                  Years ended September 1997, 1996, and 1995
<TABLE>
<CAPTION>
 
 
                                                                        Unrealized
                                                                           gain on
                                            Additional                  available-                      Total
                                    Common     paid-in  Retained          for-sale   Treasury   stockholders'
                                     stock     capital  earnings   securities, net      stock          equity
                                    ------  ----------  --------   ---------------   --------   -------------
<S>                                 <C>     <C>         <C>        <C>               <C>        <C> 
Balance at                                              (Dollars in thousands)
  September 30, 1994                $    7  $    6,080  $ 12,182            $  149    $  (614)        $17,804
 
Purchase of common stock                 -           -         -                 -         (7)             (7)
 
Net income                               -           -     2,358                 -          -           2,358
 
Cash dividends ($1.40 per
  share)                                 -           -      (970)                -          -            (970)
 
Change in unrealized gain on
  available-for-sale securities,
  net                                    -           -         -               160          -             160
                                    ------  ----------  --------   ---------------   --------         -------
 
Balance at
  September 30, 1995                     7       6,080    13,570               309       (621)         19,345
                                    ------  ----------  --------   ---------------   --------         -------
 
Purchase of common stock                 -           -         -                 -         (4)             (4)
 
Net income                               -           -     2,012                 -          -           2,012
 
Cash dividends ($1.60 per
  share)                                 -           -    (1,108)                -          -          (1,108)
 
Change in unrealized gain on
  available-for-sale securities,
  net                                    -           -         -               (37)         -             (37)
                                    ------  ----------  --------   ---------------   --------         -------
 
Balance at
  September 30, 1996                     7       6,080    14,474               272       (625)         20,208
                                    ------  ----------  --------   ---------------   --------         -------
 
Sale of common stock                     -         600         -                 -          -             600
 
Net income                               -           -     3,330                 -          -           3,330
 
Cash dividends ($1.90 per
  share)                                 -           -    (1,316)                -          -          (1,316)
 
Change in unrealized gain on
  available-for-sale securities,
  net                                    -           -         -                33          -              33
                                    ------  ----------  --------   ---------------   --------         -------
 
Balance at
  September 30, 1997                $    7  $    6,680  $ 16,488           $   305   $   (625)        $22,855
                                    ======  ==========  ========   ===============   ========         =======
</TABLE>

          See accompanying notes to consolidated financial statements

                                       18
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                Years ended September 30, 1997, 1996, and 1995

<TABLE>
<CAPTION>
 
 
                                                                 1997          1996         1995
                                                               ---------  --------------  ---------
                                                                          (In thousands)
<S>                                                            <C>            <C>         <C>
Cash flows from operating activities:                                     
 Net income                                                    $  3,330        $  2,012   $  2,358
 Adjustments to reconcile net income to net cash
  provided by operating activities
   Decrease in deferred loan fees, net                              (10)            (27)       (30)
   Accretion and amortization of discounts and
    premiums, net                                                  (250)           (203)      (196)
   Provision for loan losses                                      1,428             885        482
   Gain on sale of available-for-sale securities                   (254)              -          -
   Gain on sale of real estate acquired in settlement
    of loans, net                                                   (15)            (74)        (2)
   Gain on sale of premises and equipment                             -               -       (203)
   Depreciation                                                     468             353        288
   Amortization of intangible assets                                579             769        441
   Proceeds from sale of loans                                   11,764          16,210      9,227
   Originations and principal repayments of loans
    held for sale, net                                          (11,591)        (16,107)    (9,110)
   (Increase) decrease in accrued interest receivable              (346)            158       (744)
   (Increase) decrease in prepaid expenses and other assets          69            (755)         8
   Increase (decrease) in accrued expenses and other
     liabilities                                                 (1,573)            581       (852)
                                                               --------        --------   --------
   Net cash provided by operating activities                      3,599           3,802      1,667
                                                               --------        --------   --------
 
Cash flows from investing activities:
 Net decrease in certificates of deposit in other banks               -               -        300
 Proceeds from maturities of investment securities               20,000          12,995      9,002
 Purchases of investment securities                             (21,079)         (2,000)    (6,882)
 Proceeds from sale of available-for-sale securities                426               -          -
 Purchases of mortgage-backed securities                         (4,563)              -    (13,542)
 Principal collected on mortgage-backed securities                5,206           6,379      5,273
 Net increase in loans                                          (27,226)        (30,405)   (35,734)
 Proceeds from sale of real estate acquired in
  settlement of loans                                               671           1,233        656
 Improvements made to real estate held for
  development and sale                                                -               -         (5)
 
</TABLE>

                                                                     (Continued)

                                       19
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                 Years ended September 30, 1997, 1996, and 1995

<TABLE>
<CAPTION>
 
 
                                                          1997          1996         1995
                                                        --------   -------------   -------- 
Cash flows from investing activities, continued:                   (In thousands)
<S>                                                     <C>            <C>         <C>
 Proceeds from sale of FHLB stock                             93               -      1,103
 Purchases of FHLB stock                                       -               -     (1,103)
 Proceeds from sale of premises and equipment                  -               -        283
 Capital expenditure for premises and equipment           (1,497)         (1,489)      (805)
 Retirements of premises and equipment                        82             107          -
 Purchase of financial institution                             -               -     29,000
                                                        --------        --------   --------
   Net cash used in investing activities                 (27,887)        (13,180)   (12,454)
                                                        --------        --------   --------
 
Cash flows from financing activities:
 Net increase in deposits                                 32,611          20,844     10,321
 Proceeds from FHLB advances                               7,000          21,000     63,000
 Repayment of FHLB advances                              (12,317)        (21,817)   (60,633)
 Sale (purchase) of common stock                             600              (4)        (6)
 Cash dividends                                           (1,316)         (1,108)      (970)
                                                        --------        --------   --------
   Net cash provided by financing activities              26,578          18,915     11,712
                                                        --------        --------   --------
 
Net increase in cash and cash equivalents                  2,290           9,537        925
 
Cash and cash equivalents at beginning of year            22,516          12,979     12,054
                                                        --------        --------   --------
 
Cash and cash equivalents at end of year                $ 24,806        $ 22,516   $ 12,979
                                                        ========        ========   ========
 
Supplemental disclosures of cash flow information:
 Cash paid during the year for:
   Interest                                             $ 14,829        $ 14,009   $ 12,222
   Income taxes                                            2,231           1,744      1,198
 
Supplemental schedule of noncash investing and
  financing activities:
   Loans transferred to real estate acquired in
    settlement loans                                         508             607        551
 
   Increase in unrealized gain on available-for-sale
    Securities, net                                           33             (37)       160
 
</TABLE>

         See accompanying notes to consolidated financial statements

                                       20
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements
                      September 30, 1997, 1996, and 1995

(1)  Summary of Significant Accounting Policies
     ------------------------------------------

   The following is a description of the more significant accounting and
   reporting policies which First Palmetto Financial Corporation and subsidiary
   (First Palmetto) followed in preparing and presenting the consolidated
   financial statements.

   (a) Principles of Consolidation and Reporting
       -----------------------------------------

       The accompanying consolidated financial statements include the accounts
       of First Palmetto Financial Corporation and its wholly owned subsidiary,
       First Palmetto Savings Bank, F.S.B. (the "Bank") and its subsidiaries.
       All significant intercompany balances have been eliminated.

   (b) Use of Estimates in the Preparation of Financial Statements
       -----------------------------------------------------------

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

   (c) Reclassifications
       -----------------

       Certain amounts in the September 30, 1996 and 1995 consolidated financial
       statements have been reclassified to conform with the 1997 presentations.
       These reclassifications had no impact on the net income or stockholders'
       equity as previously reported.

   (d) Securities
       ----------

       Statement of Financial Accounting Standards (SFAS) No. 115 addresses the
       accounting and reporting for investments in equity securities that have
       readily determinable fair values and all investments in debt securities.
       These investments are to be classified into three categories as follows:

       -  held-to-maturity securities - reported at amortized cost,

       -  trading securities - reported at fair value with unrealized gains and
          losses included in earnings, or

       -  available-for-sale securities - reported at fair value with unrealized
          gains and losses reported as a separate component of stockholders'
          equity (net of tax effect).

       Certain investments in equity securities are classified as available-for-
       sale. All other securities have been classified as held-to-maturity
       securities because First Palmetto has the intent and the ability to hold
       all such securities until maturity.

                                                                     (Continued)

                                       21
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

       Gains and losses on sales of securities are recognized on a specific
       identification basis.  Premiums and discounts are amortized into interest
       income using a level yield method.

       Regulations require First Palmetto to maintain cash and U.S. Government
       and other approved securities in an amount equal to a prescribed
       percentage (5% at September 30, 1997) of deposit accounts (net of loans
       on deposit accounts) plus short-term borrowings.  First Palmetto was in
       compliance with such regulation at September 30, 1997.

   (e) Loans Held for Sale
       -------------------

       Loans held for sale are carried at the lower of cost or market as
       determined by the outstanding commitments from investors to purchase such
       loans or current investor yield requirements calculated on the aggregate
       loan basis.  Gains and losses are realized if at the time of sale the
       average interest rate on the loans sold, adjusted for servicing fees,
       differs from the agreed yield to the buyer.  First Palmetto originates
       and sells whole loans, generally retaining servicing on conventional
       loans and releasing servicing on governmental loans.  Servicing fees
       range from .25% to .375% on conventional loans.

   (f) Provision for Loan Losses
       -------------------------

       The allowance for loan losses is the amount considered adequate for
       inherent losses in the portfolio.  Management's evaluation of the
       adequacy of the allowance is based on a review of such factors which
       include the market value of the underlying collateral, growth and
       composition of the loan portfolio, the relationship of the allowance for
       loan losses to outstanding loans, delinquency trends, history of charge-
       offs and economic conditions.

       While management uses the best information available to make evaluations,
       future adjustments to the allowance may be necessary if conditions differ
       from the assumptions used in making the evaluations.

       In addition, various regulatory agencies, as an integral part of their
       examination process, periodically review the adequacy of First Palmetto's
       allowance for loan losses.  Such agencies may require First Palmetto to
       recognize additions to the allowance based on their judgments about
       information available to them at the time of their examination.

   (g) Real Estate Acquired in Settlement of Loans
       -------------------------------------------

       Real estate acquired in settlement of loans represents real estate
       acquired through foreclosure or deed in lieu of foreclosure and is
       initially recorded at the lower cost or fair value and subsequently
       reduced for estimated selling costs.  Costs relating to the development
       and improvement of the property are capitalized, whereas, those relating
       to holding the property are charged to expense.

                                                                     (Continued)

                                       22
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

   (h) Premises and Equipment
       ----------------------

       Premises and equipment are recorded at cost and depreciation is provided
       over the estimated useful lives of the related assets principally on a
       straight-line basis.  Estimated lives are ten to forty years for
       buildings, building components and improvements and two to ten years for
       furniture, fixtures and equipment.

       Leasehold improvements are recorded at cost and amortization is provided
       over the lesser of the related lease term or estimated useful life
       principally on a straight-line basis.

       Maintenance and repairs are charged to expense as incurred and
       improvements are capitalized.  The costs and accumulated depreciation
       relating to premises and equipment retired or otherwise disposed of are
       eliminated from the accounts and any resulting gains or losses are
       credited or charged to operations.

   (i) Loan Interest Income
       --------------------

       When loans become more than 90 days past due, First Palmetto places such
       loans on nonaccrual status or provides an allowance for uncollected
       interest on accrued interest if, in the opinion of management,
       collectibility of that accrued interest is doubtful.  Any allowance is
       netted against accrued interest receivable in the consolidated financial
       statements.  If the delinquent payments are made, the loan to accrual
       status.  Interest income on impaired loans is recognized on a cash basis.

   (j) Loan Origination Fees and Costs
       -------------------------------

       Loan origination fees and certain direct loan origination costs are
       deferred and amortized over the contractual life, adjusted for
       prepayments, of the related loan as an adjustment of the loan yield using
       the level yield method.  Direct costs of unsuccessful loans and indirect
       costs are expensed as incurred.

   (k) Income Taxes
       ------------

       Deferred tax assets and liabilities are recognized for the future tax
       consequences attributable to differences between the financial statement
       carrying amounts of existing assets and liabilities and their respective
       tax bases.  Deferred tax assets and liabilities are measured using
       enacted tax rates expected to apply to taxable income in the years in
       which those temporary differences are expected to be recovered or
       settled.  Under SFAS No. 109, the effect on deferred tax assets and
       liabilities of a change in tax rates is recognized in income in the
       period that includes the enactment date.

   (l) Intangible Assets
       -----------------

       Goodwill, representing the excess cost of investment over the fair value
       of net assets acquired, is being amortized by charges to operations
       generally over twelve years, using the straight-line method.


                                                                     (Continued)

                                       23
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

       Deposit-based premiums, representing the cost of acquiring deposits from
       other financial institutions, are being amortized by charges to
       operations over seven years, an estimate of the estimated life of the
       existing deposit relationship, using the straight-line method.

   (m) Cash and Cash Equivalents
       -------------------------

       Cash and cash equivalents include cash and due from banks and interest-
       bearing balances in other banks.  Generally, cash and cash equivalents
       are considered to have maturities of three months or less.

   (n) Earnings Per Share
       ------------------

       Earnings per share is computed by dividing consolidated net income by the
       weighted average number of shares of common stock outstanding during the
       year.  The effect of common stock equivalent shares applicable to stock
       option plans has not been included in the calculation of net income per
       share because such effect is not materially dilutive.

   (o) Other Accounting Changes
       ------------------------

       As of October 1, 1996, the Bank adopted the provisions of SFAS No. 122,
       "Accounting for Certain Mortgage Banking Activities," which requires that
       a mortgage banking enterprise recognize as separate assets the rights to
       service mortgage loans for others, however those servicing rights are
       acquired.  A mortgage banking enterprise that acquires mortgage servicing
       rights through either the purchase or origination of mortgage loans and
       sells or securitizes those loans with servicing rights retained should
       allocate the total cost of the mortgage loans to the mortgage servicing
       rights and the loans (without the mortgage servicing rights) based on
       their relative fair values if it is practicable to estimate those fair
       values.  If it is not practicable to estimate the fair values of the
       mortgage servicing rights and the mortgage loans (without the mortgage
       servicing rights), the entire cost of purchasing or originating the loans
       should be allocated only to the mortgage loans without the mortgage
       servicing rights.  Additionally, this standard requires that a mortgage
       banking enterprise periodically assess its capitalized mortgage servicing
       rights for impairment based on the fair value of those rights.
       Currently, the Bank is capitalizing 1% of loans sold with servicing
       rights retained and is amortizing this asset over five years using the
       straight-line method.  The remaining balance is included in other assets.

       As of October 1, 1996, the Bank adopted the provisions of SFAS No. 123
       "Accounting for Stock - Based Compensation."  SFAS No. 123 established a
       fair value-based method of accounting for stock options and other equity
       instruments.  It requires the use of that method for transactions with
       other than employees and encourages its use for transactions with
       employees.  It permits entities to continue to use the intrinsic value
       method included in APB 25 (Accounting for Stock Issued to Employees), but
       regardless of the method used to account for the compensation cost
       associated with stock option and similar plans, it requires employers to
       disclose information in accordance with SFAS No. 123.

                                                                     (Continued)

                                       24
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

       The general principle underlying SFAS No. 123 is that equity instruments
       are recognized at the fair value of the consideration received for them.
       If the fair value of the consideration received cannot be reasonably
       determined, the fair value of the equity instrument itself may be used.
       The fair value method of accounting for stock options and other
       instruments applies this general principle, measuring compensation cost
       for employers as the excess of the fair value of the equity instrument
       over the amount paid by the employee.  The Bank has elected to continue
       to use the intrinsic value method in APB 25 for financial statement
       purposes.  No additional disclosure under SFAS No. 123 is required for
       the Bank at this time because no stock options have been granted (See
       Footnote 15).

       As of January 1, 1997, the Bank adopted the provisions of SFAS No. 125,
       "Accounting for Transfers and Servicing of Financial Assets and
       Extinguishment of Liabilities."  SFAS No. 125 provides accounting and
       reporting standards for transfers and servicing of financial assets and
       extinguishment of liabilities.  This statement applies prospectively to
       transactions occurring after December 31, 1996, and establishes new
       standards that focus on control whereby after a transfer of financial
       assets, an entity recognizes the financial and servicing assets it
       controls and the liabilities it has incurred, derecognizes financial
       assets when control has been surrendered, and derecognizes liabilities
       when extinguished.  In December, 1996, the FASB issued SFAS No. 127,
       "Deferral of the Effective Date of Certain Provisions of FASB Statement
       No. 125."  SFAS No. 127 defers for one year the effective date of
       portions of SFAS No. 125 that  address secured borrowings and collateral
       for all transactions.  Additionally, SFAS No. 127 defers for one year the
       effective date of transfers of financial assets that are part of
       repurchase agreements, securities lending and similar transactions.  The
       adoption of SFAS No. 125 as amended by SFAS No. 127 did not have a
       material impact on the Bank's results of operations or financial
       positions.

(2)  Available-for-Sale Securities
     -----------------------------

     Available-for-sale securities consist of the following:
<TABLE>
<CAPTION>
 
                                                   Gross
                               Amortized         Unrealized    Market
                                 Cost              Gains       Value
                          -------------------  --------------  ------
                          September 30, 1997:  (In thousands)
<S>                       <C>                  <C>             <C>
     Equity securities                   $422           $485     $907
                          ===================  =============   ======
 
   September 30, 1996:
     Equity securities                   $595           $402     $997
                          ===================  =============   ======
 
</TABLE>

   During the year ended September 30, 1997, gross proceeds from the sale of
   available-for-sale securities was $426,000 which resulted in a gain of
   $254,000.

                                                                     (Continued)

                                       25
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

(3)  Investment Securities
     ---------------------

     Investment securities consist of the following:
<TABLE>
<CAPTION>
 
 
                                                                  Gross          Gross
                                                   Amortized    Unrealized    Unrealized   Market
                                                     Cost         Gains         Losses      Value
                                                   ---------  --------------  -----------  -------
September 30, 1997:                                           (In thousands)
<S>                                                 <C>       <C>             <C>          <C>
     U.S. Government obligations due:
       Within 12 months                              $15,909      $ 62              $  -   $15,971
       Beyond 12 months but                                                
        within 5 years                                32,009       450                 -    32,459
                                                     -------      ----        ----------   -------
                                                                           
                                                     $47,918      $512              $  -   $48,430
                                                     =======      ====        ==========   =======
                                                                           
September 30, 1996:                                                        
     U.S. Government obligations due:                                      
       Within 12 months                              $16,953      $100              $  -   $17,053
       Beyond 12 months but                                                
        within 5 years                                29,654       399               (10)   30,043
                                                     -------      ----        ----------   -------
                                                     $46,607      $499              $(10)  $47,096
                                                     =======      ====        ==========   =======
</TABLE>

     During 1997, 1996 and 1995, investment securities with total amortized cost
     of $16.0 million, $13.0 million and $9.0 million, respectively, matured or
     were sold within 90 days of maturity. Proceeds from these maturities and
     sales were $20.0 million, $13.0 million and $9.0 million which resulted in
     gross realized losses of $5,156 and $30,555 for 1996 and 1995,
     respectively.

     At September 30, 1997, investment securities with amortized cost of $27.0
     million were pledged to secure public deposits and deposits of individuals.

(4)  Mortgage-Backed Securities
     --------------------------

     Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
 
                                                              Gross        Gross
                                                 Amortized  Unrealized  Unrealized   Market
September 30, 1997:                                Cost       Gains       Losses      Value
                                                 ---------  ----------  -----------  -------
           FHLMC participation certificates                  (In thousands)
<S>                                              <C>        <C>         <C>          <C>
            (6% - 11%, due 2008 through 2023)      $29,305        $287        $(85)  $29,507
 
           FNMA mortgage-backed securities
             (6.50% - 7.80%, due 2003 through
             2022)                                   2,936         120           -     3,056
 
           GNMA mortgage-backed securities             126           4           -       130
                                                   -------        ----  ----------   -------
             (8%, due 2001 through 2002)           $32,367        $411        $(85)  $32,693
                                                   =======        ====  ==========   =======
</TABLE>

                                                                     (Continued)

                                       26
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
 
 
                                                                Gross          Gross
                                                 Amortized    Unrealized    Unrealized   Market
September 30, 1996:                                Cost         Gains         Losses      Value
                                                 ---------  --------------  -----------  -------
                                                                   (In thousands)
<S>                                              <C>        <C>             <C>          <C>
           FHLMC participation certificates
            (6% - 11%, due 2005 through 2023)      $30,332           $157        $(496)  $29,993
 
           FNMA mortgage-backed securities
             (7.75% - 8.11%, due 2022)               2,509            113            -     2,622
 
           GNMA mortgage-backed securities
             (8%, due 2001 through 2002)               169              4            -       173
                                                   -------           ----   ----------   -------
                                                   $33,010           $274        $(496)  $32,788
                                                   =======           ====   ==========   =======
 
</TABLE>

     There were no sales of mortgage-backed securities during 1997, 1996 or
     1995.

(5)  Loans
     -----

<TABLE>
<CAPTION>
 
   Loans consist of the following:
                                                           September 30,
                                                       -------------------
                                                           1997       1996
                                                       --------   --------
                                                         (In thousands)
<S>                                                    <C>        <C>
   Real estate mortgage (principally single 
    family dwellings, 1-4 units)                       $128,602   $122,759
   Commercial real estate                                78,147     62,043
   Real estate construction                               8,462      8,695
   Commercial                                            13,525     12,578
   Installment                                           29,131     27,847
   Loans held for sale                                      642        396
   Undisbursed proceeds on real estate construction      (2,891)    (4,461)
   Deferred loan fees, net                                 (273)      (284)
   Allowance for loan losses                             (3,009)    (2,364)
                                                       --------   --------
                                                       $252,336   $227,209
                                                       ========   ========
</TABLE>

     Loans serviced for others approximated $128.9 million, $136.5 million, and
     $140.1 million at September 30, 1997, 1996, and 1995, respectively.

     The following summarizes the changes in the allowance for loan losses for
     the years ended September 30, 1997, 1996, and 1995:

<TABLE>
<CAPTION>
 
                                    1997     1996       1995
                                   -------  -------  -----------
                                          (In thousands)
<S>                                <C>      <C>      <C>
   Balance at beginning of year    $2,364   $1,800       $1,655
   Provision for loan losses        1,428      885          482
   Loan charge-offs                  (917)    (567)        (396)
   Recoveries                         134      246           59
                                   ------   ------       ------
   Balance at end of year          $3,009   $2,364       $1,800
                                   ======   ======       ======
                                                     (Continued)
</TABLE>


                                                                     (Continued)

                                       27
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

   At September 30, 1997 and 1996, the recorded investment in loans that are
   considered to be impaired was $1,545,000 and $478,000, respectively.  There
   was no specific allowance for credit losses related to the impaired loans as
   of September 30, 1997 and 1996.  The average recorded investment in impaired
   loans during the years ended September 30, 1997 and 1996 was $396,000 and
   $493,000, respectively.  Interest income recognized on impaired loans
   amounted to $27,000 and zero for the years ended September 30, 1997 and 1996,
   respectively.  Large groups of smaller-balance homogenous loans such as
   residential mortgages and consumer installment loans are not evaluated for
   impairment individually.

   First Palmetto had nonaccrual loans of approximately $981,000, $984,000, and
   $823,000, at September 30, 1997, 1996, and 1995, respectively.  Foregone
   interest income related to nonaccrual loans for the years ended September 30,
   1997, 1996 and 1995 amounted to $60,274, $94,868 and $58,622, respectively.
   Interest income recognized on nonaccrual loans for the years ended September
   30, 1997, 1996 and 1995 amounted to $37,792, $52,032 and $45,747,
   respectively.

   First Palmetto offers mortgage and consumer loans to its officers, directors
   and employees for the financing of their personal residences and for other
   personal purposes.  These loans are currently made in the ordinary course of
   business and are made on substantially the same terms, including interest
   rates and collateral, prevailing at the time for comparable transactions with
   other persons.  Management does not believe these loans involve more than the
   normal risk of collectibility or present other unfavorable features.  The
   following summarizes the activity of loans to the officers, directors and
   employees at September 30, 1997.  (In thousands)

<TABLE>
<CAPTION>
 
<S>                                     <C>
   Loan balances, September 30, 1996    $2,550
   New loans originated                  1,163
   Loan repayment                         (930)
                                        ------
   Loan balances, September 30, 1997    $2,783
                                        ======
</TABLE>

   First Palmetto is a party to financial instruments with off-balance-sheet
   risk in the normal course of business to meet the financing needs of its
   customers.  These financial instruments include commitments to extend credit
   and standby letters of credit.  Those instruments involve, to varying
   degrees, elements of credit and interest rate risk in excess of the amount
   recognized in the statement of financial position.

   First Palmetto's exposure to credit loss in the event of nonperformance by
   the other party to the financial instrument for commitments to extend credit
   and standby letters of credit is represented by the contract amount of those
   instruments.  First Palmetto uses the same credit policies in making
   commitments as it does for on-balance-sheet instruments.  At September 30,
   1997 and 1996, preapproved but unused lines of credit for loans totaled
   approximately $18.0 million and $18.4 million, standby letters of credit
   approximated $2.7 million and $2.5 million, and outstanding loan commitments
   aggregated $1.9 million and $945,000, respectively.  Of these loan
   commitments, $916,000 and $247,000 are at variable rates and $948,000 and
   $698,400 are at fixed rates at September 30, 1997 and 1996, respectively.
   The interest rates for these commitments at September 30, 1997 range from
   6.50% to 9.50%.  These commitments, including undisbursed proceeds on
   construction loans, represent no more than the normal lending risk that First
   Palmetto commits to its borrowers.  Management believes that these
   commitments can be funded through normal operations.  First Palmetto is not
   involved with any other types of financial instruments with off-balance sheet
   risk.

                                                                     (Continued)

                                       28
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


     First Palmetto grants residential, residential construction, commercial,
     and installment loans to customers throughout its market area. As reflected
     in the summary of loans receivable at September 30, 1997, the largest
     component of First Palmetto's loan portfolio consists of lower-risk single-
     family, 1-4 unit, residential loans. The higher risk components of the loan
     portfolio consist of real estate construction, commercial, and installment
     loans for which repayment is more dependent on the current real estate
     market and general economic conditions.

(6)  Accrued Interest
     ----------------

     Accrued interest receivable consists of the following:

<TABLE>
<CAPTION>
                                   1997     1996
                                  ------   ------
<S>                               <C>     <C>
                                 (In thousands)
 
     Loans                         $1,661  $1,527
     Investment securities            853     634
     Mortgage-backed securities       212     219
                                   ------  ------
                                   $2,726  $2,380
                                   ======  ======
</TABLE> 


     At September 30, 1997 and 1996, the allowance for uncollected interest
     amounted to $17,696 and $31,779, respectively.

(7)  Real Estate Acquired in Settlement of Loans
     -------------------------------------------

     A comparative summary of real estate acquired in settlement of loans
     follows:

<TABLE>
<CAPTION>
 
                                 September 30,
                                 -------------
                                 (In thousands)
                                  1997   1996
                                 ------  -----
<S>                               <C>    <C>
     Undeveloped land             $  48  $  70
     Single family residences       275    162
     Commercial property              9    248
                                  -----  -----
                                  $ 332  $ 480
                                  =====  =====
</TABLE>

(8)  Investments Required by Law
     ---------------------------

     First Palmetto is required by law to invest in stock of a Federal Home Loan
     Bank (FHLB). No ready market exists for the FHLB stock and it has no quoted
     market value. This stock is redeemable at $100 per share, its historical
     cost basis, subject to certain limitations set by the FHLB.

     Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
     Insurance Corporation. Federal deposit insurance expense amounted to
     approximately $288,000, $1.8 million and $618,000 for the years ended
     September 30, 1997, 1996, and 1995, respectively. On September 30, 1996,
     First Palmetto was assessed a one time assessment of approximately 65 basis
     point for every $100 of domestic deposits. The one time assessment amounted
     to $1.3 million.

                                                                     (Continued)

                                       29
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements
 
 (9) Premises and Equipment
     ----------------------

   A comparative summary of premises and equipment follows:
<TABLE> 
<CAPTION> 
                                                                 Accumulated   Net Book
                                                          Cost   Depreciation     Value
                                                        ------   ------------  --------
                                                                 (In thousands)
       <S>                                              <C>      <C>           <C> 
       September 30, 1997:                                      
           Land and improvements                        $2,612         $    -    $2,612
           Office buildings and improvements             3,995          1,233     2,762
           Leasehold improvements                          850            676       174
           Furniture, fixtures and equipment               886            411       475
           Automobiles                                      76             28        48
                                                        ------         ------    ------
                                                        $8,419         $2,348    $6,071
                                                        ======         ======    ======
       September 30, 1996:
           Land and improvements                        $2,066         $    2    $2,064
           Office buildings and improvements             3,271          1,071     2,200
           Leasehold improvements                          856            571       285
           Furniture, fixtures and equipment               742            236       506
           Automobiles                                      75             13        62
                                                        ------         ------    ------
                                                        $7,010         $1,893    $5,117
                                                        ======         ======    ======
</TABLE>

     First Palmetto leases various equipment and real estate under operating
     leases expiring on various dates through 2019. Minimum lease commitments
     under all noncancelable leases are as follows:

<TABLE>
<CAPTION>
   Years ending September 30,                           (In thousands)
   --------------------------                                                
   <S>                                                  <C> 
          1998                                                   $131
          1999                                                     72
          2000                                                     46
          2001                                                     28
          2002                                                     25
          Later years                                             122
                                                                 ----
                                                                 $424
                                                                 ====
</TABLE>

     Rent expense was $133,002, $143,443, and $121,267 for the years ended
     September 30, 1997, 1996, and 1995, respectively.

                                                                     (Continued)

                                       30
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

(10) Deposits
     --------
 
     A comparative summary of deposits follows:

<TABLE>
<CAPTION>
 
 
                                                    September 30,
                                                 ------------------
                                                   1997      1996
                                                 --------  --------
                                                   (In thousands)
<S>                                              <C>       <C>
   Noninterest bearing checking                  $ 22,545  $ 15,627
   NOWs (1.75% in 1997 and 1996)                   37,436    29,820
   MMDAs (3.00% in 1997 and 1996)                  19,786    26,539
   Savings (2.50% in 1997 and 1996)                22,038    22,057
                                                 --------  --------
                                                  101,805    94,043
                                                 --------  --------
   Time:
     Less than 3.00%                                   21        33
     3.00% to 4.99%                                 4,547    14,974
     5.00% to 6.99%                               212,678   176,152
     7.00% to 9.99%                                 1,718     2,955
                                                 --------  --------
                                                  218,964   194,114
                                                 --------  --------
                                                 $320,769  $288,157
                                                 ========  ========
   Weighted average cost of deposits 
     (as of dates indicated above)                   4.76%     4.65%
                                                 ========  ========

</TABLE> 

   A summary of time deposits by maturity as of September 30, 1997 follows:
<TABLE>
<CAPTION>
 
                                             (In thousands)
     <S>                                     <C>
     October 1, 1997 - September 30, 1998         $186,280
 
     October 1, 1998 - September 30, 1999           26,524
 
     After September 30, 1999                        6,160
                                                  --------
        Total time deposits                       $218,964
                                                  ========
 
</TABLE>

     At September 30, 1997 and 1996, the aggregate amount of time deposits of
     $100,000 or more amounted to $34.6 million and $50.8 million, respectively.


     Interest expense on deposits consists of the following:

<TABLE>
<CAPTION>
                     Years ended September 30,
                     -------------------------
                      1997     1996     1995
                     -------  -------  -------
                          (In thousands)
<S>                  <C>      <C>      <C>
   NOWs and MMDAs    $ 1,487  $ 1,378  $ 1,233
   Savings               562      586      641
   Time               11,369   10,365    8,505
                     -------  -------  -------
                     $13,418  $12,329  $10,379
                     =======  =======  =======
 
</TABLE>

     At September 30, 1997, approximately $497,000 in interest-bearing balances
     in other banks and $27.0 million in investment securities were pledged to
     secure public deposits and deposits of individuals.

                                                                     (Continued)

                                       31
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


(11)  FHLB Advances
      -------------

      FHLB advances consist of the following:

<TABLE> 
<CAPTION> 


                                              September 30,
       Maturity                    Interest  ----------------
         Date                        Rate      1997     1996
       --------                    --------  -------  -------
                                               (In thousands)
       <S>                         <C>       <C>      <C>
       February 24, 1997              5.40%  $     -  $   500
       March 11, 1997                 5.45%        -    1,000
       April 28, 1997                 4.67%        -      250
       June 1, 1997                   5.01%        -    1,000
       June 5, 1997                   5.86%        -    5,000
       July 27, 1997                  5.25%        -    1,000
       December 11, 1997              5.66%    2,500    5,000
       January 29, 1998               5.32%    2,000    2,000
       March 31, 1998                 5.03%      200      400
       April 28, 1998                 4.98%      200      400
       January 8, 1999                5.57%   10,000   10,000
       February 25, 1999              5.30%    1,000    1,500
       April 28, 1999                 5.23%      333      500
       July 27, 1999                  5.82%    1,000    1,000
       July 27, 2000                  6.02%    1,000    1,000
       January 29, 2001               5.69%    2,000    2,000
       July 4, 2004                   6.49%    7,000        -
                                             -------  -------
                                             $27,233  $32,550
                                             =======  =======
</TABLE>

      At September 30, 1997, all stock in the FHLB, and a blanket lien on
      certain first mortgage loans secured by one to four unit single-family
      dwellings were pledged as collateral to secure these advances.

(12)  Income Taxes
      ------------

      Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                  Years ended September 30,
                                  -------------------------
                                   1997     1996     1995
                                  ------   ------   ------
                                       (In thousands)
   <S>                            <C>      <C>      <C>
   Current:                            
     Federal                      $1,629   $1,725   $1,295
     State                            42       76        -
                                  ------   ------   ------
                                   1,671    1,801    1,295
                                  ------   ------   ------
   Deferred:                               
     Federal                         211     (516)       3
     State                            27      (90)       2
                                  ------   ------   ------
                                     238     (606)       5
                                  ------   ------   ------
                                  $1,909   $1,195   $1,300
                                  ======   ======   ======
</TABLE>
                                        
                                                                     (Continued)

                                       32
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

      The income tax expense of First Palmetto for the years ended September 30,
      1997, 1996, and 1995 was different from the amount computed by applying
      the federal income tax rate to income before income taxes because of the
      following:

<TABLE>
<CAPTION>
                                                          Years ended September 30,
                                                          --------------------------
                                                           1997      1996      1995
                                                          ------    ------    ------
                                                            (Dollars in thousands)                                 
<S>                                                       <C>       <C>       <C>
Income tax expense at federal rate                        $1,781    $1,091    $1,244
Increase in income taxes resulting from:                                 
 Other, net                                                  128       104        56
                                                          ------    ------    ------
                                                          $1,909    $1,195    $1,300
                                                          ======    ======    ======
Effective tax rate                                          36.4%     37.3%     35.5%
                                                          ======    ======    ======
</TABLE> 

      The tax effects of temporary differences that give rise to significant
      portions of deferred tax assets and deferred tax liabilities at September
      30, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                   September 30,
                                                  --------------
                                                   1997    1996
                                                  ------  ------
<S>                                               <C>     <C>
   Deferred tax assets:                           (In thousands)
     Provision for loan losses                    $1,116  $  872
     Net fees deferred for financial reporting        94     114
     Accrued vacation pay                             26      28
     Special FDIC assessment                           -     472
     Other                                            21      12
                                                  ------  ------
       Total gross deferred tax assets             1,257   1,498
                                                  ------  ------
 
   Deferred tax liabilities:
     Tax bad debts in excess of base year            447     447
     FHLB stock basis over tax basis                 315     315
     Depreciation                                     29      32
     Unrealized gains on securities                  179     159
                                                  ------  ------
       Total gross deferred tax liability            970     953
                                                  ------  ------
         Net deferred tax asset                   $  287  $  545
                                                  ======  ======
</TABLE>

      A portion of the change in the net deferred tax asset relates to the
      unrealized gains on securities available-for-sale. Under SFAS No. 115 the
      related deferred tax expense of $20,000 has been recorded directly to
      shareholders' equity. The balance of the change in the deferred tax asset
      results from the current period deferred tax expense of $238,000.

      No valuation allowance for deferred tax assets was required at September
      30, 1997 and 1996. The realization of net deferred tax assets may be based
      on utilization of carrybacks to prior taxable periods, anticipation of
      future taxable income in certain periods, and the utilization of tax-
      planning strategies. Management has determined that it is more likely than
      not that the net deferred tax asset can be supported based upon these
      criteria.

                                                                     (Continued)

                                       33
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

      Prior to recent legislation enacted by Small Business Job Protection Act
      of 1996, the Bank was allowed a special bad debt deduction related to
      additions to tax bad debt reserves established for the purpose of
      absorbing losses. The provisions of the Code permitted the Bank to deduct
      from taxable income an allowance for bad debts based on the greater of a
      percentage (8%) of taxable income before such deduction or actual loss
      experience. For 1995 and 1996, the percentage of taxable income method was
      used. For tax years beginning after fiscal 1996, this method has been
      repealed. In 1997, First Palmetto used the "Bank" experience method or the
      specific charge-off method. First Palmetto is required to recapture into
      taxable income the portion of it's bad debt reserves that exceeds its base
      year reserves. The amount of bad debt reserves subject to recapture over
      six years for the Bank is $1.2 million. The base year reserves of $4.6
      million will not be subject to recapture unless the bad debt reserves are
      used for purposes other than to absorb bad debt losses or the Bank fails
      to meet the tax definition of a Bank.

      Income tax returns for 1993 and subsequent years are subject to
      examination by the taxing authorities.


(13)  Regulatory Capital Requirements
      -------------------------------

      The Bank is subject to various regulatory capital requirements
      administered by the federal banking agencies. Failure to meet minimum
      capital requirements can initiate certain mandatory and possible
      additional discretionary actions by regulators that, if undertaken, could
      have a direct material effect on the Bank's financial statements. Under
      capital adequacy guidelines and the regulatory framework for prompt
      corrective action, the Bank must meet specific capital guidelines that
      involve quantitative measures of the Bank's assets, liabilities and
      certain off-balance-sheet items as calculated under regulatory accounting
      practices. The Bank's capital amounts and classifications are also subject
      to qualitative judgements by the regulators about components, risk
      weightings and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Bank to maintain minimum amounts and ratios (set forth in the
      table below) of tangible and core capital (as defined in the regulations)
      to total assets (as defined), and of risk-based capital (as defined) to
      risk-based assets (as defined). Management believes, as of September 30,
      1997, that the Bank meets all capital adequacy requirements to which it is
      subject.

      As of September 30, 1997, the Bank was categorized as well-capitalized
      under the regulatory framework for prompt corrective action. To be
      categorized as well as the Bank must maintain minimum total risk-based,
      Tier I risk-based, and Tier I core ("leverage") ratios as set forth in the
      table. There are no conditions or events since that date that management
      believes have changed the Bank's category.



                                                                     (Continued)

                                       34
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


      The Bank's actual capital amounts and ratios are also presented in the
      table.

<TABLE>
<CAPTION>
 
 
                                                                                    To be well
                                                                                Capitalized under
                                                        For capital adequacy    prompt corrective
                                          Actual              purposes          action provisions
                                    ------------------  --------------------  --------------------
                                     Amount     Ratio     Amount      Ratio     Amount      Ratio
                                    -------  ---------  --------   ---------  ---------  ---------
        <S>                         <C>      <C>        <C>        <C>        <C>        <C>
        As of September 30,
          1997:
        Tangible capital
           (to total assets)        $19,066      5.15%   $ 5,556       1.50%
         Core capital
           (to total assets)         19,736      5.32     11,132       3.00     $18,553      5.00%
        Tier I capital
          (to risk-based assets)     22,434     10.39          -          -      12,955      6.00
        Risk-based capital
          (to risk-based assets      22,434     10.39     17,266       8.00      21,583     10.00

        As of September 30,
          1996:
        Tangible capital
          (to total assets)         $16,222      4.80%   $ 5,106       1.50%
        Core capital
          (to total assets)          17,070      5.00     10,237       3.00     $17,070      5.00%
        Tier I capital
          (to risk-based assets)     19,484     10.10          -          -      11,545      6.00
        Risk-based capital
          (to risk-based assets      19,434     10.10     15,377       8.00      19,242     10.00
</TABLE>

      Under the framework, the Bank's capital levels allow the Bank to accept
      brokered deposits without prior approval from regulators.

      OTS capital distributions specify the conditions relative to an
      institution's ability to pay dividends. The new regulations permit
      institutions meeting fully phased-in capital requirements and subject only
      to normal supervision to pay out 100 percent of net income to date over
      the calendar year and 50 percent of surplus capital existing at the
      beginning of the calendar year without supervisory approval. The
      regulations state that an institution subject to more stringent
      restrictions may make request through OTS to be subject to the new
      regulations. The Bank has received approval from the OTS to be subject to
      the requirements of the new regulations.

      The Bank may not declare or pay a cash dividend on, or purchase , any of
      its common stock, if the effect thereof would cause the capital of the
      Bank to be reduced below the minimum regulatory capital requirements.

                                                                     (Continued)

                                       35
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

(14)  Pension Plan
      ------------

      First Palmetto has a noncontributory defined contribution pension plan for
      substantially all employees. Contributions are 8% of each active
      participant's compensation for the year plus 5.7% of each active
      participant's compensation for the year over $10,000. First Palmetto's
      expense related to the plan amounted to $330,000, $300,000, and $325,000
      for the years ended September 30, 1997, 1996, and 1995, respectively.

(15)  Stock Option Plan
      -----------------

      Options under the First Palmetto Financial Corporation's 1990 Stock Option
      Plan (the 1990 Plan) may be granted to employees at an exercise price
      equal to the fair market value of the stock on the date of the grant and
      shall be exercisable within ten years from the date of the grant. In the
      case of an employee who owns more than 10% of First Palmetto's outstanding
      common stock at the time the option is granted, the option price may not
      be less than 110% of the fair market value of the shares on the date of
      the grant, and shall not be exercisable after the expiration of five years
      from the date it is granted. Option shares may be paid for in cash, shares
      of common stock, or a combination of both. An aggregate of 66,459
      additional shares of common stock have been reserved for issuance under
      this plan. At September 30, 1997, no options had been granted under this
      plan.

(16)  Fair Value of Financial Instruments
      -----------------------------------

      Fair value estimates, methods, and assumptions as of September 30, 1997
      and 1996 for First Palmetto are set forth below and are subject to the
      following limitations.

      Fair value estimates are made at a specific point in time, based on
      relevant market information and information about the financial
      instrument. These estimates do no reflect any premium or discount that
      could result from offering for sale at one time First Palmetto's entire
      holdings of a particular financial instrument. Because no market exists
      for a portion of First Palmetto's financial instruments, fair value
      estimates are based on judgments regarding future expected loss
      experience, current economic conditions, risk characteristics of various
      financial instruments, and other factors. These estimates are subjective
      in nature and involve uncertainties and matters of significant judgment
      and therefore cannot be determined with precision. Changes in assumptions
      could significantly affect the estimates.

      Fair value estimates are based on existing on- and off-balance sheet
      financial instruments without attempting to estimate the value of
      anticipated future business. The value of assets and liabilities that are
      not considered financial assets or liabilities including the mortgage
      banking operation, deferred tax liabilities, and premises and equipment.
      In addition, the tax ramifications related to the realization of the
      unrealized gains and losses can have a significant effect on fair value
      estimates and have not been considered.

                                                                     (Continued)

                                       36
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

First Palmetto's fair value methods and assumptions are as follows:

-  Cash and due from banks, interest-bearing balances in other banks,
   certificates of deposit in other banks, accrued interest receivable,
   and FHLB stock - the carrying value is a reasonable estimate of fair
   value.

-  Available-for-sale securities, investment securities, and mortgage-
   backed securities - fair value is based on available quoted market
   prices or quoted market prices for similar securities if a quoted
   market price is not available.

-  Loans - fair value for fixed and adjustable rate loans is estimated
   based upon discounted future cash flows using discount rates comparable
   to rates currently offered for such loans.

-  Deposits - the fair value of time deposits is estimated using rates
   currently offered for deposits of similar remaining maturities. The
   fair value of all other deposit account types is the amount payable on
   demand at year-end.

-  FHLB advances - fair value is estimated based on the current rates
   offered to First Palmetto for debt with the same remaining maturities.

-  Commitments to extend credit and standby letters of credit - First
   Palmetto's variable rate credit commitments are subject to minimal
   interest rate risk exposure since the rates periodically (generally one
   year or less) adjust to market. Fixed rate loan commitments do not
   represent significant interest rate risk exposure as these loans are
   typically sold.

Based on the limitations, methods, and assumptions noted above, the estimated
fair values of First Palmetto's financial instruments are as follows:

<TABLE>
<CAPTION>
 
                                                            Carrying       Fair
                                                             Amount        Value
                                                          ------------  ------------
                                                                (In thousands)
<S>                                                       <C>           <C>
September 30, 1997:                                             
     Financial assets:
       Cash and due from banks                                $  6,721      $  6,721
       Interest-bearing accounts in other banks                 18,085        18,085
       Certificates of deposit in other banks                      399           399
       Available-for-sale securities                               907           907
       Investment securities                                    47,918        48,430
       Mortgage-backed securities                               32,367        32,693
       Loans                                                   252,336       255,524
       Accrued interest receivable                               2,726         2,726
       FHLB stock                                                2,030         2,030
 
     Financial liabilities:
       Deposits                                                320,769       321,019
       FHLB advances                                            27,233        26,964
</TABLE>
                                                                     (Continued)

                                       37
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
 
 
<S>                                                <C>       <C>
September 30,1996:
     Financial assets:
       Cash and due from banks                     $  8,867  $  8,867
       Interest-bearing accounts in other banks      13,649    13,649
       Certificates of deposit in other banks           399       399
       Available-for-sale securities                    997       997
       Investment securities                         46,607    47,096
       Mortgage-backed securities                    33,010    32,788
       Loans                                        227,209   229,849
       Accrued interest receivable                    2,380     2,380
       FHLB stock                                     2,122     2,122
 
     Financial liabilities:
       Deposits                                     288,157   288,415
       FHLB advances                                 32,550    32,176
 
</TABLE>

                                                                     (Continued)

                                       38
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


(17)  Summary of Quarterly Income Statement Information (Unaudited)


      A summary of quarterly income statement information for the years ended
      September 30, 1997 and 1996 follows:

<TABLE>
<CAPTION>
 
                                    (Dollars in thousands, except per share amounts)
                                                   Three months ended
                                     December 31  March 31  June 30  September 30
                                     -----------  --------  -------  ------------
<S>                                  <C>          <C>       <C>      <C> 
Interest income                           $6,746    $6,771   $7,051        $7,334
Interest expense                           3,650     3,633    3,734         4,008
                                          ------    ------   ------        ------
 
 Net interest income                       3,096     3,138    3,317         3,326
 
Provision for loan losses                    125       365      225           713
                                          ------    ------   ------        ------
 Net interest income after
  provision for loan losses                2,971     2,773    3,092         2,613
 
Other income                                 736       793      527           580
Other expense                              2,366     2,238    2,253         1,989
                                          ------    ------   ------        ------
 
Income before income taxes                 1,341     1,328    1,366         1,204
Income taxes                                 510       468      509           422
                                          ------    ------   ------        ------
 
 Net income                               $  831    $  860   $  857        $  782
                                          ======    ======   ======        ======
Per share data
 Net income                               $ 1.20    $ 1.24   $ 1.24        $ 1.12
                                          ======    ======   ======        ======

<CAPTION> 
 
                                                   Three months ended
                                      December 31  March 31  June 30  September 30
                                     -----------  --------  -------  ------------
<S>                                  <C>          <C>       <C>      <C> 
Interest income                           $6,357    $6,521   $6,510        $6,628
Interest expense                           3,568     3,585    3,480         3,553
                                          ------    ------   ------        ------
 
 Net interest income                       2,789     2,936    3,030         3,075

Provision for loan losses                     75       145       75           590
                                          ------    ------   ------        ------
 Net interest income after
  provision for loan losses                2,714     2,791    2,955         2,485
 
Other income                                 508       776      480           491
Other expense                              2,086     2,107    2,282         3,518
                                          ------    ------   ------        ------
 
Income (loss) before income taxes          1,136     1,460    1,153          (542)
Income taxes (benefit)                       400       514      407          (126)
                                          ------    ------   ------        ------
 
 Net income (loss)                        $  736    $  946   $  746        $ (416)
                                          ======    ======   ======        ======
 
Per share data
 Net income (loss)                        $ 1.06    $ 1.37   $ 1.08        $ (.61)
                                          ======    ======   ======        ======
</TABLE>
                                                                     (Continued)

                                       39
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

(18)  Parent Company Financial Data
      -----------------------------

      The primary asset of First Palmetto (the Parent Company) is its investment
      in the Bank and its principal sources of income are dividends from the
      Bank and equity in undistributed net income of the Bank. Certain
      regulatory and other requirements restrict the lending of funds by the
      Bank to the Parent Company and the amount of dividends which can be paid
      to the Parent Company. At September 30, 1997, the Bank had available
      undivided profits of approximately $4.8 million for payments of dividends
      without obtaining prior regulatory approval.

      The following is a summary of selected financial information for the
      Parent Company:


                       Statements of Financial Condition
                       ---------------------------------
<TABLE>
<CAPTION>
 
                                                              September 30,
                                                           1997            1996
                                                         --------        --------
                                                             (In thousands)
<S>                                                      <C>             <C>
Assets                                                        
--------
Cash on deposit with subsidiary                          $   920         $   296
Available-for-sale securities                                907             997
Investment in subsidiary                                  21,301          19,064
                                                         -------         -------
  Total assets                                           $23,128         $20,357
                                                         =======         =======
 
Liabilities
-----------
Taxes payable                                            $    94         $     -
Deferred taxes                                               179             149
                                                         -------         -------
Total liabilities                                            273             149
                                                         -------         -------
 
Stockholders' equity
--------------------
Common stock                                                   7               7
Additional paid-in capital                                 6,680           6,080
Retained earnings, substantially restricted               16,488          14,474
Unrealized gain on available-for-sale securities             305             272
Treasury stock, at cost                                     (625)           (625)
                                                         -------         -------
  Total stockholders' equity                              22,855          20,208
                                                         -------         -------
  Total liabilities and stockholders' equity             $23,128         $20,357
                                                         =======         =======
 
</TABLE>
                             Statements of Income
                             --------------------
<TABLE>
<CAPTION>
 
 
                                                        Years ended September 30,
                                                          1997    1996    1995
                                                         ------  ------  ------
                                                             (In thousands)
<S>                                                      <C>     <C>     <C>
     Dividends from subsidiary                           $  900  $1,100  $  950
     Equity in undistributed net income of subsidiary     2,256     889   1,392
     Other income                                           285      35      36
                                                         ------  ------  ------
       Total income                                       3,441   2,024   2,378
     Expenses                                               111      12      20
                                                         ------  ------  ------
       Net income                                        $3,330  $2,012  $2,358
                                                         ======  ======  ======
</TABLE> 

                                                                     (Continued)

                                       40
<PAGE>
 
              FIRST PALMETTO FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                           Statements of Cash Flows
                           ------------------------
<TABLE>
<CAPTION>
 
 
                                                                 Years ended September 30,
                                                                  1997      1996      1995
                                                                -------   --------  --------
                                                                       (In thousands)
<S>                                                             <C>       <C>       <C>
Cash flows from operating activities:                                 
 Net income                                                     $ 3,330   $ 2,012   $ 2,358
 Adjustments to reconcile net income to net cash
  provided by operating activities:
   Gain on sale of available-for-sale securities                   (254)        -         -
   Equity in undistributed net income of subsidiary              (2,256)     (889)   (1,392)
   Increase in taxes payable                                         94         -         -
                                                                -------   -------   -------
 Net cash provided by operating activities                          914     1,123       966
                                                                -------   -------   -------
 
Cash flows from investing activities:
 Proceeds from sale of available-for-sale securities                426         -         -
                                                                -------   -------   -------
 Net cash provided by investing activities                          426       -0-       -0-
                                                                -------   -------   -------
 
 
Cash flows from financing activities:
 Purchase of common stock                                             -        (4)       (7)
 Sale of common stock                                               600         -         -
 Dividends paid to stockholders                                  (1,316)   (1,108)     (970)
                                                                -------   -------   -------
 Net cash used in financing activities                             (716)   (1,112)     (977)
                                                                -------   -------   -------
 
Net increase (decrease) in cash and cash equivalents                624        11       (11)
Cash and cash equivalents at beginning of year                      296       285       296
                                                                -------   -------   -------
 
Cash and cash equivalents at end of year                        $   920   $   296   $   285
                                                                =======   =======   =======
 
Supplemental schedule of noncash financing activities:
   Decrease in unrealized gain on available-for-sale
    securities of subsidiary                                    $   (18)  $     -   $     -
   Unrealized gain on available-for-sale securities
    of parent company (net of tax effect of $20)                     51       (37)      172
</TABLE>

(19)  Commitments and Contingencies
      -----------------------------

      First Palmetto is involved in various claims and legal actions arising in
      the ordinary course of business. In the opinion of management, the
      ultimate disposition of the matters will not have a material effect on
      First Palmetto's financial position, results of operations or liquidity.

      The average Federal Reserve balance requirement as of September 30, 1997
      was $1,052,000.

                                       41
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT



The Board of Directors
First Palmetto Financial Corporation
Camden, South Carolina


We have audited the accompanying consolidated statements of financial condition
of First Palmetto Financial Corporation and subsidiary (First Palmetto) as of
September 30, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1997.  These consolidated financial statements are
the responsibility of First Palmetto's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Palmetto
Financial Corporation and subsidiary at September 30,1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.



November 26, 1997

                                       42
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

                   BOARD of DIRECTORS and EXECUTIVE OFFICERS

<TABLE> 
<CAPTION> 

DIRECTORS                                               EXECUTIVE OFFICERS
<S>                                                     <C> 
H. Davis Green, Jr.                                     H. Davis Green, Jr.
Chairman of the Board, First Palmetto                   Chairman of the Board
H. Davis Green, Jr. Appraisals
Camden, South Carolina

Samuel R. Small                                         Samuel R. Small
Chief Executive Officer,                                President and Chief
First Palmetto Savings Bank, F.S.B.                     Executive Officer
Camden, South Carolina

Steve G. Williams, Jr.                                  Steve G. Williams, Jr.
Senior Vice President and Treasurer,                    Senior Vice-President and Treasurer
First Palmetto Savings Bank, F.S.B.
Camden, South Carolina

Pierce W. Cantey, Jr.                                   Darlene H. Love
Managing Partner,                                       Secretary
Carswell, Cantey, Burch and Associates, LLP
Camden, South Carolina                                  DIRECTORS EMERITUS

William R. Clyburn                                      H. B. Marshall, Jr.
President, Bill Clyburn Realty, Inc.                    Agent, New York Life Insurance Company
Kershaw, South Carolina                                 Camden, South Carolina

James L. Creed                                          Austin M. Sheheen, Sr.
Timber Company Executive (Retired),                     Business Executive (Retired), Sheheen
Texaco                                                  Camden, South Carolina
D.J. Creed and Son, Inc.               
Camden, South Carolina                                  William F. Tripp, Jr.                   
                                                        Plant Manager (Retired), E.I. DuPont    
Frank Goodale                                           Camden, South Carolina                   
Merchant, F.D. Goodale, Jeweler                         
Camden, South Carolina                                  

Donald H. Holland
Attorney, Holland, DuBose and Cushman
Camden, South Carolina

Charlie E. Nash
President, Charlie E. Nash Insurance Agency, Inc.
Camden, South Carolina

Glenn G. Tucker
President, Tucker Down East Resources, Inc.
Camden, South Carolina

</TABLE> 

                                       43
<PAGE>
 
                     FIRST PALMETTO FINANCIAL CORPORATION

                             CORPORATE INFORMATION


CORPORATE HEADQUARTERS
First Palmetto Financial Corporation
407 DeKalb Street
Camden, South Carolina  29020
Telephone (803) 432-1416

STOCK TRANSFER AGENT
First Palmetto Savings Bank, F.S.B.
407 DeKalb Street
Camden, South Carolina  29020

INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick
Suite 600
One Insignia Financial Plaza
Greenville, South Carolina  29603

LEGAL COUNSEL
Holland, DuBose and Cushman
718 Lafayette Avenue
Camden, South Carolina  29020

Savage, Royall and Sheheen
1111 Church Street
Camden, South Carolina  29020

BRANCH OFFICES
921 Bay Street, Beaufort, South Carolina  29902
104 East Church Street, Bishopville, South Carolina  29010
2310 North Broad Street, Camden, South Carolina  29020
3932 Forest Drive, Columbia, South Carolina  29206
9221 Two Notch Road, Columbia, South Carolina  29223
266 Cashua Street, Darlington, South Carolina  29532
Highway #1, Elgin, South Carolina  29045
10540 Two Notch Road, Elgin, South Carolina  29045
7327 St. Andrews Road, Irmo, South Carolina  29063
301 Hampton Street, Kershaw, South Carolina 29067
977 North Main Street, Lancaster, South Carolina 29721
5321 Sunset Boulevard, Lexington, South Carolina  29072
Highway #1, Lugoff, South Carolina  29078
111 North Brooks Street, Manning, South Carolina  29102
210 North Pearl Street, Pageland, South Carolina   29728

SUBSIDIARY
First Palmetto Savings Bank, F.S.B.
407 DeKalb Street
Camden, South Carolina  29020

EMPLOYEES
At September 30, 1997 First Palmetto employed 124 persons.

                                       44
<PAGE>
 
COMMON STOCK INFORMATION
------------------------

      At September 30, 1997, First Palmetto had 708,010 shares of common stock
outstanding held by approximately 391 shareholders.

      At the present time, there is no established public trading market in
which shares of First Palmetto's common stock are regularly traded, nor are
there any uniformly quoted prices for such shares. The following is the known
range of high and low sales prices for the common stock for the two most recent
years.

<TABLE>
<CAPTION>
                               October 1, 1996 to  October 1, 1995 to
Stock Data-Per Share           September 30, 1997  September 30,1996
--------------------           ------------------  ------------------
<S>                            <C>                 <C>
Sales Price (Estimated)
 High                                $40.00              $33.00
 Low                                 $33.00              $28.00
 Book Value at September 30          $32.28              $29.16
 Annual Cash Dividend                $ 1.90              $ 1.60
 
</TABLE>

FORM 10-K INFORMATION
---------------------

      A copy of Form 10-K, including financial statements and schedules, as
filed with the Securities and Exchange Commission will be furnished without
charge to stockholders as of the record date upon written request made to First
Palmetto's corporate headquarters, attention Darlene Love, Secretary.

                                       45