<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended SEC Commission File
June 30, 1996 Docket Number 0-15334
- --------------------- ---------------------
PALFED, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0821295
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification number)
107 Chesterfield Street South
Aiken, South Carolina 29801
- ----------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (803) 642-1400
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......
There were 5,225,571 shares of Common Stock outstanding on June 30, 1996.
<PAGE>
PALFED, INC.
---------------------------------------
Quarterly Report on Form 10-Q
For The Quarter Ended June 30, 1996
-------------
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM PAGE
- ---- ----
1. Financial Statements
Consolidated Statements of Financial
Condition as of June 30, 1996
and December 31, 1995. 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1996 and 1995. 4
Consolidated Statements of Cash
Flows for the Three and Six Months Ended
June 30, 1996 and 1995. 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II - OTHER INFORMATION
ITEM
- ----
4. Submission of Matters To a Vote of
Security Holders 16
5. Other Information 16
6. (a) Exhibits 17
(b) Reports on Form 8-K 17
Exhibit 11.1 18
SIGNATURES 19
2
<PAGE>
Consolidated Statements of Financial Condition
(Unaudited)
PALFED, Inc.
and Subsidiaries
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
(in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,900 $ 15,471
Interest-bearing deposits with other banks 5,531 5,854
Investment and mortgage-backed securities:
Available-for-sale 26,906 55,550
Held-to-maturity 60,704 62,293
Loans receivable, net 491,605 464,281
Investment in real estate, net 14,688 14,448
Investment in Federal Home Loan Bank stock 10,884 10,884
Premises and equipment, net 5,889 5,350
Accrued interest, net of allowance of
$618 and $1,052, respectively 3,999 4,256
Other assets 6,896 7,637
-------- --------
$638,002 $646,024
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing accounts $ 30,318 $ 27,333
Savings and NOW accounts 111,430 105,329
Certificates of deposit 371,103 363,193
Accrued interest payable 4,817 891
-------- --------
Total deposits 517,668 496,746
-------- --------
Federal Home Loan Bank advances 62,400 91,500
Other liabilities 4,268 6,293
-------- --------
Total liabilities 584,336 594,539
======== ========
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; authorized
10,000,000 shares; 5,225,571 and 5,142,166
shares issued; 5,225,571 and 5,101,297
shares outstanding, respectively 5,226 5,142
Additional paid-in capital 28,058 26,904
Retained earnings 22,640 20,626
Unamortized deferred compensation relating to
incentive stock grants (1,201)
Unrealized loss on debt securities, net of income tax
benefit of $552 and $456, respectively (1,057) (884)
Treasury stock, at cost (40,869 shares) (303)
-------- --------
Total stockholders' equity 53,666 51,485
-------- --------
$638,002 $646,024
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended For the Six Months Ended
PALFED, Inc.
and Subsidiaries
<TABLE>
<CAPTION>
June 30 June 30 June 30 June 30
1996 1995 1996 1995
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $10,764 $10,111 $21,154 $19,860
Mortgage-backed securities 1,005 1,712 2,163 3,438
Investment securities 595 793 1,287 1,590
Other 49 109 124 184
------- ------- ------- -------
Total interest income 12,413 12,725 24,728 25,072
Interest expense:
Deposits 6,038 6,042 12,040 11,390
Other borrowings 970 1,790 2,230 3,853
------- ------- ------- -------
Total interest expense 7,008 7,832 14,270 15,243
Net interest income 5,405 4,893 10,458 9,829
Provision for estimated losses
on loans 247 209 586 447
------- ------- ------- -------
Net interest income after provision
for estimated loan losses 5,158 4,684 9,872 9,382
Noninterest income:
Checking transaction fees 597 647 1,201 1,334
Financial services fees 220 260 455 418
Late charge and other fees 121 135 276 280
Gain on sales of investment and
mortgage-backed securities
and loans 94 47 589 81
Real estate operations (21) (151) (175) (521)
Other 193 169 389 417
------- ------- ------- -------
Total noninterest income 1,204 1,107 2,735 2,009
Noninterest expenses:
Compensation and employee benefits 2,456 2,157 4,980 4,383
Occupancy and equipment 711 636 1,464 1,279
Federal insurance premiums and
assessments 353 342 707 684
Professional and outside service
fees 418 322 700 599
Data processing 251 214 418 437
Advertising and public relations 225 326 423 498
Other 222 224 490 481
------- ------- ------- -------
Total noninterest expenses 4,636 4,221 9,182 8,361
Income before provision for income
taxes 1,726 1,570 3,425 3,030
Provision for income taxes 595 549 1,202 1,044
------- ------- ------- -------
Net income $ 1,131 $ 1,021 $ 2,223 $ 1,986
======= ======= ======= =======
Earnings per share $ 0.22 $ 0.20 $ 0.43 $ 0.39
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
PALFED, Inc.
and Subsidiaries
<TABLE>
<CAPTION>
For the six months ended June 30,
1996 1995
(in thousands)
<S> <C> <C>
Operating Activities:
Cash flows from operating activities:
Net income $ 2,223 $ 1,986
Adjustments to reconcile net income to cash
provided by operations:
Depreciation 384 386
Provision for deferred income taxes 333
Amortization of goodwill and intangibles,
loan fees, deferred income, and
premiums and discounts 18 104
Provision for estimated losses on loans,
real estate and accrued interest receivable 1,093 1,169
(Gain) loss on sales of real estate (188) 7
Gain on sales of loans (319) (182)
(Gain) loss on sale of assets available for sale (270) 101
Changes in:
Accrued interest receivable, net (181) (933)
Accrued interest payable 2,860 4,255
Other assets 611 539
Other liabilities (excluding deferred income) (2,265) 907
Other, net 428 40
Net cash provided by operating activities 4,727 8,379
Investing activities:
Cash flows from investing activities:
Purchases of investment and mortgage-backed securities (4,068)
Principal payments and maturities of investment
and mortgage-backed securities 5,732 7,347
Purchases of assets available-for-sale (2,572) (7,700)
Principal collections on assets available-for-sale 11,992 1,765
Proceeds from sales of assets available-for-sale 42,218 28,718
Loans originated (net of payments received) (52,696) (23,716)
Proceeds from sales of foreclosed real estate 1,857 2,018
Purchase of premises and equipment (921) (628)
Other, net (343) (92)
Net cash provided by investing activities 1,199 7,712
Financing activities:
Cash flows from financing activities:
Net increase in deposit accounts 18,062 21,745
Proceeds from FHLB advances and other borrowed money 50,800 24,000
Repayments of FHLB advances and other borrowed money (79,900) (65,750)
Payment of cash dividend (209)
Treasury stock sold 108
Other, net 319 1,065
Net cash used by financing activities (10,820) (18,940)
Net decrease in cash and cash equivalents (4,894) (2,849)
Cash and cash equivalents, beginning of period 21,325 18,331
Cash and cash equivalents, end of period $ 16,431 $ 15,482
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 10,345 $ 10,988
Income taxes 797 800
Supplemental schedule of noncash investing and
financing activities:
Securitizations of mortgage loans $ 9,411 $ 975
Real estate acquired through foreclosure 2,677 6,126
Financed sales of foreclosed real estate 1,042 3,551
Issuance of common stock as compensation 81 77
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PALFED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accounting and reporting policies of PALFED, Inc. and Subsidiaries (the
"Company") conform to generally accepted accounting principles and to general
practice within the thrift industry. They reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
consolidated financial position and results of operations for the interim
periods presented. These adjustments are of a normal and recurring nature.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements, the related notes, and the report of
independent accountants included in the Company's Annual Report to
Shareholders for the year ended December 31, 1995. The year end consolidated
statement of financial condition data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the three and
six months ended June 30, 1996 are not necessarily indicative of the results
to be expected for a full year.
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are summarized as follows:
June 30, 1996 December 31, 1995
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(in thousands)
AVAILABLE-FOR-SALE
- --------------------------
Investment securities $ 19,589 $ 19,138 $ 31,230 $ 31,060
Mortgage-backed securities 7,785 7,768 24,383 24,490
-------- -------- -------- --------
$ 27,374 $ 26,906 $ 55,613 $ 55,550
-------- -------- -------- --------
-------- -------- -------- --------
HELD-TO-MATURITY
- --------------------------
Investment securities $ 6,958 $ 6,794 $ 8,940 $ 8,879
Mortgage-backed securities 53,746 53,704 53,353 54,691
-------- -------- -------- --------
$ 60,704 $ 60,498 $ 62,293 $ 63,570
-------- -------- -------- --------
-------- -------- -------- --------
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS RECEIVABLE
Loans receivable are summarized as follows at the indicated dates:
June 30 December 31
1996 1995
-------- -----------
(in thousands)
Loan collateralized by real estate:
Permanent residential mortgage $228,335 $207,671
Construction 49,337 38,114
Second mortgage 54,548 52,313
Commercial 127,766 128,051
Loans collateralized by other property:
Consumer 37,908 39,585
Commercial 17,151 16,080
Loans collateralized by savings accounts 4,173 4,769
-------- --------
519,218 486,583
Less:
Loans in process (18,652) (13,141)
Unamortized yield adjustments (1,047) (744)
Allowance for estimated losses (7,914) (8,417)
-------- --------
$491,605 $464,281
-------- --------
-------- --------
Changes in the allowance for estimated loan losses are summarized as follows for
the quarters and six months ended June 30:
Quarters Six Months
1996 1995 1996 1995
------------------- ------------------
(in thousands)
Balance, beginning of period $ 8,195 $ 8,256 $ 8,417 $ 8,212
Provisions 247 209 586 447
Charge-offs (613) (557) (1,346) (822)
Recoveries 85 365 257 436
Reclassifications (196) (196)
------- -------- ------- -------
Balance, end of period $ 7,914 $ 8,077 $ 7,914 $ 8,077
------- -------- ------- -------
------- -------- ------- -------
At June 30, 1996, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS No. 114 totalled approximately $12.0 million,
of which $7.1 million related to loans with a corresponding valuation allowance
of $1.0 million. The impaired loans at June 30, 1996, were measured for
impairment using the fair value of the collateral as substantially all of these
loans were collateral dependent. For the six months ended June 30, 1996, the
average recorded investment in impaired loans was approximately $11.9 million.
The interest income recognized on impaired loans during the six months ended
June 30, 1996 was $409,000. Impaired loans are summarized as follows:
June 30 December 31
1996 1995
-------- -----------
(in thousands)
Construction loans $ 845 $ 844
Commercial real estate loans 10,461 11,300
Residential mortgage 679 899
------- -------
$11,985 $13,043
------- -------
------- -------
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS AND CONTINGENCIES
The Company has salary continuation agreements with nine officers which grant
these officers the right to receive up to three times their average annual
compensation for the five years preceding a change of control of the Company
and a change of duties or salary for such officers. The maximum contingent
liability under these agreements is approximately $2.5 million at June 30,
1996 .
Concurrent with the 1990 sale of the Woodside Plantation Country Club
("WPCC"), the Company had entered into an agreement with WPCC to purchase
club memberships through December 31, 2000. In 1993, the purchaser of the
remaining lots and certain other real estate at Woodside Plantation assumed
the Company's obligations under this agreement, however, the Company remains
contingently liable under this agreement. The Company's maximum liability
over the remaining term of the agreement, which is directly related to the
number of lot sales at Woodside Plantation, is approximately $1.5 million.
The deposits of Palmetto Federal are insured under the Savings Association
Insurance Fund ("SAIF") of the FDIC. Members of the Banking Committees of the
U.S. House of Representatives and the Senate have worked on several proposals to
recapitalize the SAIF. Under one proposal, all SAIF-member institutions would
pay a special assessment to the SAIF of approximately 80 basis points (80 cents
per $100 of deposits), the amount that would enable the SAIF to attain its
designated reserve ratio of 1.25%. The special assessment would be based on the
assessable deposits held as of March 31, 1995. If an 80 basis point assessment
were levied on the assessable deposits of the Bank held at March 31, 1995, the
special assessment of Palmetto Federal would total $3.9 million. The Company
cannot predict either the final details of any legislation or the effective
dates thereof.
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The amounts of financial instruments with off-balance-sheet risk are as follows
at the dates indicated:
June 30 December 31
1996 1995
-------- -----------
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate loans: $ 13,591 $ 13,460
-------- --------
-------- --------
Unused lines of credit: $ 34,803 $ 31,639
-------- --------
-------- --------
Standby letters of credit $ 706 $ 713
-------- --------
-------- --------
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's net earnings for the three months ended June 30, 1996 were $1.1
million or $0.22 per common share compared to $1.0 million or $0.20 per common
share for the three months ended June 30, 1995. The net earnings for the six
months ended June 30, 1996 were $2.2 million or $0.43 per common share compared
to $2.0 million or $0.39 per common share for the comparable period in 1995.
The 10.8% increase in quarterly earnings resulted primarily from an increase of
$512,000 or 10.5% in net interest income and a decrease of $130,000 or 86.1% in
losses from real estate operations. The 11.9% increase in year-to-date earnings
resulted primarily from an increase of $629,000 in net interest income, an
increase of $508,000 in gains on sales of securities and loans and a decrease of
$346,000 in losses from real estate operations.
On March 4, 1996, Palmetto Federal opened its nineteenth branch on Meeting
Street in Charleston, South Carolina. Recently, Palmetto Federal has received
approval to open full service branches in Mt. Pleasant, South Carolina and
Lexington, South Carolina. The Mt. Pleasant branch is the Bank's third in the
Charleston, South Carolina area and the Lexington branch is the second in the
Columbia, South Carolina market area. Management anticipates that these
branches will begin operations in September 1996.
COMPARISON OF 1996 AND 1995 OPERATING RESULTS
NET INTEREST INCOME
Net interest income was $5.4 million for the quarter ended June 30, 1996, an
increase of $512,000 or 10.5% compared to the quarter ended June 30, 1995.
Total interest income decreased $312,000 due to a decrease of 4.6% in the
level of average interest-earning assets caused by increased sales of
investment and mortgage-backed securities, partially offset by an increase in
the yield on these assets from 8.24% during the 1995 quarter to 8.43% during
the 1996 quarter. Total interest expense decreased $824,000 due to a decrease
in the rate paid on average interest-earning assets from 5.16% during the
1995 quarter to 4.89% during the 1996 quarter and a decrease of $36.3 million
or 6.0% in the level of interest-bearing liabilities. For the six months
ended June 30, 1996, net interest income increased by $629,000 or 6.4% to
$10.5 million compared to the six months ended June 30, 1995. Total
interest income decreased $344,000 or 1.4%, while total interest expense
decreased $973,000 or 6.4% from the 1995 period.
The following table presents information with respect to interest income from
interest-earning assets and interest expense from interest-bearing liabilities,
expressed in both dollars (in thousands) and rates, for the periods indicated.
Averages are computed using month-end balances for the periods presented.
Nonaccruing loans have been included in average loans receivable
9
<PAGE>
for purposes of calculating the average yield on loans receivable.
<TABLE>
<CAPTION>
Interest Interest
Income/ Yield/ Income/ Yield/
Six Months Ended June 30, 1996 Expense Rate 1995 Expense Rate
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Interest-Earning:
Assets:
Interest-bearing deposits $ 3,433 $ 124 5.23% $ 6,161 $ 184 5.96%
Loans receivable 476,663 21,154 8.88 453,900 19,860 8.75
Mortgage-backed securities 65,019 2,163 6.65 104,190 3,438 6.60
Total investments 32,512 895 5.50 43,826 1,199 5.47
FHLB STOCK 10,884 392 7.20 10,884 391 7.19
- -------------------------------------------------------------------------------------------------
Total 588,511 24,728 8.40% 618,961 25,072 8.10%
- -------------------------------------------------------------------------------------------------
Liabilities:
Retail savings deposits $ 31,885 $ 404 2.55% $ 31,786 $ 430 2.73%
Retail time deposits 369,116 10,778 5.87 358,709 10,088 5.67
Demand deposits 102,722 858 1.68 101,862 872 1.73
FHLB ADVANCES 70,357 2,230 6.38 115,064 3,853 6.75
- -------------------------------------------------------------------------------------------------
Total 574,080 14,270 5.00% 607,421 15,243 5.06%
- -------------------------------------------------------------------------------------------------
Net interest income $10,458 $ 9,829
------- -------
------- -------
Net interest margin 3.40% 3.04%
---- ----
---- ----
Net yield 3.55% 3.18%
---- ----
---- ----
</TABLE>
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Palmetto Federal's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) change in
volume (change in volume multiplied by old rate); (2) change in rates (change in
rate multiplied by old volume); (3) change in rate-volume (change in rate
multiplied by the change in volume).
For The Six Months Ended
June 1996 vs. June 1995
Increase (Decrease)
----------------------------------
Rate/
Volume Rate Volume Total
------ -------- ------ --------
(in thousands)
Changes in:
Interest income:
Loans receivable............ $ 995 $ 285 $ 14 $ 1,294
Mortgage-backed securities.. (1,293) 29 (11) (1,275)
Investments and other....... (418) 67 (12) (363)
------- ------- ----- -------
Total interest income........ (716) 381 (9) (344)
------- ------- ----- -------
Interest expense:
Deposits.................... 272 370 8 650
FHLB advances............... (1,491) (216) 84 (1,623)
------- ------- ----- -------
Total interest expense....... (1,219) 154 92 (973)
------- ------- ----- -------
Net interest income (expense) $ 503 $ 227 $(101) $ 629
------- ------- ----- -------
------- ------- ----- -------
10
<PAGE>
PROVISION FOR ESTIMATED LOSSES ON LOANS
The provision for estimated losses on loans was $247,000 for the quarter
ended June 30, 1996, compared to $209,000 for the 1995 quarter. Net
charge-offs for the 1996 quarter were $528,000 compared to $192,000 for the
1995 quarter. For the comparable six month periods, the provision for
estimated loan losses increased from $447,000 in 1995 to $586,000 in 1996
while net charge-offs increased from $386,000 in 1995 to $1.1 million in
1996. The 1996 net charge-offs include an increase of $316,000 in consumer
and commercial loan charge-offs primarily related to increased mobile home
loan charge-offs and an increase of $160,000 in foreclosed loan charge-offs.
Additionally, the 1995 amount included $265,000 in recoveries in in-substance
foreclosed loans. The resulting allowance for estimated losses on loans at
June 30, 1996 and 1995 was $7.9 million and $8.1 million, respectively.
While management uses its best judgment in establishing the allowance for
loan losses, there is no assurance that future higher provisions will not be
required. SEE NONPERFORMING ASSETS AND RESTRUCTURED LOANS.
NONINTEREST INCOME
Noninterest income was $1.2 million for the quarter ended June 30, 1996, an
increase of $97,000 or 8.8% over the 1995 quarter. Real estate operations
losses decreased $130,000 during the comparable quarters primarily as a
result of a decrease of $64,000 in expenses associated with real estate at
Woodside Plantation, a decrease of $58,000 in foreclosed real estate
expenses, an increase of $56,000 in net gains on sales of foreclosed real
estate. These improvements were offset by an increase of $36,000 in the
provision for estimated losses on foreclosed real estate. The Company
experienced gains of $94,000 on sales of investment and mortgage-backed
securities and loans during the 1996 quarter compared to $47,000 for the 1995
quarter due to gains recognized under the provisions of SFAS No. 121,
"Accounting for Mortgage Servicing Rights", which was not in effect during
the 1995 quarter. These improvements were partially offset by declines in
other components of noninterest income. Checking transaction fees decreased
by $50,000 or 7.7% to $597,000 for the 1996 quarter due primarily to a
decrease of 9% in the checking accounts which generate these fees and
financial services fees decreased by $40,000 to $220,000 in the 1996 quarter
due to a decrease in sales of tax deferred annuities.
For the six months ended June 30, 1996, noninterest income increased by
$726,000 or 36.1% to $2.7 million from the 1995 period. For the comparable
six month periods: gains on sales of investment and mortgage-backed
securities and loans increased from $81,000 in 1995 to $589,000 in 1996 due
to increased levels of sales and the adoption of SFAS No. 122; losses from
real estate operations decreased by $346,000 or 66.4% due primarily to
decreases in foreclosed real estate expenses and losses on sales of
foreclosed real estate, and; checking transaction fees decreased $133,000 or
10.0% due to decreases in fee generating accounts.
11
<PAGE>
NONINTEREST EXPENSES
Noninterest expenses were $4.6 million and $4.2 million for the quarters ended
June 30, 1996 and 1995, respectively. For the six months ended June 30, 1996,
noninterest expenses increased by $821,000 or 9.8% to $9.2 million. Compensation
and employee benefits expense increased by $299,000 or 13.9% and $597,000 or
13.6% during the three and six month periods, respectively. The primary
components of compensation and employee benefits are comprised as follows:
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
------- ------- ------- -------
(in thousands)
Salaries and commissions $ 2,138 $ 1,929 $ 4,228 $ 3,824
Incentive programs 219 84 473 212
Medical and retirement 272 233 485 450
Payroll and other taxes 157 145 364 334
Other expenses 26 28 49 52
------- ------- ------- -------
2,812 2,419 5,599 4,872
Capitalized costs of loan
originations (356) (262) (619) (489)
------- ------- ------- -------
$ 2,456 $ 2,157 $ 4,980 $ 4,383
------- ------- ------- -------
------- ------- ------- -------
Salaries and benefits increased 13.9% during the quarter ended June 30, 1996,
due to: a 10.9% increase in salaries and commissions arising from an increase in
number of employees due to the new branches and additional loan origination
commissions, a 161% increase in incentive program costs and a 16.7% increase in
medical and retirement costs due to increased medical claims under the Company's
self-funded group insurance plan. The increase of 35.9% in capitalized loan
costs resulted from increased loan originations in the comparable quarters,
continuing the 1996 trend.
During the quarter ended June 30, 1996, professional and outside service fees
increased by $96,000 or 29.8% primarily due to an increase of $60,000 or
66.7% in legal expenses. Legal costs increased primarily due to a
significant increase in consumer bankruptcies, increased costs related to the
Company's annual shareholder meeting and related materials and the litigation
costs related to two multi-defendant lawsuits which name the Bank as a
co-defendant. Occupancy and equipment expenses increased by $75,000 or 11.8%
primarily due to expenses associated with the new Palmetto Federal branches
opened in the past eighteen months. During the second quarter of 1996,
advertising and public relations expenses decreased by $101,000 or 31.0%
compared to the second quarter of 1995, which included additional expenses
related to the kickoff of a new campaign to position Palmetto Federal as
"The Bank of Choice" in South Carolina.
During the comparable six month periods, occupancy and equipment expenses
increased by $185,000 to $1.5 million primarily as a result of costs related to
operating the new branches and offices opened in the last eighteen months.
Professional and outside service fees increased by $101,000 or 16.9% during the
comparable
12
<PAGE>
six month periods due to increased legal and consulting expenses. Advertising
and public relations decreased by $75,000 or 15.1% during the 1996 period due to
costs incurred in 1995 related to the new television, print and billboard
advertising in connection with the new marketing campaign to position Palmetto
Federal as "The Bank of Choice" in South Carolina.
LENDING ACTIVITIES
During the quarter ended June 30, 1996, the Company originated $63.2 million
in loans compared to $43.6 million during the 1995 quarter. Year-to-date
originations were $117.7 million in 1996 compared to $72.9 million in 1995,
an increase of 61.4%. Originations in the Central Savannah River Area and
Lowcountry markets improved significantly from 1995 to 1996 and originations
in the Bank's newer markets entered during the last two years also reflected
increases.
Loan originations by loan type for the quarterly and six month periods follow:
Quarters Six Months
1996 1995 1996 1995
----------------- ----------------
(in thousands)
Residential mortgage $25,889 $17,090 $ 48,349 $27,620
Construction 18,002 11,583 32,340 20,933
Second mortgage 5,551 925 10,639 1,507
Consumer and commercial 13,766 13,970 26,323 22,836
------- ------- -------- -------
Totals $63,208 $43,568 $117,651 $72,896
------- ------- -------- -------
------- ------- -------- -------
The increase in construction loan originations consisted of $3.9 million in
"spec" loans, $4.0 million in single family loans and $1.4 million in
nonresidential construction loans. The increase in second mortgage loan
originations is primarily due to advertising featuring the CashLine II
product at 7.75% with a loan-to-value ratio of up to 90%.
REAL ESTATE DEVELOPMENT ACTIVITY
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners, consisting
of real estate held for development, acquisition and development loans,
foreclosed real estate and a 50% interest in a partnership. During the
quarter ended June 30, 1996, the total carrying value of these components
increased from $13.3 million to $13.5 million, due to the construction of 2
houses on lots owned by the Company.
Under the terms of the 1990 Membership Agreement with Woodside Plantation
Country Club ("WPCC") assumed by the purchaser of the developed lots at
Woodside Plantation, the purchaser is obligated to purchase a membership from
WPCC for each lot sold in Woodside Plantation. As of June 30, 1996, the
purchaser had not purchased the required memberships for 1996 lot sales due
to ongoing discussions concerning the interpretation of the Agreement,
however, subsequent to June 30, 1996, the purchaser paid substantially all
amounts due to WPCC for membership
13
<PAGE>
purchases.
ASSET/LABILITY MANAGEMENT
During the six months ended June 30, 1996, management has reduced Federal
Home Loan Bank ("FHLB") advances by 31.8%. Additionally the weighted average
interest rate has declined from 6.56% at December 31, 1996 to 5.88% at June 30,
1996. Palmetto Federal has $12.6 million of advances maturing in the next
three months with a weighted average interest rate of 6.78%. Management
currently believes it is unlikely that the reduction in advances experienced
during the first six months of 1996 will be repeated in the second six months
of the year.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets (nonaccrual loans and foreclosed real estate ("REO"))
and restructured loans, net of specific allowances, decreased from $27.4
million or 4.2% of total assets at December 31, 1995 to $24.1 million or 3.8%
of total assets at June 30, 1996. The decrease was attributable to a
decrease in nonaccrual loans offset by an increase in REO. The table below
sets forth the amounts and categories of Palmetto Federal's nonperforming
assets and restructured loans at the dates indicated.
June 30 March 31 December 31 June 30
1996 1996 1995 1995
------- -------- ----------- -------
(dollars in thousands)
Nonaccrual loans $ 5,342 $ 6,249 $ 7,856 $ 9,021
Foreclosed real estate 8,310 9,112 8,015 8,812
Restructured loans 10,409 10,472 11,553 15,206
------- ------- ------- -------
$24,061 $25,833 $27,424 $33,039
------- ------- ------- -------
------- ------- ------- -------
General loan loss allowance
as a percentage of the total 28.4% 27.8% 26.3% 21.1%
----- ----- ----- -----
----- ----- ----- -----
Total as a percentage of loans
receivable, net 4.9% 5.4% 5.9% 7.2%
----- ----- ----- -----
----- ----- ----- -----
Total as a percentage of total
assets 3.8% 4.1% 4.2% 5.1%
----- ----- ----- -----
----- ----- ----- -----
Changes in the components of nonperforming assets and restructured loans during
the three months ended June 30, 1996 were as follows:
Nonaccrual REO Restructured Total
Loans Loans
----------- -------- ------------ -------
(in thousands)
March 31, 1996 $ 6,249 $ 9,112 $ 10,472 $25,833
Performing loans which
became nonperforming 1,500 10 210 1,720
Upgrades due to performance (613) (95) (708)
Sales (1,547) (1,547)
Net principal collections (616) (164) (780)
Charge-offs and write downs (332) (69) (401)
Net changes in allowances (42) (14) (56)
Nonaccrual loans which became REO (804) 804 0
-------- -------- -------- -------
June 30, 1996 $ 5,342 $ 8,310 $ 10,409 $24,061
-------- -------- -------- -------
-------- -------- -------- -------
14
<PAGE>
The $1.5 million of new nonaccrual loans is comprised of several loans, none of
which individually exceed $316,000. The nonaccrual loans which became REO
consists primarily of several loans collateralized by single family houses, none
exceeding $141,000.
The $1.5 million of REO sold consisted of one commercial parcel of 24.3 acres in
Ohio with a carrying value of $425,000, sold at a minor loss, and several other
properties, none of which had a carrying value greater than $158,000.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $24.1 million as well as its potential problem loans of
$16.4 million. The following table summarizes the Bank's criticized assets as
of the dates indicated:
June 30 March 31 December 31 June 30
1996 1996 1995 1995
------- -------- ----------- --------
(in thousands)
Special mention $15,173 $14,437 $ 9,867 $ 3,664
Substandard 23,912 24,665 25,450 31,881
Doubtful 29 116 0 0
Loss 1,331 1,266 1,462 1,243
------- ------- ------- -------
$40,445 $40,484 $36,779 $36,788
------- ------- ------- -------
------- ------- ------- -------
LIQUIDITY
Palmetto Federal's principal sources of funds are deposits, loan repayments,
proceeds from sales and principal payments of invest- ment and mortgage-backed
securities and loans, FHLB advances, other borrowings, and retained earnings.
The liquidity of Palmetto Federal's operations is measured by the ratio of cash
and short-term investments as defined by the OTS regulations to the sum of
savings and borrowings payable in one year, less loans on savings. The Bank's
average liquidity level for June 1996 was 6.2% which was in excess of the
required amount of 5.0%.
REGULATORY MATTERS
As of June 30, 1996 Palmetto Federal's regulatory capital was 7.2% tangible
capital, 7.2% core capital and 11.5% risk-based capital, exceeding both the
regulatory minimum levels and the well capitalized standards. On July 1,
1996, the deduction to regulatory capital for the investment in nonincludable
subsidiaries increased from 60% to 100% resulting in a decrease of $2.6
million in each of the regulatory capital measures. Management expects
Palmetto Federal to continue to be well capitalized after this change.
15
<PAGE>
Part II. Other Information
Item 4. Submission of Matters To a Vote of Security Holders
The results of the 1996 PALFED Annual Meeting of Shareholders held on April
25, 1996, were previously reported in the Form 10-Q for the quarter ended
March 31, 1996.
Item 5. Other Information
(a) Supervisory Goodwill Suit. On July 1, 1996, in U.S v. WINSTAR the
-------
United States Supreme Court held that three federal thrifts could seek
damages against the United States for breach of contract arising out of the
government's agreement to permit federal thrifts to use supervisory
goodwill and other capital credits in computing their regulatory capital.
In August 1995, the Company and Palmetto Federal filed suit against the
United States seeking damages arising out of the breach of agreements for
the inclusion of supervisory goodwill in Palmetto Federal's regulatory
capital. The Company's suit relates to the 1982 acquisition by Palmetto
Federal of First Federal Savings and Loan Association of Beaufort and the
supervisory goodwill arising from that acquisition. Although the Supreme
Court's decision in WINSTAR means the Company's suit may proceed, no
-------
prediction can be made as to whether the suit will be successful, or if
successful, what damages may be awarded.
(b) Forward looking information.
This Quarterly Report on Form 10-Q, other periodic reports filed by the
Company under the Securities Exchange Act of 1934, as amended, and any
other written or oral statements made by or on behalf of the Company may
include forward looking statements which reflect the Company's current
views with respect to future events and financial performance. Such
forward looking statements are based on general assumptions and are subject
to various risks, uncertainties, and other beliefs, and projections
expressed in such statements. These risks, uncertainties and other factors
include, but are not limited to:
(1) Possible changes in economic and business conditions and in monetary
and fiscal policies that may affect the prevailing interest rates, the rate
of inflation, or the amount of growth, stagnation, or recession in the
United States, southeastern United States, and South Carolina economies,
the value of investments, collectability of loans, and the profitability of
business entities;
(2) Possible changes in laws and regulations, and other activities of
governments, agencies and similar organizations;
16
<PAGE>
(3) The effects of easing of restrictions on participants in the financial
services industry, such as banks, securities brokers and dealers, investment
companies, and finance companies, and attendant changes in patterns and
effects of competition in the financial services industry;
(4) The success of legislative efforts to resolve the problems of the
Savings Institution Insurance Fund and the related deposit insurance
premium disparity between thrifts and commercial banks;
(5) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements, and judgments; and
(6) The ability of the Company to achieve earnings expectations, which
depends on a variety of factors, including (i) continued reduction in the
Company's levels of nonperforming assets and restructured loans and in the
Company's ability to reduce its investments in real estate; (ii) the
continued growth of the markets in which the Company operates consistent
with recent historical experience, (iii) asset quality and litigation
contingencies; (iv) uncertainties concerning further reduction in employment
at the Department of Energy Savannah River Site located in the Company's
principal market area; and (v) the Company's ability to expand into new
markets and to maintain profit margins in the face of pricing pressures.
The words "believe", "expect", "anticipate", "project' and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf
of the Company. Any such statement speaks only as of the date the statements
made, and the Company undertakes no obligation to update or revise any
forward looking statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 Statement regarding computation of per share data.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALFED, INC.
------------
(Registrant)
Date: August 12, 1996 /s/ John C. Toutman
----------------- -----------------------
John C. Troutman
President and Chief
Executive Officer
Date: August 12, 1996 /s/ Darrell R. Rains
--------------- -----------------------
Darrell R. Rains
Executive Vice President
and Chief Financial
Officer
Date: August 12, 1996 /s/ Michael B. Smith
--------------- ------------------------
Michael B. Smith
Senior Vice President
and Controller
<PAGE>
Exhibit 11.1
PALFED, Inc.
Statement Regarding Computation of Per Share Data
Quarter Six Months
Ended Ended
June 30 June 30
--------- ----------
(in thousands)
1996
- -----
Weighted average shares outstanding 5,136 5,126
Stock options outstanding 230 230
Shares assumed repurchased (135) (136)
----- -----
Average common and common
equivalent shares (1) 5,231 5,220
----- -----
----- -----
Quarter Six Months
Ended Ended
June 30 June 30
--------- ----------
(in thousands)
1995
- -----
Weighted average shares outstanding 5,097 5,090
Stock options outstanding 184 185
Shares assumed repurchased (121) (135)
----- -----
Average common and common
equivalent shares (1) 5,160 5,140
----- -----
----- -----
(1) Stock options outstanding less shares assumed repurchased are common stock
equivalents.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PALFED, INC. AND SUBSIDIARIES AS OF
JUNE 30, 1996 AND THE RELATED CONSOLIDATED STATE OF INCOME FOR THE THREE
MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,900
<INT-BEARING-DEPOSITS> 5,531
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,906
<INVESTMENTS-CARRYING> 60,704
<INVESTMENTS-MARKET> 60,498
<LOANS> 491,605
<ALLOWANCE> 8,961
<TOTAL-ASSETS> 638,002
<DEPOSITS> 517,668
<SHORT-TERM> 44,400
<LIABILITIES-OTHER> 4,268
<LONG-TERM> 18,000
0
0
<COMMON> 53,666
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 638,002
<INTEREST-LOAN> 10,764
<INTEREST-INVEST> 1,600
<INTEREST-OTHER> 49
<INTEREST-TOTAL> 12,413
<INTEREST-DEPOSIT> 6,038
<INTEREST-EXPENSE> 7,008
<INTEREST-INCOME-NET> 5,405
<LOAN-LOSSES> 247
<SECURITIES-GAINS> 597
<EXPENSE-OTHER> 4,636
<INCOME-PRETAX> 1,726
<INCOME-PRE-EXTRAORDINARY> 1,726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,131
<EPS-PRIMARY> 0.220
<EPS-DILUTED> 0.220
<YIELD-ACTUAL> 3.670
<LOANS-NON> 5,342
<LOANS-PAST> 0
<LOANS-TROUBLED> 10,409
<LOANS-PROBLEM> 16,384
<ALLOWANCE-OPEN> 8,195
<CHARGE-OFFS> 613
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 7,914
<ALLOWANCE-DOMESTIC> 7,914
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,839
</TABLE>
