SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended September 30, 1998
                         Commission File Number: 0-18932

                      FIRST PALMETTO FINANCIAL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Delaware                               57-0921284
---------------------------------                 -------------------
(State or other jurisdiction                      (I.R.S. Employer
of incorporation or organization)                 Identification No.)

    407 DeKalb Street, Camden, S.C.                    29020
----------------------------------------             ----------
(Address of principal executive offices)             (Zip Code)

        Registrant's telephone number, including area code: 803-432-1416

Securities registered pursuant to Section 12(b) of the Act: None

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

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

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

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

     The  registrant's  voting stock is not regularly and actively traded in any
established  market,  and there are no regularly quoted bid and asked prices for
the  registrant's  voting stock.  As of November 4, 1998,  the aggregate  market
value of the voting stock held by non-affiliates of the registrant,  computed by
reference  to the  most  recent  privately  negotiated  sales  prices  known  to
management,  was  approximately  $20.1  million  (393,410  shares at $51.00  per
share).  It is  assumed  for  purposes  of  this  calculation  that  all  of the
registrant's directors and executive officers are affiliates of the registrant.

     As of November 4, 1998 there were issued and outstanding  708,010 shares of
the registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     September 30, 1998 (the "Annual  Report").  (Parts I and II)
2.   Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
     (PART III).
<PAGE>
                                     PART I

ITEM 1.  Business

General

     First Palmetto Financial Corporation.  First Palmetto Financial Corporation
("First  Palmetto") was incorporated  under the laws of the State of Delaware on
January 24, 1990 but did not issue stock or begin  operations  until October 31,
1990.
       
     First Palmetto is classified as a unitary  savings and loan holding company
subject  to  regulation  by the  Office of  Thrift  Supervision  ("OTS")  of the
Department of the Treasury.  First Palmetto's principal business is the business
of its  subsidiary,  First Palmetto  Savings Bank,  F.S.B.  (the "Bank") and the
Bank's  subsidiary.  Except  as  otherwise  noted,  references  herein  to First
Palmetto include the Bank. As a federally chartered savings  association,  First
Palmetto is subject to extensive  regulation and  examination by the OTS and the
Federal Deposit  Insurance  Corporation  ("FDIC"),  as the  administrator of the
Savings  Association  Insurance  Fund ("SAIF")  which  insures First  Palmetto's
deposits.

     The Bank's  main  office is located at 407  DeKalb  Street,  Camden,  South
Carolina  (telephone  (803)  432-1416).  First  Palmetto also has fifteen branch
offices in other South  Carolina  locations in  Bishopville,  Camden,  Columbia,
Darlington, Elgin, Irmo, Kershaw, Lancaster,  Lexington, Lugoff, Manning, Myrtle
Beach, Pageland and Pontiac.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

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

Consolidated Financial Condition Data

<TABLE>
<CAPTION>
                                                                              At September 30,
                                             ------------------------------------------------------------------------------
                                                    1998           1997           1996            1995             1994
                                                    ----           ----           ----            ----             ----
                                                                               (In thousands)
<S>                                          <C>                <C>             <C>             <C>            <C>
Assets                                       $   433,745        $    372,948    $    344,547    $    323,183   $    278,056
Loans, net                                       263,989             252,336         227,209         198,373        163,649
Cash and investment securities (a)                56,944              74,030          70,519          71,807         72,826
Mortgage-backed securities                        95,862              32,367          33,010          39,410         31,159
Deposits                                         343,947             320,769         288,157         267,313        225,417
Federal Home Loan Bank advances                   60,667              27,233          32,550          33,367         31,000
Stockholders' equity, substantially
  restricted                                      25,169              22,855          20,208          19,345         17,804
---------------------------------------------------------------------------------------------------------------------------
</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>
Consolidated Summary of Operations
<TABLE>
<CAPTION>
                                                                      Years Ended September 30,                                     
                                               ----------------------------------------------------------------------------
                                                   1998           1997           1996            1995             1994
                                               ------------   ------------   ------------    ------------   ---------------
                                                                        (In thousands, except per share data)
   <S>                                         <C>            <C>            <C>             <C>            <C>

   Interest income                             $     31,026   $     27,902   $     26,016    $     22,794   $     16,890
   Interest expense                                  17,275         15,025         14,186          12,483          8,213
                                               ------------   ------------   ------------    ------------   ------------
   Net interest income                               13,751         12,877         11,830          10,311          8,677
   Provision for loan losses                          2,262          1,428            885             482            523
                                               ------------   ------------   ------------    ------------   ------------
   Net interest income after
     provision for loan losses                       11,489         11,449         10,945           9,829          8,154
   Other income                                       3,904          2,636          2,255           1,934          1,651
   Other expense                                      8,861          8,846          9,993           8,105          6,597
   Income tax expenses                                2,354          1,909          1,195           1,300          1,184
   Cumulative effect of change
     in accounting principle                              -              -              -               -            243
                                               ------------   ------------   ------------    ------------   ------------
   Net income                                  $      4,178   $      3,330   $      2,012    $      2,358   $      2,267
                                               ============   ============   ============    ============   ============
   Net income per common share-basic           $       5.90   $       4.80   $       2.90    $       3.40   $       3.36
                                               ============   ============   ============    ============   ============
   Book value per common share-basic           $      35.55   $      32.28   $      29.16    $      27.90   $      25.68
                                               ============   ============   ============    ============   ============
   Dividends per share                         $       2.20   $       1.90   $       1.60    $       1.40   $       1.25
                                               ============   ============   ============    ============   ============
</TABLE>

Financial Ratios
                                                For the year ended September 30,
                                                --------------------------------
                                                    1998       1997       1996
                                                    ----       ----       ----

Return on average assets (net income
   divided by average total assets)                 1.04%       .93%      .61%

Return on average equity (net income
   divided by average equity)                      17.40%     15.68%    10.33%

Dividend payout ratio (dividends declared
   divided by net income)                             37%        40%       55%

Average equity-to-average assets ratio (average
   equity divided by average total assets)          5.95%      6.00%     5.87%

LENDING ACTIVITIES

     General. First Palmetto offers residential,  construction,  commercial real
estate, installment and commercial business loans.

                                        3
<PAGE>
     Loan Portfolio  Data. The following table sets forth selected data relating
to the  composition of First  Palmetto's loan portfolio by type of loan and type
of security at the dates indicated.
<TABLE>
<CAPTION>
                                                                               At September 30,
                                ----------------------------------------------------------------------------------------------------
                                         1998                  1997               1996                 1995             1994
                                         ----                  ----               ----                 ----             ----
                                                                              (Dollars in thousands)
<S>                             <C>           <C>      <C>         <C>    <C>         <C>      <C>        <C>       <C>       <C>
Type of Loan:
   Real estate loans:
     1-4 Family                 $   119,947    45.4%   $   129,244  51.2% $  123,155   54.2%   $ 106,264   53.6%    $ 98,649   60.2%
     Commercial                      97,557    37.0         78,147  31.0      62,043   27.3       56,489   28.4       43,347   26.6
     Construction                     9,127     3.5          8,462   3.4       8,695    3.8        5,431    2.7        6,716    4.1
   Commercial business               15,724     6.0         13,525   5.4      12,578    5.5       10,055    5.1        5,906    3.6
   Installment loans                 29,847    11.3         29,131  11.5      27,847   12.3       24,376   12.3       14,064    8.6
Less:
   Undisbursed loan proceeds          3,325     1.3          2,891   1.2       4,461    2.0        2,240    1.1        3,145    1.9
   Deferred loan fees                   239      .1            273    .1         284     .1          202     .1          233     .2
   Allowance for loan losses          4,649     1.8          3,009   1.2       2,364    1.0        1,800     .9        1,655    1.0
                                -----------  -------   ----------- -----  ----------  -----    ---------  -----     --------  -----
         Total                  $   263,989   100.00%  $   252,336 100.0% $  227,209  100.0%   $ 198,373  100.0%    $163,649  100.0%
                                ===========  =======   =========== =====  ==========  =====    =========  =====     ========  =====
</TABLE>
                                        4
<PAGE>
     Large Loans.  At September 30, 1998,  First  Palmetto's  five largest loans
ranged from  $930,500 to $1.3  million.  All of these loans were secured by real
property in First Palmetto's primary market area.

     Sensitivities  of Loans to Changes in Interest  Rates.  The following table
sets forth certain  information  as of September 30, 1998,  regarding the dollar
amount  of  loans  maturing  in  First  Palmetto's   portfolio  based  on  their
contractual  terms to maturity,  including  scheduled  repayments  of principal.
Demand  loans,  loans  having no stated  schedule  of  repayments  and no stated
maturity,   and   overdrafts   are   reported  as  due  in  one  year  or  less.

<TABLE>
<CAPTION>

                               Due            Due two
                           during the      through five     Due after five
                           year ending      years after       years after
                          September 30,   September 30,      September 30,
                               1999            1998             1998                 Total
                               ----            ----             ----                 -----
                                                  (In thousands)
<S>                       <C>             <C>                 <C>             <C>          
Real Estate               $     64,734    $  105,022          $  53,550       $     223,306
Commercial Business              9,026         6,127                571              15,724
Installment                     13,000        16,307                540              29,847
                          ------------    ----------          ---------       -------------
       Total              $     86,760    $  127,456          $  54,661       $     268,877
                          ============    ==========          =========       =============
</TABLE>
     The following table sets forth, as of September 30, 1998, the dollar amount
of loans in First  Palmetto's  portfolio  due more than one year after such date
which had predetermined  interest rates and had floating or adjustable  interest
rates. Floating or

                     Predetermined         Adjustable
                         Rates              Rates                 Total
                         -----              -----                 -----
                                     (In thousands)

Real Estate         $      110,170      $      48,402       $     158,572
Commercial                   6,204                494               6,698
Installment                 16,424                423              16,847
                    --------------      -------------       -------------
       Total        $      132,798      $      49,319       $     182,117
                    ==============      =============       =============

     Residential  Loans.  Residential  loans,  which comprised 45.4% of the loan
portfolio or $119.9 million at September 30, 1998, are generally underwritten to
the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. Charge-offs for
these type loans totaled  $148,000 for the fiscal year ended  September 30, 1998
and $272,000 for the previous year.  Residential  loans, the largest category of
loans, represents the least amount of credit risk.

     Construction  Loans.  Construction loans totaled a net $5.8 million or 2.2%
of the loan portfolio at September 30, 1998.

     During fiscal 1998, First Palmetto originated $12.9 million of construction
loans,  which  represented 6.7% of its total loans originated during the period.
Substantially  all of First Palmetto's  construction loan portfolio at September
30, 1998 consisted of loans secured by single-family dwellings.

                                        5
<PAGE>
     Construction  financing is generally  considered to involve a higher degree
of  credit  risk than  long-term  financing  of  residential  properties.  First
Palmetto's  risk of loss on a  construction  loan is dependent  largely upon the
accuracy  of the initial  estimate  of the  property's  value at  completion  of
construction  or  development  and the estimated  cost  (including  interest) of
construction.  If the estimate of  construction  cost or the  salability  of the
property upon completion of the project proves to be inaccurate,  First Palmetto
may be required  to advance  funds  beyond the amount  originally  committed  to
permit the construction of the development.

     Commercial Real Estate Loans. First Palmetto's  commercial real estate loan
portfolio  generally  consists of income producing  properties or owner occupied
properties.

     Commercial  real estate  loans,  including  loans  secured by  multi-family
apartment projects with more than four units,  constituted  approximately  $97.6
million,  or 37.0% of First Palmetto's net loan portfolio at September 30, 1998.
This was an increase of $19.4  million from the previous  year.  These loans are
typically  secured by  commercial  real  estate  located in Kershaw or  Richland
County,  South  Carolina.  Commercial  real estate loans are  generally  made in
amounts up to $1.0 million and are generally  considered to involve higher risks
than  owner-occupied  residential real estate loans.  First  Palmetto's  largest
single commercial real estate loan at September 30, 1998 was approximately  $1.3
million.  Commercial  properties  are  evaluated  based on  whether  the  income
produced would be sufficient to pay the scheduled payments.

     Installment  Loans.  Installment  loans remained stable at $29.8 million at
September 30, 1998. In originating  consumer loans,  First Palmetto focuses on a
customer's  debt  obligations,  ability  and  willingness  to repay and  general
economic  trends in evaluating  credit  request.  Charge-offs  on consumer loans
totaled  $394,000 and $182,000 for the fiscal years ended September 30, 1998 and
1997, respectively.  Due to the higher credit risks and operating costs inherent
in consumer loans, rates are generally higher than those required on residential
and commercial loans.

     Commercial  Business Loans.  Commercial business loans increased from $13.5
million at September  30, 1997 to $15.7  million at September  30, 1998. As with
commercial real estate loans, these type loans generally result in higher credit
risk to First Palmetto.  Commercial  business loans are frequently  unsecured or
secured by inventory,  accounts receivable and other types of personal property.
In the event of default,  the collateral,  if any, may be difficult to liquidate
at market prices.  To manage this risk,  First  Palmetto  assesses the financial
condition of the borrower as well as the  marketability of the collateral on the
loan (if applicable) in evaluating the loan request.  Restrictive debt covenants
which limit such items as officers' salaries, working capital and equity capital
are included in commercial business loan agreements.

     Charge-offs for commercial real estate and business loans totaled  $395,000
and  $463,000  for  the  fiscal  years  ended   September  30,  1998  and  1997,
respectively.

     First Palmetto originates commercial business loans on a limited basis.

                                        6
<PAGE>
     The following table sets forth loans and loan participations, purchased and
sold by First Palmetto during the periods indicated
<TABLE>
<CAPTION>
                                                                       Years Ended September 30,
                                               ---------------------------------------------------------------------------
                                                   1998           1997           1996            1995             1994
                                               ------------   ------------   ------------    ------------   --------------
                                                                             (In thousands)
Loans originated:
<S>                                            <C>            <C>            <C>             <C>            <C>         
   Residential                                 $     82,713   $     64,476   $     71,530    $     39,039   $     71,653
   Residential construction                          12,922         12,396         14,747           9,079         11,909
   Commercial real estate,
     including construction                          75,065         50,960         35,235          43,248         35,977
   Consumer                                          22,391         19,935         19,456          19,838         13,387
                                               ------------   ------------   ------------    ------------   ------------
       Total loans originated                  $    193,091   $    147,767   $    140,968    $    111,204   $    132,926
                                               ============   ============   ============    ============   ============
Loans purchased                                $        -0-   $        -0-   $        -0-    $        -0-   $        -0-
                                               ============   ============   ============    ============   ============
Loans sold                                     $     29,961   $     11,764   $     16,210    $      9,227   $     36,176
                                               ============   ============   ============    ============   ============
</TABLE>
     Non-Performing  Assets and Asset  Classification.  Loans are  reviewed on a
regular  basis and are placed on a  non-accrual  status when,  in the opinion of
management,  the collection of additional  interest is doubtful.  Management and
the directors of First Palmetto review on a monthly basis individual loans which
are classified as non-performing assets.  Management also evaluates the adequacy
of the  allowance for loan losses based on specific  review of delinquent  loans
and other loans with problems, composition of the Bank's loan portfolio, general
economic conditions, value of collateral and other factors. Interest accrued and
unpaid at the time a loan is placed on  non-accrual  status is  charged  against
interest  income.  Subsequent  payments  are either  applied to the  outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.

     At September 30, 1998 and 1997,  the recorded  investment in loans that are
considered to be impaired was $851,000 and $759,000,  respectively. There was no
specific  allowance  for  credit  losses  related  to the  impaired  loans as of
September 30, 1998 and 1997. The average  recorded  investment in impaired loans
during the years ended  September  30, 1998 and 1997 was $923,000 and  $396,000,
respectively.  Interest  income  recognized on the cash basis for impaired loans
amounted to $127,000  and  $27,000  for the years ended  September  30, 1998 and
1997,  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  $636,000,  $981,000,
and $984,000,  at September 30, 1998,  1997,  and 1996,  respectively.  Foregone
interest  income related to nonaccrual  loans for the years ended  September 30,
1998,  1997 and 1996  amounted to $36,216,  $60,274 and  $94,868,  respectively.
Interest income recognized on nonaccrual loans for the years ended September 30,
1998, 1997 and 1996 amounted to $25,025, $37,792 and $52,032, respectively.

     Real estate  acquired by First  Palmetto as a result of  foreclosure  or by
deed in lieu of  foreclosure  is classified as real estate owned until such time
as it is sold.  When such  property is acquired,  it is recorded at the lower of
the unpaid principal balance of the related loan or its fair value.  Thereafter,
such  properties are carried at lower of cost or fair value less estimated costs
to sell. At September  30, 1998,  real estate owned in the amount of $81,000 was
secured  by  single  family  dwellings  or land  and  $419,000  was  secured  by
commercial  property.  All such property is located in First Palmetto's  primary
lending area and management is currently seeking to sell all property.

                                        7
<PAGE>
     At September 30, 1998,  the allowance for loan losses  totaled $4.6 million
compared to $3.0 million at September 30, 1997. The allowance for loan losses as
a  percentage  of loans  was 1.73% and  1.18% at  September  30,  1998 and 1997,
respectively.  Asset  quality has  improved for the  comparative  years with the
ratio of  non-performing  assets to total assets decreasing to .26% at September
30, 1998 from .35% and .43% at September 30, 1997 and 1996, respectively. All of
the  allowance  for  loan  losses  has  been  allocated  to  general   reserves.
Approximately $1.7 million has been allocated to commercial properties, $300,000
has been allocated to consumer loans and the remainder of the allowance has been
allocated to other loans.

     The provision for loan losses for fiscal 1998 was $2.3 million  compared to
$1.4 million for the preceding  year.  The  increased  provision for loan losses
resulted from the higher level of loans  outstanding and the continuing shift in
the loan mix from lower risk  residential  lending to higher risk  consumer  and
commercial lending.  Also during the year,  management has emphasized increasing
loans  with  large  balances  as  evidenced  by six loans  over $1.0  million at
September  30, 1998,  compared to one loan over $1.0  million at  September  30,
1997. Net  charge-offs to the allowance for loan losses were $622,000 during the
fiscal year ended September 30, 1998, as compared to $783,000 for the year ended
September 30, 1997. Management continually reviews the adequacy of the allowance
for loan losses,  considering  such factors as reviews of  delinquent  loans and
other loans with problems,  composition of the Bank's loan portfolio, history of
charge-offs,  general economic  conditions that may affect borrowers' ability to
repay and the value of collateral.

     While First Palmetto  believes it has established  its existing  allowances
for loan losses in accordance  with generally  accepted  accounting  principles,
there can be no assurance that  regulators,  in reviewing First  Palmetto's loan
portfolio,  will not request  First  Palmetto to adjust its  allowance  for loan
losses, thereby impacting First Palmetto's financial condition and earnings.

     At September 30, 1998, there were no  concentrations  of loans in any types
of industry  which  exceeded 10% of First  Palmetto's  total loans that were not
otherwise  disclosed as a loan category above. In addition,  there were no loans
which were not classified as non-accrual or  restructured  at September 30, 1998
which may be so classified in the near future  because known  information  about
possible credit problems of borrowers causes management to have doubts as to the
ability of the borrowers to comply with the present loan repayment terms.

                                       8
<PAGE>
     The following  table sets forth an analysis of First  Palmetto's  allowance
for loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                                       Years Ended September 30,
                                               ---------------------------------------------------------------------------
                                                   1998           1997           1996            1995             1993
                                               ------------   ------------   ------------    ------------   --------------
                                                                       (Dollars in thousands)
<S>                                            <C>            <C>            <C>             <C>            <C>         
Balance at beginning of period                 $   3,009      $   2,364      $   1,800       $   1,655      $   1,480

Loans charged off:
  Residential                                        148            272             63              16             15
  Consumer                                           394            182            220             200            220
  Commercial                                         395            463            284             180            167
                                               ---------      ---------      ---------       ---------      ---------
     Total charge-offs                               937            917            567             396            402
                                               ---------      ---------      ---------       ---------      ---------
Recoveries
  Residential                                        209              -              -               2              2
  Consumer                                            51             54             52              30             30
  Commercial                                          55             80            194              27             22
                                               ---------      ---------      ---------       ---------      ---------
     Total recoveries                                315            134            246              59             54
                                               ---------      ---------      ---------       ---------      ---------
Provision for loan losses                          2,262          1,428            885             482            523
                                               ---------      ---------      ---------       ---------      ---------
Balance at end of period                       $   4,649      $   3,009      $   2,364       $   1,800      $   1,655
                                               =========      =========      =========       =========      =========
Ratio of net charge-offs to the
  allowance for loan losses                        13.4%          26.0%          13.6%           18.7%          21.0%
                                               =========      =========      =========       =========      =========
Ratio of net charge-offs to average
  loans outstanding during the period                .25%           .33%           .15%            .19%           .22%
                                               =========      =========      =========       =========      =========
</TABLE>

                                       9
<PAGE>
     The  following  table sets forth  information  regarding  First  Palmetto's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
                                                                               At September 30,
                                ----------------------------------------------------------------------------------------------------
                                         1998                  1997               1996                 1995             1994
                                         ----                  ----               ----                 ----             ----
                                         Percentage            Percentage         Percentage           Percentage         Percentage
                                             of                    of                  of                   of                 of
                                           Total                 Total               Total                Total              Total
                                Amount     Assets     Amount     Assets   Amount    Assets    Amount     Assets    Amount    Assets
                                ------     ------     ------     ------   ------    ------    ------     ------    ------    ------
                                                                                (Dollars in thousands)
<S>                             <C>           <C>      <C>         <C>    <C>         <C>      <C>        <C>       <C>       <C>
Non-accrual loans               $  636      .14%      $  981      .26%    $  984      .29%     $  823     .25%      $  722    .26%
Accruing loans 90 days or
  more past due                      -        -            -        -          -        -           -       -            -      -
                                ------      ---       ------      ---     ------      ---      ------     ---       ------    ---
     Total                         636      .14          981      .26        984      .29         823     .25          722    .26
                                ------      ---       ------      ---     ------      ---      ------     ---       ------    ---
Other non-performing assets (a)    500      .12          332      .09        480      .14       1,031     .32        1,134    .41
                                ------      ---       ------      ---     ------      ---      ------     ---       ------    ---

Troubled debt restructurings         -        -            -        -          -        -           -       -            -      -
                                ------      ---       ------      ---     ------      ---      ------     ---       ------    ---
Total non-performing assets     $1,136      .26%      $1,313      .35%    $1,464      .43%     $1,854     .57%      $1,856    .67%
                                ======      ===       ======      ===     ======      ===      ======     ===       ======    ===
</TABLE>
     (a) Other  non-performing  assets  represent  property  acquired  by  First
Palmetto  through  foreclosure  or  repossession.  This  property  is  initially
recorded at the lower of its fair value or the cost of the related  loan at time
of foreclosure.

                                        10
<PAGE>
INVESTMENT ACTIVITIES

     Interest  on   investment   securities,    available-for-sale   securities,
interest-bearing  deposits and mortgage-  backed  securities have provided First
Palmetto's  second largest source  of revenue after interest on loans.  Interest
on such investments constituted 22.9%, 20.7% and 23.1% of the total interest and
other  revenues  of  First  Palmetto  in  fiscal  years  1998,  1997  and  1996,
respectively.  At September 30, 1998, investments,  mortgage-backed  securities,
Federal Home Loan Bank ("FHLB") of Atlanta stock and  interest-bearing  deposits
in other banks totaled $149.2 million or 34.4% of First Palmetto's total assets.

     In accordance with generally accepted accounting principles, First Palmetto
reports its investments, other than investments  available-for-sale,  at cost as
adjusted for discounts and unamortized premiums.  Investments available-for-sale
are reported at fair value.

     First Palmetto's  mortgage-backed securities ("MBS") portfolio at September
30, 1998 was composed of adjustable  rate mortgage  ("ARM") MBS of $50.1 million
and  fixed  rate  MBS of  $45.8  million.  The ARM  MBS  have  weighted  average
adjustment dates in the period from December, 1998 to June, 1999. At the present
level of interest  rates,  the fixed rate MBS  portfolio  has a duration of less
than two years. As interest rates  increase,  market value will decrease and the
duration of the fixed rate  portfolio will lengthen as borrowers are less likely
to  refinance  the  loans  collateralizing  the MBS.  ARM MBS  often  experience
decreased prepayments in rising interest rate environments as borrowers are less
likely to fix their  mortgage  rates.  Similar  to fixed  rate MBS,  the ARM MBS
decrease  in value as rates  rise,  but not in the same  magnitude,  because the
interest rate adjusts annually to market rate. See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations -- ASSET and LIABILITY
MANAGEMENT and INTEREST RATE  SENSITIVITY"  in the Annual Report to Stockholders
(Exhibit 13) for a discussion of First Palmetto's interest rate sensitivity risk
and the associated prepayment risk.

     First  Palmetto's  MBS  portfolio is  classified as held to maturity and is
therefore  carried at amortized cost.  Although these securities are in the held
to maturity category,  they are readily marketable and have a market value which
is greater than their carrying value at September 30, 1998.

     As a member of the FHLB  System,  First  Palmetto  is  required to maintain
minimum  levels of liquid  assets  specified  by the OTS which vary from time to
time.   See   "Regulation  --  Savings   Association   Regulation  --  Liquidity
Requirements."  The  following  table  sets  forth the  carrying  value of First
Palmetto's interest-bearing deposits,  available-for-sale securities, investment
securities and mortgage-backed  securities at September 30, 1998, 1997 and 1996.
The market  values of First  Palmetto's  interest-bearing  deposits,  investment
securities  and  mortgage-backed  securities  at  September  30, 1998 were $11.9
million, $38.5 million and $97.7 million, respectively.

                                       11
<PAGE>
     The  following  table  sets  forth  the book  values  of  First  Palmetto's
investments:

                                                          September 30,
                                            ------------------------------------
                                               1998        1997         1996
                                               ----        ----         ----
                                                           (In thousands)

Interest-bearing deposits                   $  11,992    $ 18,484    $   14,048
                                            =========    ========    ==========
Investment securities

U.S. Government and agency securities       $  37,969    $ 47,918    $   46,607
Available-for-sale investments                      -         907           997
                                            ---------    --------    ----------
       Total investments                    $  37,969    $ 48,825    $   47,604
                                            =========    ========    ==========

Mortgage-backed securities

FHLMC and FNMA                              $  95,777    $ 32,241    $   32,842
     Other                                         85         126           168
                                            ---------    --------    ----------
                                            $  95,862    $ 32,367    $   33,010
                                            =========    ========    ==========
FHLB of Atlanta stock                       $   3,333    $  2,030    $    2,122
                                            =========    ========    ==========

       The  following  table  sets forth the  amounts  and  maturities  of First
Palmetto's investments at September 30, 1998:

<TABLE>
<CAPTION>
                                                          Due after         Due after
                                            Due in         one year        five years         Due
                                          one year          through           through        after
                                           or less       five years         ten years      ten years          Total
                                           -------       ----------         ---------      ---------          -----
                                                           (Dollars In thousands)
<S>                                  <C>              <C>               <C>               <C>              <C>
Investment securities                $    14,991      $     22,978      $      -          $       -        $   37,969
Mortgage-backed securities                     -               641        12,239             82,982            95,862
                                     -----------      ------------      --------          ---------        ----------
       Total                         $    14,991      $     23,619      $ 12,239          $  82,982        $  133,831
                                     ===========      ============      ========          =========        ==========

Weighted average yield                      6.73%             6.48%         6.55%              5.99%             6.22%
                                     ===========      ============      ========          =========        ==========
</TABLE>
                                       12
<PAGE>
DEPOSITS

     Deposits.  First Palmetto  offers a number of deposit  accounts,  including
statement,  regular savings accounts,  NOW/Checking,  IRA accounts, money market
accounts and certificate  accounts ranging in maturity generally from 90 days to
three years.  Deposit account terms vary, with the principal  differences  being
the minimum balance required,  the time period the funds must remain on deposit,
with the related penalty for early withdrawal,  and the interest rate.  Deposits
can also be affected by branch  acquisitions,  branch  sales and the rates being
offered for deposits compared to other investment opportunities.

     First  Palmetto's  deposits are obtained  primarily  from  residents of the
State of South Carolina.  Management of First Palmetto  estimated that less than
1/2 of 1% of deposits are obtained from customers  residing outside the State of
South Carolina.  The principal methods used by First Palmetto to attract deposit
accounts  include the  offering  of a wide  variety of  services  and  accounts,
competitive  interest rates and convenient  office  locations and service hours.
First Palmetto utilizes  traditional  marketing methods to attract new customers
and savings deposits, including mass media advertising and direct mailings.

     At September  30, 1998,  First  Palmetto  had $40.2  million of  fixed-rate
certificates  with  remaining  terms  of one year or  longer,  or 11.7% of total
deposits. Substantially all time deposits renew at maturity. As of September 30,
1998,  there were no  concentrations  of  deposits  which  would have a material
impact on the Bank if they were not renewed.

     Interest rates paid, maturity terms,  service fees and withdrawal penalties
are  established by First Palmetto on a periodic basis.  Determination  of rates
and terms are predicated on funds acquisition and liquidity requirements,  rates
paid by competitors and growth goals.

     Management's  current policy is to not accept brokered deposits,  which are
more likely to be withdrawn than deposits made by other depositors. At September
30, 1998, First Palmetto had no brokered deposits.

     Deposit Flow. The following  table sets forth the changes in dollar amounts
of deposits in the types of accounts offered by First Palmetto between the dates
indicated.
<TABLE>
<CAPTION>

                                  Percent                               Percent                                 Percent
                    September       of       Increase     September       of        Increase    September         of
                      30,1998    Deposits   (Decrease)    30, 1997     Deposits    (Decrease)    30, 1996      Deposits
                      -------    --------   ----------    --------     --------    ----------    --------      --------
                                                          (Dollars in thousands)

<S>                <C>         <C>           <C>           <C>          <C>         <C>         <C>           <C>

NOW checking
  and noninterest
  bearing
  checking         $ 60,266    17.5%     $      285        $ 59,981     18.6%       $  14,534   $ 45,447      15.8%
Money market
  deposit            19,511     5.7            (275)         19,786      6.2           (6,753)    26,539       9.2
Savings              22,482     6.5             444          22,038      6.9              (19)    22,057       7.7
Certificates
  of deposit        241,688    70.3          22,724         218,964     68.3           24,850    194,114      67.3     
                  ---------   -----     -----------       ---------   ------      -----------   --------      -----
                  $ 343,947   100.0%    $    23,178       $ 320,769    100.0%     $    32,612   $288,157      100.0%
                  =========   =====     ===========       =========   ======      ===========   ========      =====
</TABLE>

                                       13
<PAGE>
       The  following  table sets forth First  Palmetto's  average  balances and
interest rates based on daily balances during the periods indicated.
<TABLE>
<CAPTION>

                                                                  Years Ended September 30,

                                              1998                        1997                           1996
                                  -------------------------- ----------------------------     ----------------------------
                                                    Average                       Average                          Average
                                    Average          Rate        Average           Rate         Average             Rate
                                    Balance          Paid        Balance           Paid         Balance             Paid
                                    -------          ----        -------           ----         -------             ----
                                                                 (Dollars in thousands)
<S>                               <C>               <C>      <C>                  <C>         <C>                 <C>

Interest-bearing
  demand deposits                 $  57,075         2.63%    $      56,923         2.61%      $    54,503         2.53%
Savings deposits                     21,994         2.38            22,151         2.54            23,181         2.53
Time deposits                       229,975         5.71           203,052         5.60           183,357         5.65
                                  ---------                  -------------                    -----------
                                  $ 309,044         4.90%    $     282,126         4.76%      $   261,041         4.72%
                                  =========                  =============                    ===========
</TABLE>

       The following table sets forth First Palmetto's time deposits  classified
by rates as of dates indicated.

                                           At September 30,
                         --------------------------------------------
                               1998           1997           1996
                               ----           ----           ----
                                            (In thousands)

Less than 3.00%          $           16  $          21  $          33
3.00% - 4.99%                    20,117          4,547         14,974
5.00% - 6.99%                   221,357        212,678        176,152
7.00% - 9.99%                       198          1,718          2,955
                         --------------  -------------  -------------
                         $      241,688  $     218,964  $     194,114
                         ==============  =============  =============

       The  following  table  sets  forth the  amount  and  maturities  of First
Palmetto's time deposits at September 30, 1998.
<TABLE>
<CAPTION>
                                       After one      After two
                         Through        through        through         After
Rate                    one year       two years    three years     three years       Total            Rate
----                    --------       ---------    -----------     -----------       -----            ----
                                                        (Dollars in thousands)
<S>                <C>            <C>             <C>            <C>             <C>                   <C>
Less than 3.00%    $           4  $            9  $           1  $           2   $          16         2.32%
3.00% - 4.99%             20,115               2              -              -          20,117         4.86
5.00% - 6.99%            181,396          30,980          8,352            629         221,357         5.59
7.00% - 9.99%                  4              31             18            145             198         8.22
                   -------------  --------------  -------------  -------------   -------------
                   $     201,519  $       31,022  $       8,371  $         776   $     241,688         5.59%
                   =============  ==============  =============  =============   =============
</TABLE>
       The following table indicates the amount of First Palmetto's certificates
of deposit of $100,000 or more by time remaining  until maturity as of September
30, 1998.

                                                        Certificates
Maturity                                                 of deposit
                                                        (In thousands)

Three months or less                                      $  17,931
Over three through six months                                17,353
Over six through twelve months                               12,892
Over twelve months                                           10,259
                                                          ---------
   Total                                                  $  58,435
                                                          =========

                                       14
<PAGE>
     In the year ended  September 30, 1998,  First  Palmetto had new deposits of
$1.5 billion,  withdrawals of $1.5 billion and interest  credited to the deposit
accounts of $12.4  million  resulting  in a net increase of $38.7  million.  New
deposits volume includes rollovers of existing accounts.

     Borrowings.  Deposits and loan sales and repayments are the primary sources
of funds for First  Palmetto's  lending and  investment  activities  and for its
general purposes.  First Palmetto also may rely upon advances  (borrowings) from
the FHLB of Atlanta to  supplement  its supply of lendable  funds,  meet deposit
withdrawal  requirements and to extend the term of its liabilities.  The FHLB of
Atlanta  traditionally has served as First Palmetto's  primary borrowing source.
Advances from the FHLB of Atlanta are  collateralized  by First Palmetto's stock
in the FHLB of Atlanta and a portion of First  Palmetto's  first mortgage loans.
At September 30, 1998,  the Bank had $60.7 million  outstanding in FHLB advances
all of which are fixed.  Advances in the amount of $45.0  million  include  call
provisions. The advances are to mature as follows:

                                                                      Weight
                                                                      Average
                                                                     Interest
                                                                     --------
                                                                     (Dollars
                                                                   in thousands)

 Maturing in the year ended September 30, 1999       $ 6,667           5.58%
 Maturing in the year ended September 30, 2000         1,000           6.02%
 Maturing in the year ended September 30, 2001         2,000           5.69%
 Maturing in the year ended September 30, 2004        31,000           5.73%
 Maturing in the year ended September 30, 2008        20,000           5.07%
                                                  ----------       --------
                                                  $   60,667           5.50%
                                                  ==========       ========

       The  following  table  sets forth  certain  information  regarding  First
Palmetto's FHLB advances:

                                  1998             1997              1996
                             -------------    -------------    ----------------
                             Amount   Rate    Amount   Rate    Amount      Rate
                             ------   ----    ------   ----    ------      ----
                                          (Dollars in thousands)
FHLB advances
   Balance at
    September 30,           $60,667   5.50%   $27,233   5.81%  $32,550     5.55%
   Average during year       33,572   6.27     28,906   5.56    33,202     5.59
   Maximum month-end
    balance during year      61,767      -     32,550      -    36,867        -

     The FHLB of Atlanta  functions as a central  reserve bank providing  credit
for savings banks and certain other member financial associations.  As a member,
First  Palmetto is  required to own capital  stock in the FHLB of Atlanta and is
authorized  to apply for  advances on the  security of such stock and certain of
its  home  mortgages  and  other  assets  (principally,   securities  which  are
obligations of, or guaranteed by, the United States) provided certain  standards
related  to   creditworthiness   have  been  met.  See  "Regulation  --  Savings
Association Regulation -- Federal Home Loan Bank System."

                                       15
<PAGE>
SUBSIDIARY ACTIVITIES

     The Bank is permitted by  regulation to invest an amount equal to 2% of its
assets in subsidiaries (service corporations),  with an additional investment of
1% of assets where such investment  serves primarily  community,  inner-city and
community  development  purposes.  In addition,  associations meeting regulatory
capital  requirements  and certain other tests may invest up to 50% of their net
worth in conforming first mortgage loans to service  corporations.  At September
30, 1998, the net book value of the Bank's investments in stock, unsecured loans
and conforming loans in its service corporation was $535,000.

     Palmetto  State  Service  Corporation  ("PSSC")  was formed in 1976 for the
purpose of investing in real estate for future  development  and/or sale.  These
investments  are wholly owned by PSSC and do not represent  joint  ventures with
First Palmetto. During fiscal 1998, PSSC had a net loss of $31,000. At September
30, 1998,  First  Palmetto had $500,000  invested in PSSC's  common  stock,  and
negative  retained  earnings in PSSC  amounting to $350,000.  PSSC is engaged in
activities not permissible to national banks.  For a discussion of the effect of
this  investment  on  First  Palmetto's  regulatory  capital  requirements,  see
"Regulation   --  Savings   Association   Regulation   --   Regulatory   Capital
Requirements."

     During the year ended September 30, 1996, the Bank dissolved First Service,
Inc. and its wholly owned subsidiary  Midlands  Financial and Insurance Company,
Inc.

COMPETITION

     First Palmetto faces strong  competition in the attraction of deposits (its
primary  source of lendable  funds) and in the  origination  of loans.  Its most
direct  competition for deposits comes from other thrift  associations  and from
commercial  banks located in its primary market area.  Particularly  in times of
high  interest  rates,   First  Palmetto  also  faces   additional   significant
competition  for investors'  funds from short-term  money market  securities and
other  corporate and government  securities.  First  Palmetto's  competition for
loans comes  principally from other savings  associations,  commercial banks and
mortgage banking companies.

     First Palmetto  competes for loans  principally  through the interest rates
and loan fees it charges  and the  efficiency  and  quality of the  services  it
provides  borrowers,  real estate  brokers  and home  builders.  First  Palmetto
competes for deposits by offering depositors a wide variety of savings accounts,
checking   accounts,   convenient   office   locations,   drive-in   facilities,
tax-deferred retirement programs, travelers checks, money orders, safety deposit
boxes and other services.

EMPLOYEES

     First  Palmetto  and  its  subsidiaries  had 123  full  time  employees  at
September 30, 1998.  None of First  Palmetto's  employees are  represented  by a
collective bargaining agreement, and First Palmetto believes that it enjoys good
relations with its personnel.

     First Palmetto currently maintains a comprehensive employee benefit program
for qualified employees providing among other benefits,  health insurance,  life
insurance, long-term disability insurance, pension plans and stock option plans.

                                       16
<PAGE>
SAVINGS ASSOCIATION REGULATION

     General. As a savings  association,  First Palmetto is subject to extensive
regulation by the OTS for compliance with various regulatory  requirements.  The
FDIC also has the authority to conduct special examinations. First Palmetto must
file reports with OTS describing its activities and financial  condition.  It is
also  subject  to  certain  reserve  requirements  promulgated  by the  Board of
Governors of the Federal  Reserve  System (the "Federal  Reserve  Board").  This
supervision  and  regulation  is  intended   primarily  for  the  protection  of
depositors.  Certain of these  regulatory  requirements are referred to below or
appear elsewhere herein.

       Regulatory   Capital   Requirements.   Under  OTS  regulations,   savings
associations must maintain Tier 1 (core) capital equal to 4.0% of adjusted total
assets,  Tier 1 (core)  capital  equal to 4.0% of  "risk-weighted"  assets and a
combination of core and "supplementary" capital equal to 8.0% of "risk-weighted"
assets.  In  addition,  the OTS has adopted  regulations  which  impose  certain
restrictions on savings  associations that have a total risk-based capital ratio
that is less than 8.0%,  a ratio of Tier 1 capital to adjusted  total  assets of
less than 4.0% (or 3.0% if the  institution  is rated  composite 1 under the OTS
examination rating system). For the purpose of these regulations, Tier 1 capital
has the same  definition as core capital.  See "--Prompt  Corrective  Regulatory
Action."  Core  capital  is defined as common  stockholders'  equity  (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority  interests in the equity accounts of fully  consolidated  subsidiaries,
certain   nonwithdrawable   accounts  and  pledged   deposits  and   "qualifying
supervisory  goodwill."  Core  capital is  generally  reduced by the amount of a
savings  association's  intangible assets,  with limited exceptions for mortgage
servicing  rights  ("MSRs"),  purchased  credit card  relationships  and certain
grandfathered  intangible assets.  Tangible capital is given the same definition
as core capital.  Core and tangible capital are further reduced by the amount of
a savings  association's debt and equity investments in subsidiaries  engaged in
activities not permissible for national banks.

     At  September  30, 1998,  First  Palmetto's  Tier 1 capital  ratio to total
assets was 5.58%, its Tier 1 capital ratio to risk-weighted assets was 9.84% and
its total capital ratio to risk-weighted  assets was 11.10%. At that date, First
Palmetto  had  $491,000  of  qualifying   intangible   assets  and  $535,000  of
investments  in and extensions of credit to  subsidiaries  engaged in activities
not  permissible  for  national  banks.  As of September  30,1998,  the Bank was
categorized  as  well-capitalized  under the  regulatory  framework  for  prompt
corrective action.

                                       17
<PAGE>
     The  following  table  reconciles  the Bank's  stockholders'  equity  under
generally  accepted  accounting  principles  at September 30, 1998 to its Tier 1
capital and total regulatory capital.

                                                                     (Dollars
Stockholder's equity under generally                               in thousands)
   accepted accounting principles                                  $      25,189

Less:
   Deductible investments in and extensions of
     credit to subsidiary                                                    535
   Deductible intangible assets                                              967
   Disallowed servicing assets and deferred tax assets                        34
Add:
   Qualifying intangible assets                                              491
                                                                   -------------
Tier 1 (core) capital                                                     24,144
Add:
   Allowances for loan losses                                              3,086
                                                                   -------------
Total capital                                                      $      27,230
                                                                   =============
Tier 1 (core) capital as a percentage of adjusted total assets             5.58%
                                                                   =============
Tier 1 (core) capital as a percentage of risk-weighted assets              9.84%
                                                                   =============
Total capital as a percentage of risk-weighted assets                     11.10%
                                                                   =============

     The following table sets forth First Palmetto's  capital position  relative
to its various minimum  regulatory  capital  requirements at September 30, 1998.

                                                                   Percent of
                                                      Amount          Assets
                                                      ------          ------
                                                      (Dollars in thousands)

Tier 1 capital (to total assets)                    $  24,144           5.58%
Tier 1 capital requirement                             17,308           4.00  
                                                    ---------    -----------
  Excess                                            $   6,836           1.58%
                                                    =========    ===========

Tier 1 capital (to risk-weighted assets)            $  24,144           9.84%
Tier 1 capital requirement                              9,814           4.00  
                                                    ---------    -----------
  Excess                                            $  14,330           5.84%
                                                    =========    ===========
Total capital (i.e., core and
 supplementary capital) (to risk-weighted assets)   $  27,230          11.10%
Risk-based capital requirement                         19,628           8.00  
                                                    ---------    -----------
  Excess                                            $   7,602           3.10%
                                                    =========    ===========

     In addition to requiring generally applicable capital standards for savings
associations,  the Director of OTS is  authorized to establish the minimum level
of  capital  for a  savings  association  at such  amount  or at such  ratio  of
capital-to-assets  as the Director determines to be necessary or appropriate for
such  association in light of the particular  circumstances  of the association.
The Director of OTS may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound  practice and may issue a
directive  requiring any savings  association which fails to maintain capital at
or above the minimum  level  required by the  Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.

                                       18
<PAGE>
       In addition,  the OTS risk-based  capital  requirements  require  savings
institutions  with more than a "normal"  level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is measured
in terms of the sensitivity of its "net portfolio  value" to changes in interest
rates.  Net  portfolio  value is defined,  generally,  as the  present  value of
expected cash inflows from existing assets and off-balance  sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution  is  considered  to have a  "normal"  level of  interest  rate  risk
exposure if the decline in its net portfolio  value after an immediate 200 basis
point increase or decrease in market  interest rates  (whichever  results in the
greater  decline)  is less than two percent of the  current  estimated  economic
value of its assets.  A savings  institution with a greater than normal interest
rate risk will be  required  to deduct  from  total  capital,  for  purposes  of
calculating its risk-based capital requirement,  an amount equal to one-half the
difference between the institution's  measured interest rate risk and the normal
level of  interest  rate risk,  multiplied  by the  economic  value of its total
assets.  The OTS,  however,  has postponed  indefinitely  the date on which this
interest  rate risk  component  must be  deducted  from an  institution's  total
capital.

     Federal  Home  Loan Bank  System.  First  Palmetto  is a member of the FHLB
System,  which  consists  of 12  regional  Federal  Home Loan  Banks  subject to
supervision and regulation by the Federal  Housing  Finance Board ("FHFB").  The
FHLB provides a central credit facility primarily for member associations.  As a
member of the FHLB of  Atlanta,  First  Palmetto is required to acquire and hold
shares of capital stock in the FHLB of Atlanta in an amount at least equal to 1%
of the  aggregate  unpaid  principal of its home mortgage  loans,  home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of its
advances  (borrowings)  from the FHLB of Atlanta,  whichever  is greater.  First
Palmetto was in compliance with this  requirement  with an investment in FHLB of
Atlanta stock at September  30, 1998 of $3.3 million.  As of September 30, 1998,
First  Palmetto  had  outstanding  advances  of $60.7  million  from the FHLB of
Atlanta.

     Liquidity  Requirements.  Savings  associations are required to maintain an
average daily balance of liquid assets (cash,  certain time  deposits,  bankers'
acceptances,  highly  rated  corporate  debt and  commercial  paper,  qualifying
mortgage-related  securities  and mortgage  loans,  securities of certain mutual
funds,  and  specified  United  States  government,   state  or  federal  agency
obligations)  equal  to the  monthly  average  of  not  less  than  a  specified
percentage (currently 4%) of their net withdrawable  short-term savings deposits
plus  short-term  borrowings.  Monetary  penalties may be imposed for failure to
meet liquidity  requirements.  At September 30, 1998, First Palmetto exceeds the
required liquidity percentage.

     Qualified  Thrift Lender Test. The Home Owners' Loan Act ("HOLA")  requires
all savings  institutions  to meet one of two Qualified  Thrift  Lender  ("QTL")
tests or suffer a number of sanctions,  including restrictions on activities. To
qualify as a QTL, a savings  institution  must  either (i) be deemed a "domestic
building and loan  association"  under the Internal Revenue Code (the "Code") by
maintaining  at least 60% of its  total  assets in  specified  types of  assets,
including cash, certain government securities, loans secured by and other assets
related to  residential  real  property,  educational  loans and  investments in
premises of the  institution or (ii) satisfy the statutory QTL test set forth in
the HOLA by  maintaining  at least  65% of its  "portfolio  assets"  in  certain
"Qualified  Thrift  Investments."  For purposes of the HOLA QTL test,  portfolio
assets are defined as total assets less the sum of intangibles, property used in
the business of the savings  institution and liquidity  investments in an amount
not exceeding 20% of total assets. Qualified Thrift Investments consist of among
other things,  (i) loans,  equity  positions or securities  related to domestic,
residential real estate or manufactured  housing,  (ii) 50% of the dollar amount
of  residential  mortgage loans subject to sale under certain  conditions  (iii)
loans to small businesses,  student loans and credit card loans and (iv) subject
to a 20% of portfolio assets limit, of an institution's  investments in loans to
finance "starter homes" and loans for  construction,  development or improvement
of housing and community  service  facilities or for financing small business in
"credit needy" areas.

                                       19
<PAGE>
     A savings  institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months.  An initial failure to qualify as a QTL
results in a number of sanctions,  including the imposition of certain operating
restrictions and a restriction on obtaining  additional  advances from its FHLB.
If a savings  institution  does not  requalify  as a QTL within  the  three-year
period  after it fails the QTL  test,  it would be  required  to  terminate  any
activity not  permissible  for a national bank and repay as promptly as possible
any outstanding advances from its FHLB. In addition, the holding company of such
an institution  would be required to register as a bank holding company with the
Federal Reserve Board. At September 30, 1998, the Bank qualified as a QTL.

     Loans-to-One-Borrower   Limitations.  Savings  institutions  generally  are
subject to the lending limits applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution or a national bank may
lend to any borrower (including certain related entities of the borrower) at one
time  may  not  exceed  15%  of  the  unimpaired  capital  and  surplus  of  the
institution,  plus an additional 10% of unimpaired capital and surplus for loans
fully  secured  by  readily  marketable  collateral.  Savings  institutions  are
additionally  authorized to make loans to one borrower,  for any purpose,  in an
amount not to exceed  $500,000 or, by order of the Director of OTS, in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
to  develop  residential  housing,  provided:  (i) the  purchase  price  of each
single-family  dwelling in the development  does not exceed  $500,000;  (ii) the
savings   institution  is  in  compliance  with  its  fully  phased-in   capital
requirements; (iii) the loans comply with applicable loan-to-value requirements;
and (iv) the aggregate amount of loans made under this authority does not exceed
150% of unimpaired capital and surplus.

     At September 30, 1998,  First  Palmetto's  loans-to-one  borrower limit was
$4.2 million, and First Palmetto did not have any loans over its limit.

     Real Estate Lending Standards. Under OTS regulations,  savings associations
must adopt and maintain written policies that establish  appropriate  limits and
standards  for  extensions  of credit that are secured by liens or  interests in
real estate or are made for the purpose of financing  permanent  improvements to
real estate.  These  policies  must  establish  loan  portfolio  diversification
standards, prudent underwriting standards,  including loan-to-value limits, that
are clear and  measurable,  loan  administration  procedures and  documentation,
approval and  reporting  requirements.  The real estate  lending  policies  must
reflect  consideration  of the  Interagency  Guidelines  for Real Estate Lending
Policies (the  "Interagency  Guidelines")  that have been adopted by the federal
bank  regulators.  First  Palmetto  believes that its current  lending  policies
conform to the requirements.

     Deposit Insurance. First Palmetto is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF.  Under the Federal  Deposit  Insurance  Act (the "FDI  Act"),  the FDIC is
required to set semiannual assessments for SAIF-insured institutions to maintain
the designated  reserve ratio of the SAIF at 1.25% of estimated insured deposits
or at a higher percentage of estimated insured deposits that the FDIC determines
to be justified for that year by  circumstances  raising a  significant  risk of
substantial future losses to the SAIF.

     The FDIC has adopted a  risk-based  insurance  system for  determining  the
deposit insurance assessments to be paid by insured depository institutions. The
FDIC assigns an  institution  to one of three  capital  categories  based on the
institution's  financial  information,  as of the reporting  period ending seven
months before the assessment  period,  consisting of (1) well  capitalized,  (2)
adequately  capitalized  or (3)  undercapitalized,  and on of three  supervisory
subcategories  within each capital group.  The supervisory  subgroup to which an
institution  is assigned is based on a  supervisory  evaluation  provided to the
FDIC by the  institution's  primary federal  regulator and information  that the
FDIC determines to be relevant to the institution's  financial condition and the
risk posed to the deposit  insurance  funds.  Assessment  rates for  SAIF-member
institutions  like the Bank  depend  on the  capital  category  and  supervisory
category to which they are assigned and currently range from 0 basis point to 27
basis points.  The Bank's  assessment rate for the year ended September 30, 1998
was .061% of assessable deposits.

                                       20
<PAGE>
     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
OTS.  The  management  of the Bank does not know of any  practice,  condition or
violation that might lead to termination of deposit insurance.

     Standards  for Safety  and  Soundness.  The FDI Act  requires  the  federal
banking  agencies,  including the OTS, to prescribe  for all insured  depository
institutions  standards  relating to,  among other  things,  internal  controls,
information systems and audit systems, loan documentation,  credit underwriting,
interest rate risk exposure, asset growth, asset quality and compensation,  fees
and benefits and such other operational and managerial standards as the agencies
deem  appropriate.  The federal banking agencies have adopted final  regulations
and  Interagency  Guidelines  Establishing  Standards  for Safety and  Soundness
("Guidelines")  to  implement  safety and  soundness  standards  pursuant to the
statute.  The Guidelines  set forth the safety and soundness  standards that the
federal  banking  agencies  use to  identify  and  address  problems  at insured
depository  institutions before capital becomes impaired. The Guidelines address
internal  controls  and  information  systems;  internal  audit  system;  credit
underwriting;  loan  documentation;  interest rate risk exposure;  asset growth;
asset quality; earnings; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the  Guidelines,  the agency may require the institution to submit
to the agency an acceptable  plan to achieve  compliance  with the standard,  as
required  by the FDI Act.  The final  regulations  establish  deadlines  for the
submission and review of such safety and soundness compliance plans.

     Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations,  the OTS is required to take certain  supervisory  actions  against
undercapitalized   institutions,   the  severity  of  which   depends  upon  the
institution's degree of capitalization.

     Under  the  prompt  corrective  action  regulations,  a  "well-capitalized"
institution is one that is not subject to any  regulatory  order or directive to
meet any specific  capital level and that has or exceeds the  following  capital
levels:  a total  risk-based  capital ratio of 10%, a Tier 1 risk-based  capital
ratio of 6%, and a leverage ratio of 5%. An "adequately capitalized" institution
is one that does not  qualify as  "well-capitalized"  but meets or  exceeds  the
following  capital  requirements:  a total  risk-based  capital  of 8%, a Tier 1
risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3%
if the bank has the highest  composite  examination  rating.  An institution not
meeting  these  criteria  is  treated  as   "undercapitalized,"   "significantly
undercapitalized,"  or critically  undercapitalized"  depending on the extent to
which the  institution's  capital  levels are below the  adequately  capitalized
standards. An institution that falls within any of the three  "undercapitalized"
categories will be subject to certain severe  regulatory  sanctions  required by
FDICIA and the implementing regulations.

                                       21
<PAGE>
     The table  below  presents  First  Palmetto's  capital  position,  which is
considered  to be "well  capitalized",  at September  30, 1998,  relative to the
various minimum  regulatory  capital  requirements  under the prompt  corrective
action regulations.

                                                                    Percent of
                                                    Amount         Assets (1)
                                                    ------         ----------
                                                    (Dollars in thousands)

Tier 1 or leverage capital                    $       24,144           5.58%
Tier 1 or leverage capital requirement                21,635           5.00  
                                              --------------    -----------
      Excess                                  $        2,509            .58%
                                              ==============    ===========

Tier 1 risk-based capital                     $       24,144           9.84%
Tier 1 risk-based capital requirement                 14,720           6.00   
                                              --------------    -----------
      Excess                                  $        9,424           3.84%
                                              ==============    ===========

Risk-based capital                            $       27,230          11.10%
Risk-based capital requirement                        24,534          10.00  
                                              --------------    -----------
      Excess                                  $        2,696           1.10%
                                              ==============    ===========

(1) Based upon adjusted  total assets for purposes of Tier 1 capital or leverage
capital  requirements,  and  risk-weighted  assets  for  purposes  of the Tier 1
risk-based and risk-based capital requirements.

     Federal  Reserve  System.  Pursuant to regulations  of the Federal  Reserve
Board, a thrift  association must maintain  average daily reserves.  No reserves
are required to be maintained on the first $4.9 million of transaction accounts,
and  reserves  equal to 3% must be  maintained  on the  next  $46.5  million  of
transaction  accounts,  plus  reserves  equal  to 10% on  the  remainder.  These
percentages  are subject to adjustment  by the Federal  Reserve  Board.  Because
required  reserves  must  be  maintained  in the  form  of  vault  cash  or in a
non-interest  bearing  account  at a Federal  Reserve  Bank,  the  effect of the
reserve   requirement   is  to   reduce   the   amount   of  the   association's
interest-earning assets. First Palmetto meets its reserve requirements.

     Dividend  Limitations.  Under OTS  regulations,  First Palmetto may not pay
dividends  on its  capital  stock if its  regulatory  capital  would  thereby be
reduced below the amount then required for the liquidation  account  established
for the  benefit  of certain  depositors  of First  Palmetto  at the time of its
conversion  to stock form.  In addition,  savings  association  subsidiaries  of
savings and loan holding companies are required to give OTS 30 days prior notice
of any proposed declaration of dividend to the holding company.

     Federal  regulations  impose  limitations  on the payment of dividends  and
other capital  distributions  (including stock  repurchases and cash mergers) by
First Palmetto. Under these regulations, a savings association that, immediately
prior to, and on a pro forma basis after  giving  effect to, a proposed  capital
distribution,  has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital  requirements (a "Tier
1 Association")  is generally  permitted  without OTS approval,  to make capital
distributions  during a calendar  year in the amount equal to the greater of (i)
75% of net income for the previous  four  quarters or (ii) up to 100% of its net
income to date  during the  calendar  year plus an amount  that would  reduce by
one-half  the amount by which its total  capital to assets  ratio  exceeded  its
fully  phased-in  capital  requirement  to assets ratio at the  beginning of the
calendar year. At September 30, 1998, the Bank was a Tier 1 Association.

                                       22
<PAGE>
     The Bank is  prohibited  from  making any  capital  distributions  if after
making the  distribution,  it would be  undercapitalized  as defined in the OTS'
prompt  corrective  action  regulations.  See  "--Prompt  Corrective  Regulatory
Action."  After  consultation  with the  FDIC,  however,  the OTS may  permit an
undercapitalized savings association to repurchase,  redeem, retire or otherwise
acquire shares or ownership interests if the repurchase,  redemption, retirement
or other acquisition;  (i) is made in connection with the issuance of additional
shares or other obligations of the institution in at least an equivalent amount;
and (ii) will  reduce  the  institution's  financial  obligations  or  otherwise
improve the institution's financial condition.

     In addition to the foregoing,  earnings of First Palmetto  appropriated  to
bad debt  reserves  and  deducted  from  Federal  income  tax  purposes  are not
available  for payment of cash  dividends  without  payment of taxes at the then
current tax rate by First  Palmetto on the amount of earnings  removed  from the
reserves for such  distributions.  See  "--Taxation."  First Palmetto intends to
make full use of this  favorable  tax  treatment  afforded to the Bank and First
Palmetto  and does not  contemplate  use of any earnings of the Bank in a manner
which  would  limit  the  Bank's  bad  debt  deduction  or  create  federal  tax
liabilities.

SAVINGS AND LOAN HOLDING COMPANY REGULATION

     First Palmetto is a savings and loan holding  company within the meaning of
the HOLA. As such,  First Palmetto is registered  with the OTS and is subject to
regulations,   examinations,   supervision  and  reporting  requirements.  As  a
subsidiary of First Palmetto, the Bank is subject to certain restrictions in its
dealing with First Palmetto and any affiliates of First Palmetto. First Palmetto
also is required to file certain  reports with,  and  otherwise  comply with the
rules and regulations of, the Securities and Exchange  Commission  ("SEC") under
the federal securities laws.

     Activities Restrictions. The Board of Directors of First Palmetto presently
intends to continue  to operate  First  Palmetto  as a unitary  savings and loan
holding  company.  There are generally no  restrictions  on the  activities of a
unitary  savings and loan holding  company  provided that the Bank  continues to
satisfy the QTL test.  The United  States  Congress in its last two sessions has
considered  legislation  that, if enacted,  restrict the business  activities of
unitary  savings  and  loan  holding  companies  and  is  expected  to  take  up
legislation  affecting  savings and loan holding  companies again in 1999. First
Palmetto  cannot predict  whether,  or in what form,  such  legislation  will be
enacted.

     Restrictions  on  Acquisitions.  A savings and loan  holding  company  must
obtain prior approval of the Director of OTS before acquiring (i) control of any
other savings  association or savings and loan holding company or  substantially
all the assets  thereof  or (ii) more than 5% of the voting  shares of a savings
association or holding  company  thereof which is not a subsidiary.  Except with
the prior  approval of the  Director of OTS, no director or officer of a savings
and loan holding  company or person owning or  controlling by proxy or otherwise
more than 25% of such company's  stock,  may also acquire control of any savings
association,  other  than a  subsidiary  savings  association,  or of any  other
savings and loan holding company.

     The OTS has amended its regulations to permit federal savings  institutions
to  branch in any state or states  of the  United  States  and its  territories.
Except in supervisory cases or when interstate  branching is otherwise permitted
by state law or other statutory provision, a federal savings institution may not
establish an out-of-state branch unless (i) it qualifies as a "domestic building
and loan association" under Section {7701(a)(19) of the Internal Revenue Code of
1986,  as amended  and the total  assets  attributable  to all  branches  of the
association  in the state would  qualify if such  branches  taken as a whole for
treatment as a domestic building and loan association and (ii) such branch would
not result in (a)  formation of a prohibited  multi-state  multiple  savings and
loan holding  company or (b) a violation of certain  statutory  restrictions  on
branching by savings  association  subsidiaries of banking holding companies.  A
federal savings  institution  generally may not establish new branches unless it
meets or exceeds minimum regulatory capital requirements. The OTS will

                                       23
<PAGE>
also  consider  the  institution's  record  of  compliance  with  the  Community
Reinvestment Act in connection with any branch application.

     Transactions with Affiliates. Transactions between savings associations and
any affiliate  are governed by Sections 23A and 23B of the Federal  Reserve Act.
An affiliate of a savings  association is any company or entity which  controls,
is controlled by or is under common control with the savings  association.  In a
holding company  context,  the parent holding  company of a savings  association
such as First  Palmetto and any  companies  which are  controlled by such parent
holding company are affiliates of the savings association.  Generally,  Sections
23A and 23B (i)  limit  the  extent  to which  the  savings  association  or its
subsidiaries may engage in "covered  transactions"  with any one affiliate to an
amount equal to 10% of such association's capital stock and surplus, and contain
an aggregate  limit on all such  transactions  with all  affiliates to an amount
equal to 20% of such  capital  stock and surplus and (ii)  require that all such
transactions be on terms  substantially  the same, or at least as favorable,  to
the  association  or subsidiary as those provided to a  non-affiliate.  The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee  and  similar  other  types of  transactions.  In addition to the
restrictions  imposed by Sections  23A and 23B, no savings  association  may (i)
loan or otherwise  extend credit to an affiliate,  except for an affiliate which
engages only in activities which are permissible for bank holding companies,  or
(ii)  purchase  or invest in any  stocks,  bonds,  debentures,  notes or similar
obligations of any affiliate,  except for affiliates  which are  subsidiaries of
the savings association.

     Savings  associations  are also  subject to the  restrictions  contained in
Section  22(h)  of the  Federal  Reserve  Act on loans  to  executive  officers,
directors and principal shareholders. Under Section 22(h), loans to an executive
officer and to holders of more than 10% of any class of a savings  association's
voting stock, and certain affiliated entities of either, may not exceed together
with all other  outstanding  loans to such person and  affiliated  entities  the
association's  loans  to  one  borrower  limit  (generally  equal  to 15% of the
association's  unimpaired  capital and surplus).  Section  22(h) also  prohibits
loans, above the amounts  prescribed by the appropriate  federal banking agency,
to directors,  executive officers and holders of more than 10% of any class of a
savings associations' voting stock, and their respective affiliates, unless such
is  approved  in  advance  by a  majority  of  the  board  of  directors  of the
association with an "interested"  director not participating in the voting.  The
Federal  Reserve Board has prescribed the loan amount (which  includes all other
outstanding  loans to such  person),  as to which such prior board of  directors
approval  is  required,  as being the  greater of  $25,000 or 5% of capital  and
surplus  (up to  $500,000).  Further,  Section  22(h)  requires  that  loans  to
directors,  executive  officers  and  principal  shareholders  be made on  terms
substantially  the same as offered in comparable  transactions to other persons.
Section 22(h) also prohibits a depository  institution from paying the overdraft
of any of its executive officers or directors.

     Savings   associations   are  further  subject  to  the   requirements  and
restrictions  of Section 22(g) of the Federal  Reserve Act on loans to executive
officers  and the  restrictions  of 12  U.S.C.  Section  1972 on  certain  tying
arrangements and extensions of credit by correspondent  banks.  Section 22(g) of
the Federal Reserve Act requires that loans to executive  officers of depository
institutions  not be made on terms more  favorable  than those afforded to other
borrowers, and imposes reporting requirements for any additional restrictions on
the type,  amount and terms of credits to such officers.  Section 1972 prohibits
(i) a  depository  institution  from  extending  credit to or offering any other
services, or fixing or varying the consideration for such extension of credit or
service,  on the condition that the customer obtain some additional service from
the  institution  or  certain of its  affiliates  or not  obtain  services  of a
competitor  of  the  institution,   subject  to  certain  exceptions,  and  (ii)
extensions  of credit to  executive  officers,  directors,  and greater than 10%
stockholders of a depository  institution by any other  institution  which has a
correspondent  banking relationship with the institution,  unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable  transactions  with other  persons and does not involve more than the
normal risk of repayment or present unfavorable features.

                                       24
<PAGE>
TAXATION

     General.  First Palmetto files consolidated federal income tax returns on a
September  30 fiscal  year end basis.  Consolidated  returns  have the effect of
eliminating   intercompany   distributions,   including   dividends,   from  the
computation  of  consolidated  taxable  income for the taxable year in which the
distributions occur.

     Federal Income Taxation.  Savings associations generally are subject to the
provisions  of the  Code in the  same  general  manner  as  other  corporations.
However,  prior to enactment of recent  legislation under the Small Business Job
Protection Act of 1996 ("SBJPA-96")  savings institutions such as the Bank which
met certain  definitional tests and other conditions  prescribed by the Code may
have benefited from certain favorable provisions regarding their deductions from
taxable income for annual  additions to their bad debt reserve.  For purposes of
the bad debt reserve  deduction,  loans were  separated  into  "qualifying  real
property  loans," which generally were loans secured by interest in certain real
property,  and  nonqualifying  loans,  which are all other  loans.  The bad debt
reserve  deduction with respect to nonqualifying  loans was based on actual loss
experience.  The  amount  of the bad debt  reserve  deduction  with  respect  to
qualifying  real  property  loans was based upon  actual  loss  experience  (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the  "percentage  of taxable income  method").  For the years
ended  September  30,  1996 and 1995,  First  Palmetto  calculated  the bad debt
reserve deduction based upon the percentage of taxable income method.

     Under  the  percentage  of  taxable  income  method,  the bad debt  reserve
deduction for qualifying real property loans was computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments,  effective for taxable years beginning after 1986. The
bad debt deduction  under the percentage of taxable income method was subject to
certain  limitations.  First,  the  amount  added to the  reserve  for losses on
qualifying real property loans could not exceed the amount necessary to increase
the balance of such reserve at the close of the taxable year to 6% of such loans
outstanding at the end of the taxable year. Further, the addition to the reserve
for losses on qualifying  real property loans could not exceed the amount which,
when  added to that  year's  addition  to the bad debt  reserve  for  losses  on
nonqualifying  loans,  equals  the  amount  by which  12% of total  deposits  or
withdrawable  accounts of  depositors  at year-end  exceeded the sum of surplus,
undivided  profits  and  reserves at the  beginning  of the year.  Finally,  the
percentage bad debt deduction  under the percentage of taxable income method was
reduced by the deduction for losses on nonqualifying loans.

     Under  SBJPA-96  legislation  enacted on August 20, 1996, the percentage of
taxable  income method was repealed for tax years  beginning  after December 31,
1995. In future years, the Bank must use the "Bank"  experience method available
to  institutions  with total assets of less than $500 million.  Under the recent
legislation,  the Bank  will also be  required  to  recapture  into  income  its
"applicable  excess reserve",  the portion of its bad debt reserves that exceeds
its base year  reserves.  The amount of bad debt  reserves  subject to recapture
over six years for the Bank is $1.2  million.  The recapture may be deferred for
the 1996 and 1997 tax years provided that the Bank meets the  "residential  loan
requirement"  for both tax years.  The Bank has met this requirement tax for the
1996 and 1997 tax year,  deferring  recapture of the "applicable excess reserve"
for the 1996 and 1997 tax year.  The portion of the Bank's tax bad debt  reserve
that is not recaptured under the new law (i.e., the Bank's base year reserves of
$4.6 million) is subject to recapture at a later date only under certain limited
circumstances,  including stock  repurchases or redemptions by the thrift or the
conversion of the thrift to a type of institution  (such as a credit union) that
is not considered a bank for tax purposes.  Importantly,  the new law eliminated
any recapture as a result of a savings association's  conversion to a commercial
bank charter or acquisition.

     First  Palmetto's  federal  income tax returns have not been audited  since
1984.

                                       25
<PAGE>
     State Income Taxation. Under South Carolina law, First Palmetto is required
to pay  income  tax at the rate of 6% of net  income,  as  defined  in the South
Carolina statute.  This tax is imposed on financial  associations in lieu of the
general state business  corporation  income tax. State income  taxation of First
Palmetto has not been material.

     Accounting Changes. 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 1999.

     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.

     SFAS 132,  "Employers'  Disclosures about Pensions and Other Postretirement
Benefits", revises employers' disclosures about pension and other postretirement
benefit plans. It does not change  measurement or recognition,  but standardizes
the  disclosure  requirements,  requires  additional  information  on changes in
benefit obligations and fair values of plan assets. Certain disclosures that are
no longer useful as in the past are eliminated.  This statement is effective for
fiscal  years  beginning  after  December 15, 1997.  Earlier  periods  which are
presented should be restated.

     SFAS 133,  "Accounting for Derivative  Instruments and Hedging Activities",
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative instruments embedded in other contracts and hedging
activities.  It requires  that an entity  recognize  all  derivatives  as either
assets or liabilities in the statement of financial position,  and measure those
instruments  at fair value.  If certain  conditions are met, a derivative may be
specifically  designated  as (a) a hedge of the  exposure to changes in the fair
value of a recognized  asset or liability or a firm  commitment,  (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency  exposure of a net investment in a foreign  corporation.
This statement is effective for fiscal quarters beginning after June 15, 1999.

                                       26
<PAGE>
Item 2.  Properties

       The following table sets forth the locations of First Palmetto's offices,
as well as certain  additional  information  relating  to those  offices,  as of
September 30, 1998.
<TABLE>
<CAPTION>

                                    Year Facility       Leased              Approximate
                                        Began             or                   Square           Net Book
Office Location                      Operations         Owned                  Footage            Value
---------------                      ----------         -----                  -------            -----
<S>                                    <C>             <C>                     <C>                <C>
Main Office
   407 DeKalb Street                   1963            Owned                   10,337             $   512,839
   Camden, S.C.  29020

Bishopville Branch Office
   104 East Church Street              1994            Leased                   1,300             $        -
   Bishopville, S.C.  29010                            (Expires 2000,
                                                       with five year
                                                       renewal option)

Camden Operations Center
   Broad and DeKalb Street             1934            Owned                    7,900             $   273,357
   Camden, S.C.  29020

Camden Operations Center
   1050 Broad Street                   1997            Owned                    6,400             $   328,533
   Camden, S.C.  29020

Columbia Branch Offices
   3932 Forest Drive                   1988            Owned                    4,950             $   539,327
   Columbia, S.C.  29206

   9221 Two Notch Road                 1980            Leased                   2,200             $         -
   Columbia, S.C.  29223                               (Expires 1999,
                                                       with two ten year
                                                       renewal options)

Darlington Branch Office
   266 Cashua Street                   1992            Owned                    1,600             $         -
   Darlington, S.C.  29532

Dusty Bend Branch Office
   2310 North Broad Street             1981            Leased                   1,600             $         -
   Camden, S.C.  29020                                 (Expires 2002,
                                                       with ten year
                                                       renewal option)

Elgin Branch Office
   Highway #1                          1986            Leased                   1,200             $    43,365
   Elgin, S.C.  29045                                  (Expires 2006,
                                                       with ten year
                                                       renewal option)

Irmo Branch Office
   7327 St. Andrews Road               1996            Owned                    2,200             $   506,013
   Irmo, S.C.  29063

Kershaw Branch Office
   301 Hampton Street                  1996            Owned                    2,850             $   374,199
   Kershaw, S.C.  29067

                                       27
<PAGE>
                                    Year Facility       Leased              Approximate
                                        Began             or                   Square           Net Book
Office Location                      Operations         Owned                  Footage            Value
---------------                      ----------         -----                  -------            -----

Lancaster Branch Office
   977 North Main Street               1973            Leased                   3,040             $       -0-
   Lancaster, S.C.  29721                              (Expires 1999)

Lexington Branch Office
   5321 Sunset Boulevard               1997            Owned                    2,950             $   600,406
   Lexington, S.C.  29072

Lugoff Branch Office
   Highway #1 South                    1969            Owned                    3,900             $   852,135
   Lugoff, S.C.  29078

Manning Branch Office
   111 N. Brooks Street                1995            Owned                    4,000             $   204,809
   Manning, SC  29102

Myrtle Beach Branch Office
   10207 North Kings Highway           1997            Owned                    3,240             $   637,490
   Myrtle Beach, S.C.

Pageland Branch Office
   201 N. Pearl Street                 1994            Owned                    1,300             $   333,877
   Pageland, S.C.  29728

Pontiac Branch Office
   10540 Two Notch Road                1989            Leased                   1,300             $    75,740
   Elgin, S.C.  29045                                  (Expires 2019,
                                                       with ten year
                                                       renewal option)
</TABLE>
Item 3.  Legal Proceedings

       Although First Palmetto,  from time to time, is involved in various legal
proceedings occurring in the ordinary course of business,  there are no material
legal  proceedings  to which First  Palmetto or its  subsidiary is a party or to
which any of their property is subject.

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

       No matters were submitted to a vote of security  holders during the final
quarter of fiscal 1998.

                                       28
<PAGE>
                                     PART II

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

       The information required by this item is incorporated by reference to the
section  captioned  "Corporate  Information -- Common Stock  Information" in the
Annual Report.

Item 6.  Selected Financial Data

       The information required by this item is incorporated by reference to the
tables captioned "Selected  Consolidated  Financial and Other Data" in Part I of
this report.

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

       The information required by this item is incorporated by reference to the
section captioned  "Management's  Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

       The information required by this item is incorporated by reference to the
section captioned  "Management's  Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report.

Item 8.  Financial Statements and Supplementary Data

       First  Palmetto's  Consolidated  Statements  of  Financial  Condition  at
September  30, 1998 and 1997,  Consolidated  Statements  of Income for the three
years ended September 30, 1998,  Consolidated Statements of Stockholders' Equity
for the three years ended  September 30, 1998,  and  Consolidated  Statements of
Cash Flows for the three years  ended  September  30,  1998,  together  with the
related notes and report of KPMG Peat Marwick, LLP, independent certified public
accountants,  are contained in the Annual Report and are incorporated  herein by
reference.

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

       Not applicable.

                                       29
<PAGE>
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

       For information  concerning the Board of Directors of First Palmetto, the
information  contained  under the section  captioned  "Election of Directors" in
First  Palmetto's  definitive  proxy statement for First  Palmetto's 1999 Annual
Meeting of  Stockholders  (the  "Proxy  Statement")  is  incorporated  herein by
reference.

Item 11.  Executive Compensation

       The  information  contained  under the  section  captioned  "Election  of
Directors  -- Executive  Compensation"  in the Proxy  Statement is  incorporated
herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     (a)  Security Ownership of Certain Beneficial Owners

          Information  required by this item is incorporated herein by reference
          to the section  captioned  "Principal  Holders of Common Stock" of the
          Proxy Statement.

     (b)  Security Ownership of Management

          Information  required by this item is incorporated herein by reference
          to the section  captioned "Stock Ownership of Management" of the Proxy
          Statement.

    (c)   Changes in Control

          Management of First Palmetto knows of no  arrangements,  including any
          pledge by any person of securities of First Palmetto, the operation of
          which may at a subsequent  date result in a change of control of First
          Palmetto.

Item 13.  Certain Relationships and Related Transactions

          The  information  required  by this  item is  incorporated  herein  by
          reference  to  the  sections  captioned  "Executive   Compensation  --
          Compensation  Committee  Interlocks  and  Insider  Participation"  and
          "Certain Transactions" in the Proxy Statement.

                                       30
<PAGE>
                                     PART IV

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

     (a)  (1) Financial  Statements - The  following  financial  statements  are
          included in the Annual Report. The remaining  information appearing in
          the Annual  Report is not  deemed to be filed as part of this  report,
          except as expressly provided herein.
                           
          1.   Certified Public Accountant's Report

          2.   Consolidated  Statements of Financial  Condition at September 30,
               1998 and 1997

          3.   Consolidated  Statements of Income for the Years Ended  September
               30, 1998, 1997 and 1996

          4.   Consolidated  Statements  of  Stockholders'  Equity for the Years
               Ended September 30, 1998 1997 and 1996

          5.   Consolidated  Statements  of  Cash  Flows  for  the  Years  Ended
               September 30, 1998, 1997 and 1996

          6.   Notes to Consolidated Financial Statements

     (a)  (2) Financial Statement Schedules - All financial  statement  schedule
          have been omitted as the required  information is either  inapplicable
          or included in the Consolidated Financial Statements or related notes.

     (a)  (3) Exhibits - The following exhibits are either filed as part of this
           report or are incorporated herein by reference:

 Exhibit No. 3.1  Restated  Certificate  of  Incorporation  of  First   Palmetto
                  Financial Corporation  (incorporated  by  reference to Exhibit
                  3.1 to First  Palmetto's  registration  statement on Form  S-4
                  filed with the SEC on June 14, 1990)

 Exhibit No. 3.2  Bylaws of First Palmetto Financial  Corporation  (incorporated
                  by  reference to Exhibit 3.2 to First Palmetto's  registration
                  statement on Form S-4 filed with the SEC on June 14, 1990)

 Exhibit No. 10.1 Stock  Option  Plan of  First  Palmetto  Financial Corporation
                  (incorporated by reference to Exhibit 10.8 to First Palmetto's
                  registration statement on Form S-4 filed with the SEC on  June
                  14, 1990)

 Exhibit No. 10.2 Agreement  and  Plan  of   Conversion    and    Reorganization
                 (incorporated by reference to Exhibit 2.1 to  First  Palmetto's
                 registration statement on Form S-4 filed with the SEC  on  June
                 14, 1990)

 Exhibit No. 10.3 Amended and  Restated  Agreement and Plan of Merger dated June
                  12, 1990  (incorporated by  reference  to Exhibit 2.2 to First
                  Palmetto's  registration  statement on Form S-4 filed with the
                  SEC on June 14, 1990)

 Exhibit No. 13   1998 Annual  Report to Stockholders (Except for those portions
                  of the Annual Report which are expressly  incorporated  herein
                  by  reference,   the  Annual  Report  is  furnished  for   the
                  information  of  the  SEC and is not deemed "filed" as part of
                  this report)

                                       31
<PAGE>
 Exhibit No. 22   Subsidiaries

 Exhibit No. 27   Financial Data Schedules (SEC use only)

          (a)     Reports on Form 8-K - None.

          (b)     Exhibits - All exhibits to this report are attached or
                  incorporated by reference as stated above.
             
          (c)     Financial Statement Schedules - None.

                                       32
<PAGE>
                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned,  thereunto  duly  authorized  as  of December 21,
1998.

                          FIRST PALMETTO FINANCIAL CORPORATION



                          By:    /s/ Samuel R. Small
                                 -----------------------------------------------
                                 Samuel R. Small
                                 President, Chief Executive Officer and Director
                                 (Duly Authorized Representative)

       Pursuant to the requirement of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated as of December 21, 1998.

<TABLE>
<CAPTION>
<S>     <C>                                                <C>  <C> 
By:    /s/ H. Davis Green, Jr.                             By:  /s/ Samuel R. Small                       
       --------------------------------------                   -----------------------------------------------
       H. Davis Green, Jr.                                      Samuel R. Small
       Chairman of the Board                                    President, Chief Executive Officer and Director
                                                                (Principal Executive Officer)

By:    /s/ Steve G. Williams, Jr.                          By:  /s/ Pierce W. Cantey, Jr.                                
       --------------------------------------                   ------------------------------------------------
       Steve G. Williams, Jr.                                   Pierce W. Cantey, Jr.
       Senior Vice President, Treasurer,                        Director
       Chief Financial Officer, and Director
       (Principal Financial and Accounting Officer)

By:    /s/ William R. Clyburn                              By:   /s/ Frank D. Goodale, Jr.
       --------------------------------------                   ------------------------------------------------
       William R. Clyburn                                       Frank D. Goodale, Jr.
       Director                                                 Director

By:    /s/ Donald H. Holland                               By:  /s/ Charlie E. Nash                          
       --------------------------------------                   ------------------------------------------------
       Donald H. Holland                                        Charlie E. Nash
       Director                                                 Director


By:    /s/ Glenn G. Tucker
       --------------------------------------
       Glenn G. Tucker
       Director
</TABLE>
                                       33
<PAGE>
                                INDEX TO EXHIBITS

Exhibit

3.1  Restated   Certificate  of  Incorporation   of  First  Palmetto   Financial
     Corporation  (incorporated  by reference to Exhibit 3.1 to First Palmetto's
     registration statement on Form S-4 filed with the SEC on June 14, 1990)

3.2  Bylaws of First Palmetto Financial  Corporation  (incorporated by reference
     to Exhibit 3.2 to First Palmetto's registration statement on Form S-4 filed
     with the SEC on June 14, 1990)

10.1 Stock Option Plan of First Palmetto Financial Corporation  (incorporated by
     reference to Exhibit  10.8 to First  Palmetto's  registration  statement on
     Form S-4 filed with the SEC on June 14, 1990)

10.2 Agreement  and  Plan of  Conversion  and  Reorganization  (incorporated  by
     reference to Exhibit 2.1 to First Palmetto's registration statement on Form
     S-4 filed with the SEC on June 14, 1990)

10.3 Amended  and  Restated  Agreement  and Plan of Merger  dated June 12,  1990
     (incorporated by reference to Exhibit 2.2 to First Palmetto's  registration
     statement on Form S-4 filed with the SEC on June 14, 1990)

13   1998 Annual Report to Stockholders (Except for those portions of the Annual
     Report which are expressly  incorporated  herein by  reference,  the Annual
     Report  is  furnished  for the  information  of the  SEC and is not  deemed
     "filed" as a part of this report.)

22   Subsidiaries

27   Financial Data Schedules (SEC use only)

                                       34