Employee Stock Ownership Plan (2002)Full Document 

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                                  VALUATION OF
                          EMPLOYEE STOCK OWNERSHIP PLAN


                                  Prepared for:

                               First Reliance Bank

                            Florence, South Carolina


                                     As Of:
                                  March 1, 2002


                                  Prepared By:

                             Keller & Company, Inc.
                              555 Metro Place North
                                    Suite 524
                               Dublin, Ohio 43017
                                 (614) 766-1426


                                KELLER & COMPANY

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                                  VALUATION OF
                          EMPLOYEE STOCK OWNERSHIP PLAN

                                  Prepared for:

                               First Reliance Bank

                            Florence, South Carolina

                                     As Of:
                                  March 1, 2002

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                                TABLE OF CONTENTS

                                                             PAGE

I.   INTRODUCTION AND DESCRIPTION OF FIRST RELIANCE BANK        1

II.  MARKET AREA                                                5

III. COMPARABLE GROUP SELECTION

     Introduction                                               8
     General Parameters
       Merger/Acquisition                                       9
       Trading Exchange                                         9
       IPO Date                                                 9
       Geographic Location                                     10
       Asset Size                                              10
     Balance Sheet Parameters
       Introduction                                            11
       Cash and Investments to Assets                          12
       One- to Four-Family Loans to Assets                     12
       Total Net Loans to Assets                               13
       Borrowed Funds to Assets                                13
       Equity to Assets                                        14
     Performance Parameters
       Introduction                                            14
       Return on Average Assets                                15
       Return on Average Equity                                15
       Net Interest Margin                                     16
       Operating Expenses to Assets                            16
       Noninterest Income to Assets                            16
     Asset Quality Parameters
       Introduction                                            17
       Nonperforming Assets to Asset Ratio                     17
       Repossessed Assets to Assets                            17
       Allowance for Loan Losses to Assets                     17
     The Comparable Group                                      18

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                                                 PAGE

IV. ANALYSIS OF FINANCIAL PERFORMANCE              19

V. MARKET VALUE ADJUSTMENTS

   Introduction                                    22
   Earnings Performance                            22
   Market Area                                     25
   Financial Condition                             25
   Dividend Payments                               27
   Liquidity of Stock                              27
   Management                                      28

VI. VALUATION METHODS

   Introduction                                    29
   Price to Book Value Method                      29
   Price to Earnings Method                        30
   Valuation Conclusion                            31

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                                LIST OF EXHIBITS

NUMBER

 1     Balance Sheet at December 31, 2001
 2     Balance Sheets at December 31, 1999 and 2000
 3     Statement of Income for the Year Ended
         December 31, 2001
 4     Statements of Income for the Period August 16, 1999
         To December 31, 1999 and for the Year Ended
         December 31, 2000
 5     Key Demographic Data and Trends
 6     Unemployment Rates
 7     Key Housing Data
 8     Bank Stock Prices and Pricing Ratios
         as of March 1, 2002
 9     Key Financial Data and Ratios
         as of March 1, 2002
 10    Balance Sheet Parameters -
          Comparable Group Selection
 11    Operation Performance and Asset Quality
         Parameters - Comparable Group Selection
 12    Balance Sheet Ratios - Final Comparable Group
 13    Operation Performance and Asset Quality Ratios -
              Final Comparable Group
 14    Balance Sheet Totals - Final Comparable Group
 15    Balance Sheet - Asset Composition
 16    Balance Sheet - Liabilities and Equity
 17    Income and Expense Comparison
 18    Income and Expense Comparison as a Percent of
              Average Assets
 19    Yields, Costs & Earnings Ratios
 20    Dividends, Reserves and Supplemental Data
 21    Valuation Analysis and Conclusions
 22    Market, Pricing and Financial Ratios -
              Comparable Group
 23    Profile of Keller & Company, Inc.

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I.       INTRODUCTION AND DESCRIPTION OF FIRST RELIANCE BANK

         This stock valuation has been prepared by Keller & Company, Inc., an
independent appraisal firm, and presents our opinion as to the current market
value of the common stock of First Reliance Bank ("First Reliance" or the
"Bank"), Florence, South Carolina, a state-chartered commercial bank. This stock
valuation has been prepared to determine the market value of the Bank's stock to
be granted in accordance with the Bank's Employee Stock Ownership Plan ("ESOP").

         This stock valuation assumes that the Bank is a going concern and that
its shares are traded in noncontrol blocks. We have given consideration to
market conditions for securities in general and for publicly-traded bank stocks
in particular. We have specifically examined the performance of selected
publicly-traded commercial banks and their holding companies and compared them
to the performance of the Bank and the industry.

         In preparing this ESOP stock valuation, we reviewed the Bank's audited
financial statements for the fiscal years ended December 31, 1999, December 31,
2000 and December 31, 2001, and the Bank's quarterly FDIC Call Reports for the
periods ended March 31, 2001, June 30, 2001, September 30, 2001 and December 31,
2001.

         Our valuation is not intended to represent and must not be construed to
be a recommendation of any kind as to the desirability of purchasing or selling
any of the outstanding shares of common stock of the Bank. Recognizing that this
stock valuation is based on numerous factors that can change over time, we can
provide no assurance that any person who purchases the stock of the Bank will
subsequently be able to sell such shares at prices similar to the market value
of the Bank as determined in this ESOP stock valuation.

                                       1

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I.       Introduction and Description of First Reliance Bank  (cont.)

         The Bank conducts its business from its main office and one branch
office, both located in Florence, South Carolina. The Bank is a
community-oriented institution principally engaged in the business of serving
the financial needs of the public in the communities throughout its market area
of Florence County, with its sources of funds being retail deposits from
residents in its market area, advances from the Federal Home Loan Bank and
securities sold under agreements to repurchase.

         As indicated in Exhibit 1, as of December 31, 2001, the Bank had assets
of $86,194,534 deposits of $75,686,644 and total stockholders' equity of
$7,658,007, including retained earnings of $415,500. Exhibit 2 presents the
Bank's financial condition for the calendar years ended December 31, 2000, its
first full year of operation, and December 31, 1999, the year in which the Bank
opened in August 1999.

         The Bank had earnings of $617,000 for the twelve months ended December
31, 2001, as presented in Exhibit 2, compared to earnings of $293,000 for the
twelve months ended December 31, 2000. Inasmuch as 2000 was First Reliance's
first full year of operations, there is an insufficient historical trend from
which to derive or extrapolate core or normalized income. Consequently, for the
purposes of this valuation, we will consider net and core income to be
identical. It should be noted, moreover, that First Reliance's positive earnings
in 2000 after commencing operations in August of 1999 and experiencing robust
and dynamic growth during its first sixteen months of operations, resulted in
profitability in excess of initial projections. Such positive net earnings in an
institution's first full year of operations is a quite infrequent and favorable
accomplishment.

         First Reliance's primary lending strategy has been to focus on the
origination and retention of mortgage loans, which constituted 60.7 percent of
the Bank's gross loans at December 31, 2001. Residential mortgage loans on one-
to four-family dwellings accounted for 44.7 percent of the Bank's mortgage loans
and 27.2 percent of gross loans at December 31, 2001. The remainder of the
Bank's mortgage loans consisted of construction loans, loans on farmland,
multi-family

                                        2

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I.       Introduction and Description of First Reliance Bank  (cont.)

loans and nonresidential real estate loans.  Nonmortgage loans, including
commercial and industrial loans, various categories of consumer loans and a
modest balance of agricultural production loans, represented 39.3 percent of
gross loans. Of the Bank's total closed end first mortgage loans on one- to
four-family residences, approximately 55.6 percent mature or reprice in one year
or less and 36.1 percent of the Bank's total loans mature or reprice in one year
or less.

         The Bank's balance of one- to four-family mortgage loans increased in
dollar volume during 2001, but its share of those loans as a percentage of total
loans remained generally constant. First Reliance's nonperforming assets and
ratio of nonperforming assets to total assets, much lower than industry
averages, increased in 2001 as the Bank's overall loan portfolio experienced
considerable growth in its second operating year. At December 31, 2001, the Bank
had nonperforming assets of $242,000 or 0.28 percent of total assets. The Bank's
nonperforming assets were comprised of repossessed real estate, loans ninety
days or more past due, and nonaccruing loans. First Reliance's allowance for
loan losses was $1.0 million at December 31, 2001, and $780,000 at December 31,
2000, while its ratio of allowance for loan losses to gross loans decreased from
1.67 percent to 1.21 percent in 2001, reflecting loan growth and a low level of
nonperforming assets. The Bank's ratio of allowance for loan losses to
nonperforming assets was a strong 413.2 percent at December 31, 2001.

         Excluding Federal Home Loan Bank stock of $142,000, at December 31,
2001, the Bank had $17.4 million or 20.2 percent of its assets in cash and
investment securities. Included in the Bank's cash and investments was $3.4
million of mortgage-backed securities.

         From December 31, 2000, to December 31, 2001, First Reliance
experienced a strong $21.1 million or 38.6 percent increase in deposits from
$54.6 million to $75.7 million, with an $8.6 million increase occurring in the
third quarter of 2001, following the opening of its first branch in Florence.
The Bank had $1.9 million of borrowed funds, in the form of federal funds
purchased, at December 31, 2001, compared to a very similar balance of $2.1
million at December

                                       3

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I.       Introduction and Description of First Reliance Bank (cont.)

31, 2000. Due to the Bank's strong asset growth, First Reliance's ratio of
equity to total assets decreased from 10.96 percent at December 31, 2000, to
8.89 percent at December 31, 2001, although the dollar amount of equity
increased by $611,000 or 8.7 percent in 2001 as a result of positive earnings in
2001.

         Interest income from loans and investments has been the Bank's primary
basis of earnings, with net interest margin being the principal component of net
earnings. For the twelve months ended December 31, 2001, the Bank's net interest
margin was 4.94 percent based on average interest-earning assets, which was
higher than the bank industry average of 3.90 percent, but lower than its 2000
net interest margin of 5.27 percent, again reflecting strong loan and asset
growth in 2001. In future years, management will continue to focus on
maintaining a competitive net interest margin without undertaking additional or
excessive credit risk.

                                       4

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II.      MARKET AREA

         The Bank's market area is considered to be Florence County in South
Carolina. Exhibit 5 provides economic/demographic summaries for this market
area, Florence City, Florence ZIP Code area, South Carolina and the United
States.

         The focus of the demographic and economic characteristics are the level
and trends in population, households, and income for the market area, Florence
City, the Florence ZIP Code area, South Carolina and the United States. The
trend for population indicates increases from 1990 through 2000 in each region.
The market area population increased by 10.0 percent, and increases of 1.5
percent, 15.5 percent, 15.1 percent and 13.2 percent occurred in Florence City,
the Florence ZIP Code area, South Carolina and the United States, respectively.
All areas are expected to continue to increase in population through the year
2006 at rates of 2.1 percent, 1.1 percent, 3.5 percent, 8.7 percent and 7.4 for
the market area, Florence City, the Florence ZIP Code area, South Carolina and
the United States, respectively.

         More important is the trend in households. Florence County (the market
area) has seen a 17.9 percent increase in households from 1990 through 2000,
compared to increases of 8.7 percent in Florence City, a strong 23.0 percent in
the Florence ZIP Code area, 21.9 percent in South Carolina and 14.7 percent in
the United States. All areas are projected to continue to increase their levels
of households at rates of 5.8 percent, 2.1 percent, 7.1 percent, 12.5 percent
and 7.8 percent for the market area, Florence City, the Florence ZIP Code area,
South Carolina and the United States, respectively.

         With regard to income, the market area's1990 per capita income was
$11,007, compared to Florence City's $12,831,the Florence ZIP Code area's
$12,602, South Carolina's $11,897 and the United States' $12,313. Florence
County's 1990 median household income of $24,264 was lower than all other areas.
Median household income levels of $24,906, $27,248, $26,256 and $28,255 were
reported in 1990 for Florence City, the Florence Zip Code area, South Carolina
and the United States, respectively. All per capita and median household income
levels increased in 2000. Per capita income increased by 58.6 percent, 58.0
percent, 58.2 percent, 61.2 percent and

                                       5

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II.      Market Area (cont.)

80.0 percent in the market area, Florence City, the Florence ZIP Code Area,
South Carolina and the United States to levels of $17,461, $20,273, $19,938,
$19,177 and $22,162, respectively. Median household levels increased from 1990
to 2000 by 46.4 percent, 45.8 percent, 43.3 percent, 38.7 percent and 48.3
percent to levels of $35,524, $36,313, $39,041, $36,428 and $41,914 in the
market area, Florence City, the Florence ZIP Code area, South Carolina and the
United States, respectively. All areas are also projected to increase their
levels of median household income through the year 2006. The market area will
increase 9.7 percent to $38,958, Florence City and the Florence ZIP Code area
will increase by 11.7 percent to $40,562 and 14.8 percent to $44,818,
respectively, and South Carolina and the United States will increase by 13.1
percent and 11.8 percent, respectively, to $41,188 and $46,878 median household
income levels, respectively, by the year 2006.

         Exhibit 6 provides the unemployment rates in Florence County, South
Carolina and the United States from 1997 through 2001. The market area's
unemployment rates have been higher than both South Carolina's and that of the
United States until 2001. In 1997, Florence County had an unemployment rate of
5.6 percent compared to unemployment rates of 4.5 percent in South Carolina and
4.9 percent in the United States. In 1998, Florence County's unemployment rate
decreased to 4.5 percent, compared to decreases to 3.8 percent in South Carolina
and to 4.5 percent in the United States. In 1999, the unemployment rate had
increased in Florence County and in South Carolina but decreased in the United
States. Florence County's unemployment rate in 1999 increased to 5.5 percent and
South Carolina's unemployment rate increased to 4.5 percent, while the United
States decreased to 4.2 percent. By 2000, Florence County's rate of unemployment
had decreased to 4.8 percent and South Carolina's rate of unemployment decreased
to 3.9 percent unemployment, while the United States had decreased to 4.0
percent unemployment. Annual unemployment rates for 2001 were 5.2 percent, 5.4
percent and 4.8 percent for Florence County, South Carolina and the United
States, respectively. Through February of 2002, the United States had shown an
increase in unemployment to 6.1 percent and South Carolina's unemployment rate
increased slightly to 5.5 percent, while Florence County had an increase in
unemployment to 5.5 percent.

                                       6

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II.      Market Area (cont.)

         Exhibit 7 provides key housing data for the market area (Florence
County), Florence city, the Florence ZIP Code area, South Carolina and the
United States. The market area had the highest owner-occupancy rate in 2000 of
73.0 percent followed by South Carolina at 72.2 percent, the Florence ZIP Code
area at 69.7 percent, the United States at 66.2 percent and Florence City at
61.4 percent. The offset to the owner-occupancy rate is the percent of
renter-occupied units with the market area having the lowest renter-occupancy
rate in 2000 of 27.0 percent, and Florence City having the highest
renter-occupancy rate at 38.6 percent.

         The market area had the lowest median housing value in 1990 of $564,600
compared to $58,100, $59,658, $60,700 and $79,098 in Florence City, the Florence
ZIP Code area, South Carolina and the United States, respectively. The market
area also had the lowest median rent in 1990 of $342 compared to $367 in
Florence City and $378 in the Florence ZIP Code area.

         In summary, the market area's population level has increased from 1990
to 2000 as has the level of households. The income levels, both per capita and
median household have also increased. With the exception of the Florence ZIP
Code area, all median household income levels are below state levels, and all
levels, including South Carolina, are below the national median household income
average. Also, the market area unemployment figures have been slightly above
state and national levels from 1997 through 2000 and then below the state level
in 2001 and similar to the state level in February 2002.

                                       7

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III.     COMPARABLE GROUP SELECTION

Introduction

         Integral to the valuation of First Reliance is the selection of an
appropriate group of similar publicly-traded commercial banks or commercial bank
holding companies, hereinafter referred to as the "comparable group". This
section identifies the comparable group and describes each parameter used in the
selection of each bank in the group, resulting in a comparable group based on
such specific and detailed parameters, current financials and recent trading
prices. The various characteristics of the selected comparable group provide the
primary basis for making the necessary adjustments to the Bank's value relative
to the comparable group. There is also a recognition and consideration of
financial comparisons with all publicly-traded, FDIC-insured commercial banks in
the United States, all publicly-traded, FDIC-insured commercial banks in the
Southeast and the twenty publicly-traded, FDIC-insured commercial banks in South
Carolina.

         Exhibits 8 and 9 present Bank Stock Prices and Pricing Ratios and Key
Financial Data and Ratios, respectively, both individually and in aggregate, for
the universe of 691 publicly-traded, FDIC-insured banks in the United States
("all banks") used in the selection of the comparable group and other financial
comparisons. Exhibits 8 and 9 also subclassify all banks by region, including
the 220 Southeast Banks ("Southeast banks") and the twenty South Carolina banks
("South Carolina banks") and by trading exchange.

         The selection of the comparable group was based on the establishment of
both general and specific parameters using financial condition as well as
operating and asset quality characteristics of First Reliance as determinants
for defining those parameters. The determination of parameters was also based on
the uniqueness of each parameter as a normal indicator of a bank's operating
philosophy and perspective. The parameters established and defined are
considered to be both reasonable and reflective of the Bank's basic operation.
Inasmuch as we deemed it appropriate that the comparable group consist of at
least ten banks or bank holding companies, the parameters relating to asset size
and geographic location have been expanded when necessary to fulfill that
requirement.

                                       8

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GENERAL PARAMETERS
Merger/Acquisition

         The comparable group will not include any bank or bank holding company
that is in the process of a merger or acquisition due to the price impact of
such a pending transaction. The banks that were potential comparable group
candidates but were not considered due to their involvement in a
merger/acquisition or a potential merger/acquisition include the following:

         Institution                        State
         -----------                        -----

         Home Town Bank of Villa Rica       Georgia
         Independence Bank                  North Carolina
         Main Street BankShares, Inc.       North Carolina
         Rowan Bancorp                      North Carolina

Trading Exchange

         It is necessary that each bank in the comparable group be listed on one
of the three major stock exchanges, the New York Stock Exchange, the American
Stock Exchange, or the National Association of Securities Dealers Automated
Quotation System (NASDAQ), on the OTC Bulletin Board or in the Pink Sheets. Such
a listing indicates that a bank's stock has demonstrated trading activity and is
responsive to normal market conditions, which are requirements for listing. Of
the 691 publicly-traded, FDIC-insured banks, 52 are traded on the New York Stock
Exchange, 30 are traded on the American Stock Exchange, 359 are traded on
NASDAQ, 222 are listed on the OTC Bulletin Board and 28 are listed in the Pink
Sheets.

IPO Date

         Another general parameter for the selection of the comparable group is
the initial public

                                       9

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IPO Date (cont.)

offering ("IPO") date, which must be at least five quarterly periods prior to
the trading date of March 1, 2002, used in this report, in order to insure at
least four consecutive quarters of reported data as a publicly-traded bank. The
resulting parameter is a required IPO date prior to December 31, 2000.

Geographic Location

         The geographic location of a bank is a key parameter due to the impact
of various economic and industry conditions on the performance and trading
prices of bank stocks. Although geographic location and asset size are the two
parameters that have been developed incrementally to fulfill the comparable
group requirements, the geographic location parameter has definitely eliminated
regions of the United States distant to the offices of First Reliance, including
the Midwestern states, the New England states, the southwestern states and
western states.

         The geographic location parameter consists of South Carolina and its
surrounding states of North Carolina and Georgia, as well as Alabama, Arkansas,
Florida, Kentucky, Louisiana, Maryland, Tennessee, Virginia and West Virginia,
for a total of 12 states. To extend the geographic parameter beyond those states
could result in the selection of similar banks with regard to financial
conditions and operating characteristics, but with different pricing ratios due
to their geographic regions. The result could then be an unrepresentative
comparable group with regard to price relative to the parameters and, therefore,
an inaccurate value.

Asset Size

         Asset size was another parameter used in the selection of the
comparable group. The total assets for any comparable group bank considered was
$250 million or less, due to the typically different operating strategies,
expansion capabilities, liquidity of stock and acquisition appeal of

                                       10

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Asset Size (cont.)

much smaller and larger banks when compared to the Bank, with assets of
approximately $86.1 million. Such an asset size parameter was necessary to
obtain a comparable group of at least ten banks.

         In connection with asset size, we did not consider the number of
offices or branches in selecting or eliminating candidates, since this
characteristic is directly related to operating expenses, which are recognized
as an operating performance parameter.

SUMMARY

         Exhibits 10 and 11 show the 91 banks or bank holding companies
considered as comparable group candidates after applying the general parameters,
with the shaded lines denoting the banks ultimately selected for the comparable
group using all the parameters established in this section.

BALANCE SHEET PARAMETERS

Introduction

         The balance sheet parameters focused on five balance sheet ratios as
determinants for selecting a comparable group, as presented in Exhibit 10,
consisting of the following:

              1.    Cash and investments to assets
              2.    One- to four-family loans to assets
              3.    Total net loans to assets
              4.    Borrowed funds to assets
              5.    Equity to assets

                                       11

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Introduction  (cont.)

         The balance sheet parameters enable the identification and elimination
of banks that are distinctly different from the Bank with regard to asset mix,
and to distinguish banks with significantly different equity positions from
First Reliance. The ratio of deposits to assets was not used as a parameter, as
it is directly related to and affected by a bank's equity and borrowed funds
ratios, which are separate parameters.

Cash and Investments to Assets

         First Reliance's ratio of cash and investments to assets, not including
Federal Home Loan Bank stock, was 20.2 percent at December 31, 2001, reflecting
the Bank's lower than average share of investments and indicating a slight
decrease from 22.5 percent at December 31, 2000. The Bank's investments
consisted primarily of federal agency securities, federal funds sold, municipal
securities and debt securities.

         The parameter range for cash and investments is broad due to the
volatility of this parameter and to prevent the elimination of otherwise good
potential comparable group candidates. The defined range is 40.0 percent of
assets or less, with a midpoint of 20.0 percent.

One- to Four-Family Loans to Assets

         First Reliance's mortgage lending activity is focused on the
origination of residential mortgage loans secured by one- to four-family
dwellings. One- to four-family loans, including construction loans, represented
44.7 percent of the Bank's mortgage loans and 20.5 percent of its

                                       12

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total assets at December 31, 2001.

One- to Four-Family Loans to Assets

         The parameter for this characteristic requires any comparable group
candidate to have from 10.0 percent to 40.0 percent of its assets in one- to
four-family loans with a midpoint of 25.0 percent.

Total Net Loans to Assets

         At December 31, 2001, First Reliance had a 74.1 percent ratio of total
net loans to assets, primarily reflecting the Bank's smaller than average share
of cash and investments. The parameter for the selection of the comparable group
is from 50.0 percent to 90.0 percent with a midpoint of 70.0 percent. The extent
of the range recognizes that, as stated above, some banks purchase lower volumes
of investments and/or mortgage-backed securities, but might otherwise be similar
to First Reliance.

Borrowed Funds to Assets

         First Reliance had borrowed funds of $1.9 million or 2.2 percent of
assets at December 31, 2001. The Bank's ratio of borrowed funds to assets was a
nominally higher 3.2 percent at December 31, 2000.

         The use of borrowed funds by some banks indicates an alternative to
retail deposits and may provide a source of term funds for lending. The Federal
insurance premium on deposits has also increased the attractiveness of borrowed

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