<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [Fee Required]
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended SEC Commission File
December 31, 1996 Number 0-15334
PALFED, Inc.
(Exact name of registrant as specified in its charter)
South Carolina 57-0821295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
107 Chesterfield Street South, Aiken, South Carolina 29801
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (803) 642-1400
----------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes..[X].. No....[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's outstanding Common Stock held
by non-affiliates of the registrant on March 24, 1997 was approximately
$76,848,000. There were 5,286,554 shares of Common Stock outstanding on March
24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the year ended December 31, 1996
(Parts I, II and IV)
2. Proxy Statement for the 1997 Annual Meeting of Shareholders
(Part III).
Page 1 of____ sequentially numbered pages
The Index to Exhibits is on page 40.
<PAGE>
PALFED, Inc.
and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
-------
<C> <S> <C>
PART I
Item 1. Business................................. 1
Item 2. Properties............................... 30
Item 3. Legal Proceedings........................ 30
Item 4. Submission of Matters to a Vote of
Security Holders........................ 30
PART II
Item 5. Market for Registrant's Common
Equity and Related Shareholder Matters... 33
Item 6. Selected Financial Data................... 33
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 33
Item 8. Financial Statements and Supplementary
Data..................................... 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure... 34
PART III
Item 10. Directors and Executive Officers of the
Registrant................................ 34
Item 11. Executive Compensation..................... 34
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................... 35
Item 13. Certain Relationships and Related
Transactions.............................. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................... 35
SIGNATURES
</TABLE>
(i)
<PAGE>
PART I
ITEM 1. BUSINESS.
PALFED, Inc. ("PALFED", together with its subsidiaries, the "Company"),
is a South Carolina corporation that was incorporated on March 7, 1986 to own
all the outstanding stock of Palmetto Federal Savings Bank of South Carolina
("Palmetto Federal" or the "Bank"). PALFED acquired all of the stock of
Palmetto Federal on January 27, 1987.
As a savings and loan holding company, the primary business of PALFED is
to manage the business of Palmetto Federal and its other subsidiaries and
affiliates. Palmetto Federal is a federally-chartered stock savings bank
which was chartered in 1951 and converted from a federal mutual savings and
loan association to a federal stock savings bank in 1985. PALFED Investment
Services, Inc. ("PALFED Investment"), a wholly-owned subsidiary of PALFED,
offers retail securities brokerage services and consumer insurance products.
At December 31, 1996 the Company had total assets of approximately $665
million. At December 31, 1996, PALFED and its subsidiaries had approximately
262 full-time employees and 55 part-time employees.
All aspects of the Company's businesses, including banking, are highly
competitive. The Company and its subsidiaries face substantial competition
from banking and nonbanking institutions, including money market mutual
funds, national and state banks, mutual savings banks, savings and loan
associations, mortgage banking companies, finance companies, insurance
companies, brokerage firms, credit unions and other types of financial
institutions located throughout the Southeast and the United States.
BANKING AND BANK-RELATED SERVICES
GENERAL
Palmetto Federal primarily engages in attracting deposits from the
general public and, using these funds, loan repayments, other borrowings, and
proceeds from the sale of securitized mortgage loans, makes loans primarily
for the purchase, financing or improvement of real estate. Palmetto Federal
also engages in consumer and commercial lending and other fee generating
financial services. Palmetto Federal currently operates 22 banking offices,
all of which are located in south central and southern South Carolina. The
Bank also operates seven mortgage lending offices located in South Carolina
and one mortgage banking office located in Georgia. The Bank's deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") which is supervised by the Federal Deposit Insurance Corporation
("FDIC"). The operations of the Company and the Bank are subject to
regulation by the Office of Thrift Supervision ("OTS"), the FDIC and the
Federal Reserve Board ("FRB"). Palmetto Federal is a member of the Federal
Home Loan Bank System ("FHLBS").
LENDING ACTIVITIES
General. A principal lending activity of Palmetto Federal is the
origination of single family residential mortgage loans, including
construction loans on single family and, to a lesser extent, multi-unit
dwellings and conventional mortgage loans on multi-unit dwellings and on
commercial and other type properties. Additionally, the Company originates
both short term construction and permanent loans secured by medical and
professional office buildings, strip shopping centers and motels, and makes
small business loans. In addition, Palmetto Federal offers mobile home,
automobile, home improvement and unsecured consumer loans. The Bank also
offers a home equity line of credit secured by the borrower's residence.
Although federal regulations allow the Company to originate loans nationwide,
the Company has originated substantially all of its loans in its primary
market areas of South Carolina and in the greater Augusta, Georgia area.
<PAGE>
From 1991 through 1993, the Bank capped the aggregate levels of consumer,
commercial, commercial real estate, non-residential and land loans at the
March, 1991 levels in response to increased OTS risk-based capital
requirements and to lower the overall level of credit risk in its portfolio.
In 1994, the Bank discontinued this limit on the aggregate level of its
commercial and consumer loans and changed its lending strategy to increase
the origination of higher yielding consumer and commercial loans. These loans
typically involve more risk than associated with residential lending.
Although residential mortgage originations comprise the majority of
originations, a significant portion of originations during 1995 and 1996 were
commercial real estate loans. The Bank originated $36.2 million in commercial
and commercial real estate loans in 1996, compared to $30.9 million in 1995.
During 1995, the Bank increased the origination of larger commercial real
estate loans, including those loans greater than $1.0 million. The 1995
originations included eight commercial real estate loans of $1.0 million or
greater, totaling $13.1 million, compared to only one loan of this scope in
1994. The 1996 originations included 8 such loans, totaling $10.9 million.
Commercial mortgages outstanding increased from $128.1 million at December
31, 1995 to $145.7 million at December 31, 1996.
The Bank operates under an investment policy which primarily is aimed at
underwriting residential mortgage loans in accordance with Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") underwriting guidelines. Single family loan originations consist of
both fixed and adjustable rate loans. The Company generally retains all
adjustable rate loans, construction loans, fixed rate loans with original
terms of 20 years or less and balloon loans in portfolio. FHA, VA and 30 year
fixed rate loans are typically originated for sale and either securitized and
sold in the secondary market as mortgage backed securities or sold for cash
through an established investor network. Details of residential mortgage
originations are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
(IN THOUSANDS)
Fixed rate loans originated for sale
(principally loans with 30-year terms and
FHA/VA loans)*............................. $57,066 $ 38,380
Fixed rate loans originated for portfolio
(principally loans with 10, 15 and 20-year
terms, construction loans and loans with
balloon payments)......................... 92,756 46,298
----------- ---------
Total fixed rate loans originated
and converted............................. 149,822 84,678
Total adjustable rate loans originated....... 13,692 27,144
---------- ---------
Total residential mortgage originations
and conversions........................... $163,514 $ 111,822
---------- ---------
---------- ---------
</TABLE>
* Loans originated for sale include $13.6 million and $5.4 million at
December 31, 1996 and 1995, respectively, of adjustable rate and construction
loans which converted to 30 year fixed rate mortgage loans held for sale.
Compared with balances at December 31, 1995, net loans receivable in
1996 grew by 11%. Loan originations increased significantly in 1996 over
1995 levels. In 1996, the Bank originated loans of $227.1 million,
compared to $172.2 million in 1995. In 1996, the Bank continued to
expand its lending markets to reduce reliance on the Central Savannah
River Area ("CSRA") market area. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (hereinafter
referred to as "Management's Discussion and Analysis") included in the
Company's Annual Report to Shareholders for the year ended December 31,
1996 (the "1996 Annual Report") and incorporated herein by reference.
Palmetto Federal reviews and annually revises, as necessary, its
underwriting and lending practices and loan policies in response to regulatory
changes. Underwriting guidelines, including loan to value ratios, are
established for each type of loan. The Bank's underwriting standards and
guidelines for each loan type are reviewed annually with any amendments or
revisions presented to the Board of Directors for approval. These guidelines are
in addition to the requirements of outside agencies and investors. The Bank's
lending policies are reviewed for compliance with applicable regulations and
rules, including Federal Truth-In-Lending, the Equal Credit Opportunity Act, the
Fair Credit Reporting
2
<PAGE>
Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, and applicable state usury requirements.
At December 31, 1996, the Bank held approximately $236.2 million in
permanent 1-4 single family first mortgage loans (including those loans held
for sale), $26.6 million of which exceeded an 80% loan to value ratio without
private mortgage insurance and $6.8 million of which exceeded a 90% loan to
value ratio. These higher loan to value ratio loans constitute increased risk
to the portfolio, but the Bank's loss experience for this category of loan
has not been significant.
The following tables are a comparison of Palmetto Federal's loan
portfolio at the dates indicated. Loans held for sale are classified as
permanent residential mortgage loans.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
% OF
LOAN
VARIABLE FIXED TOTAL PORTFOLIO
---------- ------------------ -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage......................... $ 139,895 $ 96,301 $ 236,196 43.0%
Construction........................................... 7,767 47,049 54,816 10.0
Second mortgage........................................ 40,221 15,801 56,022 10.2
Commercial............................................. 69,041 76,644 145,695 26.6
Loans collateralized by other property or unsecured:
Consumer............................................... 6,797 28,106 34,903 6.4
Commercial............................................. 9,907 6,302 16,209 2.9
Loans collateralized by savings accounts................. 0 4,725 4,725 0.9
---------- ----------- ----------- -------
Total gross loans........................................ $ 273,628 $ 274,928 $ 548,566 100.0%
---------- ----------- ----------- -------
---------- ----------- ----------- -------
49.9% 50.1% 100.0%
---------- ----------- -----------
---------- ----------- -----------
Mortgage-backed securities............................... $ 0 $ 59,977 $ 59,977
---------- ----------- -----------
---------- ----------- -----------
0% 100.0% 100.0%
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------
% OF
LOAN
VARIABLE FIXED TOTAL PORTFOLIO
---------- ------------------ -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage......................... $ 149,622 $ 58,049 $ 207,671 42.7%
Construction........................................... 15,051 23,063 38,114 7.8
Second mortgage........................................ 29,027 23,286 52,313 10.8
Commercial............................................. 71,817 56,234 128,051 26.3
Loans collateralized by other property or unsecured:
Consumer............................................... 6,405 33,180 39,585 8.1
Commercial............................................. 8,082 7,998 16,080 3.3
Loans collateralized by savings accounts................. 0 4,769 4,769 1.0
---------- ----------- ----------- -------
Total gross loans........................................ $ 280,004 $ 206,579 $ 486,583 100.0%
---------- ----------- ----------- -------
---------- ----------- ----------- -------
57.5% 42.5% 100.0%
---------- ----------- -----------
---------- ----------- -----------
Mortgage-backed securities............................... $ 0 $ 77,843 $ 77,843
---------- ----------- -----------
---------- ----------- -----------
0% 100.0% 100.0%
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------
% OF
LOAN
VARIABLE FIXED TOTAL PORTFOLIO
---------- ------------------ -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage......................... $ 115,450 $ 90,854 $ 206,304 44.2%
Construction........................................... 7,747 25,911 33,658 7.2
Second mortgage........................................ 30,194 25,457 55,651 11.9
Commercial............................................. 50,588 58,946 109,534 23.5
Loans collateralized by other property or unsecured:
Consumer............................................... 3,978 38,554 42,532 9.1
Commercial............................................. 8,304 6,873 15,177 3.3
Loans collateralized by savings accounts................. 0 3,784 3,784 0.8
----------- ---------- ---------- ------
Total gross loans........................................ $ 216,261 $ 250,379 $ 466,640 100.0%
----------- ---------- ---------- ------
----------- ---------- ---------- ------
46.3% 53.7% 100.0%
----------- ---------- ----------
----------- ---------- ----------
Mortgage-backed securities............................... $ 0 $ 106,273 $ 106,273
----------- ---------- ----------
----------- ---------- ----------
0% 100.0% 100.0%
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------------------------------------------
% OF
LOAN
VARIABLE FIXED TOTAL PORTFOLIO
---------- ------------------ -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage........................ $ 132,122 $ 71,644 $ 203,766 43.6%
Construction.......................................... 1,314 25,499 26,813 5.8
Second mortgage....................................... 30,368 26,785 57,153 12.3
Commercial............................................ 61,090 49,197 110,287 23.7
Loans collateralized by other property or unsecured:
Consumer.............................................. 8,229 39,698 47,927 10.3
Commercial............................................ 9,008 7,516 16,524 3.6
Loans collateralized by savings accounts................ 0 3,447 3,447 0.7
----------- ---------- ---------- -----
Total gross loans....................................... $ 242,131 $ 223,786 $ 465,917 100.0%
----------- ---------- ---------- -----
----------- ---------- ---------- -----
52.0% 48.0 100.0%
----------- ---------- ----------
----------- ---------- ----------
Mortgage-backed securities.............................. $ 0 $ 106,563 $ 106,563
----------- ---------- ----------
----------- ---------- ----------
0% 100.0% 100.0%
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1992
-----------------------------------------------------------
% OF
LOAN
VARIABLE FIXED TOTAL PORTFOLIO
---------- ------------------ -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage....................... $ 119,198 $ 76,385 $ 195,583 41.3%
Construction......................................... 2,197 10,651 12,848 2.7
Second mortgage...................................... 30,195 29,689 59,884 12.6
Commercial........................................... 63,061 67,797 130,858 27.6
Loans collateralized by other property or unsecured:
Consumer............................................. 5,243 45,766 51,009 10.8
Commercial........................................... 11,248 8,837 20,085 4.2
Loans collateralized by savings accounts............... 0 3,974 3,974 0.8
----------- ---------- ---------- -------
Total gross loans...................................... $ 231,142 $ 243,099 $ 474,241 100.0%
----------- ---------- ---------- -------
----------- ---------- ---------- -------
48.7% 51.3% 100.0%
----------- ---------- ----------
----------- ---------- ----------
Mortgage-backed securities............................. $ 36,695 $ 88,434 $ 125,129
----------- ---------- ----------
----------- ---------- ----------
29.3% 70.7% 100.0%
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
LOAN MATURITIES. The following table sets forth certain information at
December 31, 1996 regarding the dollar amount of loans maturing in Palmetto
Federal's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayment and no stated maturity and
overdrafts are reported as due by December 31, 1997.
<TABLE>
<CAPTION>
PAYMENTS DUE WITHIN
--------------------------------------------------------------------
MORE THAN
1 YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS 5 YEARS TOTAL
---------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage................................ $ 120,134 $ 58,538 $ 58,538 $ 91,400 $ 98,052 $ 426,662
Real estate construction............................ 50,473 2,172 2,172 0 0 54,817
Installment, commercial, and loans collateralized by
savings accounts.................................. 27,202 9,196 9,196 9,913 329 55,836
---------- --------- --------- ---------- ---------- ----------
Total............................................... $ 197,809 $ 69,906 $ 69,906 $ 101,313 $ 98,381 $ 537,315
---------- --------- --------- ---------- ---------- ----------
---------- --------- --------- ---------- ---------- ----------
</TABLE>
5
<PAGE>
The following table sets forth loans due after one year which have fixed
rates or floating or adjustable rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FLOATING OR
ADJUSTABLE RATE FIXED RATE
----------------------- -----------------------
% OF % OF
TOTAL LOAN TOTAL LOAN
AMOUNT PORTFOLIO AMOUNT PORTFOLIO
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgage.................... $ 172,546 32.11% $ 133,982 24.94%
Real estate construction................ 2,121 0.39 2,222 0.41
Installment, commercial, and loans
collateralized by savings accounts.... 9,358 1.71 19,277 3.51
---------- ----- ---------- -----
Total................................... $ 184,025 34.25% $ 155,481 28.94%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
Construction Loans. Palmetto Federal provides construction financing for
single family, multi-family and nonresidential commercial real estate.
Construction loans are generally made for periods of six months to one year.
This period may be extended subject to negotiation and the payment of an
extension fee. Typically, interest rates on construction loans for loan terms
over one year are tied to an indexed rate and are adjustable monthly or
quarterly during the term of the loan. The Bank's policies allow residential
construction loans to builders for both presold and "spec" homes for up to an
85% loan to value ratio. The Bank also makes a combined construction/permanent
loan to individuals which combines a construction loan with a permanent mortgage
loan for up to a 95% loan to value ratio. As of December 31, 1996, the Bank had
approximately $2.2 million of single family construction loans, including loans
in process, that exceeded an 80% loan to value ratio. At December 31, 1996,
total construction loans comprised approximately 10.0% or approximately $54.8
million of the Bank's loan portfolio. Included in the Bank's total construction
loans were approximately $40.9 million in single family residential construction
loans, of which approximately $26.9 million were loans to builders for "spec"
homes. The Bank's loss experience for this loan category has been minimal.
Construction loans also involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction.
Commercial Real Estate Loans. Commercial real estate loans made by
Palmetto Federal are secured by office buildings, shopping centers,
multi-family apartment and condominium projects with more than four dwelling
units. Permanent commercial real estate loans are generally made for up to
85% of the appraised value of the properties securing the loan with interest
rates determined by market conditions. Generally, the majority of the Bank's
loan charge-offs have been in this loan category. As of December 31, 1996,
the Bank had approximately $145.7 million in commercial real estate loans,
which comprised approximately 26.6% of the Bank's loan portfolio.
Certain risks are inherent with loan portfolios which contain commercial
real estate, multi-family, commercial business and consumer loans. While these
types of loans provide benefits to the Company's asset/liability management
programs and reduce exposure to interest rate changes, such loans may entail
significant additional credit risks compared to residential mortgage lending.
Commercial and multi-family mortgage lending generally involves greater risk
than single-family lending. Furthermore, the repayment of loans secured by
income-producing properties is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the property is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the Company's loans may be impaired. These risks can be
affected significantly by supply and demand in the market for the type of
property securing
6
<PAGE>
the loan and by general economic conditions, and commercial and multi-family
loans may thus be subject, to a greater extent than single-family property
loans to adverse conditions in the economy. Commercial real estate and
multi-family loans typically involve larger loan balances to single borrowers
or groups of related borrowers than single family mortgage loans.
Palmetto Federal also makes commercial real estate loans for land
acquisition, development and/or construction costs. Typically, such loans
with a term over one year are tied to an indexed rate and are adjustable
monthly or quarterly during the term of the loan. Generally, Palmetto
Federal's loan underwriting policies for acquisition, development and
construction project loans are the same as for permanent commercial real
estate loans, however, loans made to finance the sale of foreclosed property
may be made at higher loan to value ratios and favorable interest rates to
expedite the reduction of the Bank's foreclosed property. Certain land
acquisition, development and/or construction loans made prior to 1987 were in
an amount equal to 100% of the aggregate costs of the financed project,
including land acquisition costs, development costs, construction costs and
interest costs. Palmetto Federal generally does not require a developer to
obtain a completion bond guaranteeing the completion of the financed project
in the event that the developer, for any reason, is unable to perform. In any
instance in which it has not obtained a completion bond, however, Palmetto
Federal generally requires a personal guarantee by the developer.
Second Mortgage Loans. Second mortgage residential loans comprised
approximately $56.0 million or 10.4% of the Bank's loan portfolio at December
31, 1996. The Bank's second mortgage loans consist of approximately $20.8
million in term loans primarily for home improvements and approximately $35.2
million in home equity line of credit loans. These loans typically have a
maximum loan to value ratio of 90%.
Consumer and Mobile Home Loans. At December 31, 1996, consumer loans
constituted 6.4% or approximately $34.9 million of Palmetto Federal's loan
portfolio, compared to 8.1% or approximately $39.6 million of the Banks's loan
portfolio at December 31, 1995. The consumer loan portfolio is made up of mobile
home, automobile and unsecured loans. The Bank originated approximately $24.7
million in consumer loans in 1996, compared to $31.2 million in 1995. Automobile
loans represented 14.9% or approximately $5.2 million of the Bank's consumer
loan portfolio at December 31, 1996. Palmetto Federal also offers Personal Cash
Line, which is an unsecured consumer loan. At December 31, 1996, this revolving
line of credit represented 7.1% of Palmetto Federal's consumer loan portfolio.
Consumer loans have historically tended to have a higher rate of default than
residential mortgage loans.
Mobile home loans represented 52.5% and 56.1%, respectively, of Palmetto
Federal's consumer loan portfolio at December 31, 1996 and 1995. During 1996,
the Bank originated approximately $724,000 in mobile home loans, compared to
$1.7 million in 1995. Mobile home loans historically have a higher rate of
default than other types of consumer loans, but generally provide a higher yield
than other types of loans. In 1996, mobile home loan chargeoffs increased by
$514,000 and the Bank repossessed 51 mobile homes. The Bank tightened loan
underwriting standards on this type of loan and its mobile home loan portfolio
declined by $3.8 million in 1996 to $18.4 million at year end. The Bank makes
loans for new mobile homes for up to 90% of the purchase price of
the home, not to exceed 120% of dealer's cost, and for used mobile homes at the
lesser of NADA value or 80% of the purchase price.
Loan Servicing. Palmetto Federal ordinarily retains the servicing of its
loans for which it generally receives a fee payable monthly of one-quarter to
one-half of one percent per year of the unpaid principal balance of each loan.
The Bank's servicing fees were $846,000, $898,000 and $816,000 in 1996, 1995 and
1994, respectively. During 1992 Palmetto Federal sold approximately $150 million
in mortgage servicing rights. The only servicing rights sold in 1993 related to
an existing commitment from the 1992 sale. The Bank sold no significant
servicing rights in 1994, 1995 or 1996.
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights", which requires that the right to service mortgage loans for others be
recognized as an asset, whether that servicing right is acquired or originated.
Servicing rights of $153,000 were recorded during 1995 as a result of adopting
this standard, resulting in a gain of $101,000, net of related income taxes. See
Note
7
<PAGE>
1 of the Consolidated Financial Statements, included in the Company's 1996
Annual Report and incorporated herein by reference.
Loan Fees. It is the general policy of Palmetto Federal to issue loan
commitments for a fee to qualified borrowers for a specified time period. These
commitments are generally for a period of 60 days. With management approval
commitments may be extended for up to six months. Palmetto Federal had
commitments to originate loans in a principal amount of approximately $32.9
million at December 31, 1996.
In addition to interest earned on loans and fees for issuing loan
commitments, Palmetto Federal receives loan fees for originating loans. Loan
origination fees are a percentage of the principal amount of the mortgage loan
and are charged to the borrower by Palmetto Federal for creation of the loan.
Loan fees, as well as certain narrowly defined origination costs, are deferred
and amortized as an adjustment to the yield over the life of the related loan.
The net deferred fees are reflected in interest income over the appropriate
amortization period. In the case of adjustable rate mortgages, a substantial
portion of the net deferred fee on each individual loan is recognized as income
over the first adjustment period. Any remaining net deferred fees or costs
associated with loans that are sold are recognized as adjustments to the gains
or losses on the sales of such loans. Therefore, for loans originated and held
by Palmetto Federal, the loan origination fees are not separately identified in
results of operations, nor are the fees being recognized as income immediately
upon closing of the loans but are included in net interest income as an
adjustment of yield.
LOAN DELINQUENCIES AND CLASSIFIED ASSETS
Loan Delinquencies.
Palmetto Federal's collection procedures provide that when a loan becomes 15
days delinquent the borrower is contacted by mail and payment requested. If the
delinquency continues, subsequent efforts are made to contact and request
payment from the delinquent borrower. In certain instances Palmetto Federal may
develop a repayment schedule with the borrower to enable the borrower to
restructure his or her financial affairs.
The accrual of interest income on loans in excess of 90 days past due is
generally suspended and previously recognized interest income reversed.
Additionally, the Bank discontinues the accrual of interest on any loan when
it determines the collection of interest is less than probable. If a
nonaccrual loan is restructured, the Company's policy is that the loan may
accrue interest only if the Bank's evaluation of the borrower's financial
condition supports full repayment of the restructured loan. If a loan
continues in a delinquent status for an additional 60 to 90 days, Palmetto
Federal will initiate foreclosure proceedings. All property acquired as the
result of foreclosure or by deed in lieu of foreclosure is classified as
"real estate acquired in settlement of loans" until such time as it is sold
or otherwise disposed of by Palmetto Federal.
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting By
Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting
By Creditors For Impairment of a Loan--Income Recognition and Disclosures, an
Amendment of SFAS No. 114." Under this new standard, a loan is considered
impaired, based on current information and events, if it is probable that the
Company will be unable to collect the scheduled payments of principal and
interest when due according to the contractual terms of the loan. The minimum
nonpayment period before management considers a loan to be impaired is 90
days. The types and characteristics of loans that are measured using SFAS No.
114 include individual loans greater than $500,000 or a group of related
loans to a single borrower aggregating more than $500,000. These loans are
typically collateral dependent commercial real estate loans. All other loans
generally are measured under net realizable value techniques or, as in the
case of small homogeneous loans, under a methodology which includes loan
classifications and historical charge-offs. Impaired loans typically are not
charged off until foreclosure on the collateral property. Occasionally, an
impaired loan is partially charged off as part of a loan restructuring.
Nonaccrual loans are typically 90 days or more delinquent and may include
loans within the scope of SFAS No. 114. Impaired loans may include accruing
loans which have a specific valuation allowance or which have been
restructured. Also under this standard, in-substance foreclosed loans
continue to be measured at the fair value of the collateral, however, these
loans are classified as loans receivable rather than as foreclosed real
estate, as was the case previously. Therefore, in-substance foreclosures of
$3.2 million at December 31, 1994 have been reclassified from investment in
real estate to loans receivable. See Notes 1 and 3 of the Consolidated
Financial Statements, included in the Company's 1996 Annual Report and
incorporated herein by reference.
8
<PAGE>
The amounts and categories of Palmetto Federal's nonperforming assets
(nonaccrual loans and foreclosed real estate ("REO")) and restructured loans,
changes in the components of nonperforming assets and restructured loans, and
additional information concerning the Bank's nonperforming assets and
restructured loans is set forth in "Management's Discussion and Analysis
- --Nonperforming Assets and Restructured Loans," included in the Company's 1996
Annual Report and incorporated herein by reference.
The additional interest income that would have been earned during the year
ended December 31, 1996 if the restructured loans noted above had been current
in accordance with their original terms and had been outstanding throughout the
year ended December 31, 1996 was approximately $160,000. The amount of interest
income on the restructured loans included in net earnings for the year ended
December 31, 1996 was approximately $208,000. Although restructured loans
include loans which are considered to be earning assets, there is more than
normal risk associated with these loans due to the fact that some were made to
facilitate the sale of foreclosed real estate and some were restructured with
terms that either extend the maturity or reduce the stated interest rate.
Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrowers'
ability to comply with present repayment terms. These loans are not included in
nonperforming assets. At December 31, 1996, potential problem loans totaled
approximately $14.5 million.
Management of Palmetto Federal establishes an allowance for possible loan
losses each year based on its estimate of losses in the loan portfolio. The loan
loss allowance is charged against Palmetto Federal earnings in the year in which
the allowance is established. Loan charge-offs are charged against the loan loss
allowance. At December 31, 1996, the loan loss allowance was $7.0 million or
approximately 1.4% of total loans. Additional information concerning Palmetto
Federal's loan loss allowances for 1996 is set forth in "Management's Discussion
and Analysis--Nonperforming Assets and Restructured Loans," appearing in the
Company's 1996 Annual Report and incorporated herein by reference.
The determination of the adequacy of the Bank's allowance for loan losses
is based upon management's assessment of risk elements in the portfolio,
factors affecting loan quality and assumptions about the economic environment
in which the Bank operates. The Bank utilizes a loan classification system in
assessing the overall quality of its loan portfolio to determine an adequate
allowance for the level of loan losses, with specific emphasis on the Bank's
larger loans. This system involves an ongoing review of the Bank's
commercial, real estate and consumer loan portfolios and includes factors
such as the cash flow and financial status of the borrower, the existence and
the value of the collateral and general economic conditions. This system is
dependent upon management's estimates and judgments and there can be no
assurance that the Bank will not have to increase its allowance for possible
loan losses in the future as a result of adverse markets for real estate and
economic conditions generally in the Bank's primary market areas, future
increases in nonperforming assets or for other reasons which would adversely
affect the Bank's results of operations. In addition, the Bank's principal
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and the carrying
value of its other nonperforming assets, including foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowance
for loan losses based on their judgments at the time of their examination.
The following table describes the Bank's allocation of its allowance for
estimated loan losses.
9
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
ALLOCATION % LOANS % LOANS % LOANS % LOANS
OF ALLOWANCE FOR TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOAN LOSSES: AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------------------ --------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential............. $ 596 41.9% $ 2,141 42.7% $ 1,545 44.5% $ 2,509 43.6%
Construction...................... -- 10.2 564 7.8 539 7.3 442 5.8
Second mortgage................... 177 10.4 780 10.8 832 12.0 941 12.3
Commercial........................ 3,333 27.1 4,037 26.3 4,148 22.9 4,712 23.7
Loans collateralized by other
property or unsecured:
Consumer.......................... 2,554 6.5 585 8.1 695 9.2 800 10.3
Commercial........................ 323 3.0 238 3.3 397 3.3 422 3.6
Savings accounts.................. -- 0.9 72 1.0 57 0.8 57 0.7
--------- ----- --------- ----- --------- ----- --------- -----
Total allowance..................... $ 6,983 100.0% $ 8,417 100.0% $ 8,213 100.0% $ 9,883 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
</TABLE>
<TABLE>
<CAPTION>
1992
----------------------
ALLOCATION % LOANS
OF ALLOWANCE FOR TO TOTAL
LOAN LOSSES: AMOUNT LOANS
- ------------------------------------ --------- -----------
<S> <C> <C>
Loans collateralized by real estate:
Permanent residential............. $ 1,961 41.1%
Construction...................... 196 2.7
Second mortgage................... 912 12.7
Commercial........................ 3,986 27.7
Loans collateralized by other
property or unsecured:
Consumer.......................... 812 10.8
Commercial........................ 305 4.2
Savings accounts.................. 60 0.8
--------- -----
Total allowance..................... $ 8,232 100.0%
--------- -----
--------- -----
</TABLE>
Criticized Assets. OTS regulations require thrifts to monitor and classify
their assets to establish a mechanism of early identification of problem loans
and to calculate and provide for prudent valuation allowances. Institutions are
also required to classify their own assets and to establish prudent general
allowances for loan losses. An institution also is required to set aside
adequate valuation allowances to the extent an affiliate possesses assets
requiring classification and poses a risk to the institution. OTS regulations
also require institutions to establish loss allowances for off-balance sheet
items when a loss becomes probable and estimable. The determination of the
individual asset classification depends on the degree of risk associated with
the asset and the likelihood of repayment or orderly liquidation. The portion of
a loan or other asset classified as loss is considered uncollectible and a
specific valuation allowance is established for the portion of the asset so
classified. For the portion of assets classified as loss, the OTS permits
institutions either to establish specific allowances for losses of 100% of the
amount classified or to charge-off such amount. A doubtful asset has a high
possibility of loss, but certain pending factors preclude the estimation of a
specific valuation allowance. Palmetto Federal classifies an asset as
substandard if the asset exhibits a defined weakness and is inadequately
protected either by the paying capacity of the borrower or the value of the
underlying collateral. Special mention loans have some credit deficiencies as
potential weaknesses that if not corrected could increase the risk of financial
loss. The Bank's total criticized assets include its nonperforming assets and
restructured loans as well as its potential problem loans. The following table
summarizes the Bank's criticized assets at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Special mention.................. $ 13,278 $ 9,867 $ 11,050
Substandard...................... 17,702 25,450 30,138
Doubtful......................... 364 0 0
Loss............................. 1,220 1,462 1,822
--------- --------- ---------
$ 32,564 $ 36,779 $ 43,010
--------- --------- ---------
--------- --------- ---------
</TABLE>
10
<PAGE>
INVESTMENT ACTIVITIES
The Company invests in mortgage-backed and related securities. Included in
the Company's securities portfolio are mortgage-backed securities which are
insured or guaranteed by FNMA, FHLMC or Government National Mortgage Association
("GNMA"). Mortgage-backed securities increase the quality of the Company's
assets by virtue of the guarantees that back them, require less capital under
risk-based capital rules than nonguaranteed mortgage loans, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company. The returns and other information concerning such
securities are outlined below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<C> <C> <C>
Average yield for period........... 6.67% 6.61% 5.85%
Average rate at end of period...... 6.91% 6.76% 6.72%
Interest income earned............. $ 4,337 $ 6,335 $ 6,237
Average balance for the period..... 64,077 95,803 106,602
Fair value at end of period........ 60,514 79,181 101,909
Amortized cost at end of period.... 59,899 77,736 108,621
Net unrealized gain (loss)......... $ 615 $ 1,445 $ (6,712)
</TABLE>
Through an investment policy approved by its Board of Directors, Palmetto
Federal invests funds necessary to comply with liquidity regulations and other
funds not needed currently for loans in short-term investments. At December 31,
1996, Palmetto Federal held investments in United States Treasury and agency
securities with a fair value of approximately $22.7 million. In 1996 the Bank
received proceeds of $74.8 million from the sale of loans, investment and
mortgaged-backed securities. For additional information, see "Management's
Discussion and Analysis--Investment and Mortgage-backed Securities" and Note 2
of the Consolidated Financial Statements, included in the Company's 1996 Annual
Report and incorporated herein by reference.
11
<PAGE>
The following table sets forth information for Palmetto Federal with respect
to yields on loans, yields on investments and cost of funds on deposits and
borrowings for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average yields on:
Loans receivable............................ 8.90% 8.90% 8.49% 8.48% 9.26%
Mortgage-backed securities.................. 6.77 6.61 5.85 6.58 7.15
Investment portfolio........................ 5.96 5.85 5.40 3.99 5.45
All interest-earning assets................. 8.46 8.24 7.73 7.76 8.54
Weighted average rate paid on:
Retail savings deposits..................... 2.59 2.66 2.66 2.87 3.74
Brokered time deposits...................... -- -- 9.55 6.98 9.18
Retail time deposits........................ 5.79 5.80 4.94 5.27 6.19
Interest-bearing demand deposits............ 2.44 2.40 2.09 2.64 3.70
FHLB advances and other borrowed money...... 5.92 6.58 5.72 6.20 6.79
All interest-bearing liabilities............ 4.89 5.10 4.36 4.81 5.80
Net interest margin (difference between
average rates on all interest-earning
assets and interest-bearing liabilities).... 3.57 3.14 3.37 2.95 2.74
Net yield (net interest income as a
percentage of average interest
earning assets)............................. 3.70% 3.26% 3.37% 2.79% 2.54%
</TABLE>
The following table sets forth information for the Bank with respect to
weighted average contractual yields on loans, yields on investments and the cost
of funds on deposits and borrowings at December 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average yields on:
Loans receivable............................ 8.73% 8.87% 8.34% 8.25% 8.90%
Mortgage-backed securities.................. 6.91 6.76 6.72 6.88 6.46
Investment portfolio........................ 6.24 5.50 5.72 4.73 5.34
All interest-earning assets................. 8.41 8.20 7.80 7.78 8.14
Weighted average rate paid on:
Retail savings deposits..................... 2.72 2.65 2.71 2.71 3.04
Brokered time deposits...................... -- -- -- 9.38 8.31
Retail time deposits........................ 5.82 6.07 4.90 4.92 5.69
Interest bearing demand deposits............ 2.67 2.42 2.10 2.39 2.46
FHLB advances & other borrowed money........ 5.94 6.56 6.72 5.98 6.46
All interest-bearing liabilities............ 4.92 5.22 4.73 4.45 5.27
Net interest margin........................... 3.49% 2.98% 3.07% 3.33% 2.87%
</TABLE>
12
<PAGE>
The tables below set forth the book value of the Company's investments at the
dates indicated, the weighted average yields on investments for the years
ended on the dates indicated and the periods to maturity from December 31,
1996.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------
MARKET MARKET MARKET
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency obligations:
held-to-maturity....................................... $ 6,962 $ 6,947 $ 8,940 $ 8,879 $ 39,105 $ 36,011
U.S. Treasury and agency obligations:
available-for-sale..................................... 15,964 15,768 31,230 31,060 4,988 4,884
Corporate obligations.................................... 0 0 0 0 1,998 1,825
Other investments........................................ 0 0 0 0 3 62
--------- --------- --------- --------- --------- ---------
Total.................................................... $ 22,926 $ 22,715 $ 40,170 $ 39,939 $ 46,094 $ 42,782
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average yield on investments for the year....... 5.59% 5.53% 5.30%
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
PERIODS TO MATURITY FROM DECEMBER 31, 1996
--------------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
--------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
COST AVERAGE COST AVERAGE
(IN THOUSANDS) YIELD (IN THOUSANDS) YIELD
-------------------------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations:
1 year or less............. $ 0 --% $ 0 0%
1-5 years.................. 3,967 6.04 15,561 5.36
5-10 years................. 2,995 6.73 0 0
after 10 years.............. 0 -- 403 7.44
Corporate obligations:
1 year or less.............. 0 -- 0 --
1-5 years................... 0 -- 0 --
5-10 years ................. 0 -- 0 --
after 10 years.............. 0 -- 0 --
Other investments:
1 year or less 0 -- 0 --
1-5 years 0 -- 0 --
5-10 years 0 -- 0 --
after 10 years.................. 0 -- 0 --
------- ---- ------- -----
Total........................... $6,962 6.34% $ 15,964 5.41%
------- ---- ------- -----
------- ---- ------- -----
</TABLE>
13
<PAGE>
ASSET/LIABILITY MANAGEMENT
Asset and liability management is the process by which Palmetto Federal
attempts to maximize net interest income while minimizing the adverse effect
of interest rate changes. The Company's Asset/ Liability Committee sets loan
and deposit rates, reviews the interest sensitivity gap of the Bank and sets
policies and strategies to improve the interest rate risk exposure of the
portfolio and to increase the level of net interest income. Additional
information concerning the Bank's asset and liability management is included
in "Management's Discussion and Analysis--Asset/Liability Management,"
appearing in the Company's 1996 Annual Report and incorporated herein by
reference.
The following static gap table sets forth in summary form the repricing
attributes of Palmetto Federal's interest-earning assets and interest-bearing
liabilities. Static gap is a simple measure of the difference between
interest-sensitive assets and interest-sensitive liabilities repricing for a
particular time period. A negative gap position indicates that cumulative
interest-sensitive assets are less than cumulative interest-sensitive
liabilities and indicates that net income would decrease if market rates
increased. The time periods in the table represent the time before an asset
or liability matures or can be repriced.
<TABLE>
<CAPTION>
MORE
0 TO 3 3 TO 6 6 TO 12 1 TO 3 3 TO 5 THAN 5
MONTHS MONTHS MONTHS YEARS YEARS YEARS TOTAL
----------- ----------- ----------- ---------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-Sensitive Assets
Balloon and adjustable rate
loans..................... $ 103,936 $ 54,206 $ 71,129 $ 19,729 $ 0 $ 0 $ 249,000
Fixed rate mortgage and
mortgage-backed
securities................ 33,618 20,680 28,575 80,763 63,051 67,640 294,327
Consumer and commercial
loans..................... 15,914 3,970 5,714 17,308 9,329 310 52,545
Investments................. 8,893 3,844 (310) 2,938 8,973 3,398 27,736
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Total Interest-Sensitive
Assets.................... 162,361 82,700 105,108 120,738 81,353 71,348 623,608
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Interest-Sensitive
Liabilities
Regular savings............. 39,245 0 0 0 0 0 39,245
IFA accounts................ 10,521 0 0 0 0 0 10,521
NOW accounts................ 77,703 876 1,750 7,002 7,002 11,669 106,002
Fixed maturity deposits..... 153,524 38,532 77,064 94,712 16,801 0 380,633
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Total Deposits (excluding
accrued interest)......... 280,993 39,408 78,814 101,714 23,803 11,669 536,401
----------- ----------- ----------- ---------------- ---------- ----------- ----------
FHLB advances and other
borrowed money............ 50,400 10,000 0 8,000 0 0 68,400
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Total Interest-Sensitive
Liabilities............... 331,393 49,408 78,814 109,714 23,803 11,669 604,801
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Interest Sensitivity Gap.... (169,032) 33,292 26,294 11,024 57,550 59,679 $ 18,807
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Cumulative Gap.............. $ (169,032) $ (135,740) $ (109,446) $ (98,422) $ (40,872) $ 18,807
----------- ----------- ----------- ---------------- ---------- ----------- ----------
----------- ----------- ----------- ---------------- ---------- ----------- ----------
Ratio of cumulative gap to
total interest-sensitive
assets.................... (27.11)% (21.77)% (17.55)% (15.78)% (6.55)% (3.02)%
</TABLE>
14
<PAGE>
SOURCES OF FUNDS
GENERAL. Palmetto Federal's principal sources of funds are deposits,
principal and interest payments on loans, investment and mortgage-backed
securities, proceeds from sales of investment and mortgage-backed securities,
FHLB advances, other borrowings and retained earnings. Loan repayments are a
relatively stable source of funds, while deposit flows are significantly
influenced by general interest rates and economic conditions.
The following table sets forth the average amount of and the average rate
paid on the following deposits.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------ ------------------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------------- ----------------- ----------------- ----------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings $32,381 2.59% $31,074 2.66%
deposits....... $ 31,409 2.66%
Time deposits.... 374,934 5.79 365,020 5.80 325,360 4.96
Interest-bearing
demand deposits
(including
non-interest-
bearing demand
deposits)...... 106,611 1.77 98,666 1.71 115,615 1.56
----------------- ----------------- ----------
Total deposits... $513,926 4.75% $494,760 4.79% $ 472,384 4.36%
----------------- ----------------- ----------
----------------- ----------------- ----------
</TABLE>
Deposit Activities. The primary categories of deposits for Palmetto Federal
are time deposits and various types of short-term money market and checking
(NOW) accounts and other savings alternatives that are responsive to market
conditions. The ability of Palmetto Federal to attract and maintain deposits
and Palmetto Federal's cost of funds have been, and will continue to be,
significantly affected by money market conditions. See "Management's
Discussion and Analysis--Asset/Liability Management," included in the
Company's 1996 Annual Report and incorporated herein by reference. Palmetto
Federal currently does not use brokered deposits as a source of funds.
15
<PAGE>
The following table sets forth deposit account balances, excluding
accrued interest payable, by account type, original term and weighted average
interest rate at the date indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------
WEIGHTED PERCENTAGE
TYPE OF AVERAGE OF TOTAL
ACCOUNT AMOUNT INTEREST RATE DEPOSITS
- --------------------------------------------------- ------------------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
NOW accounts....................................... $105,252 1.85% 19.61%
Money market deposit accounts...................... 11,553 6.02 2.15
Passbook and commercial savings.................... 35,203 2.72 6.56
Time Deposits
Jumbo certificates................................. 51,721 6.02 9.64
Other time deposits:
60 day.......................................... 17,982 3.48 3.35
91 day.......................................... 6,019 4.90 1.12
6--10 month..................................... 91,039 5.41 16.96
12 to 15 month.................................. 79,879 5.64 14.88
18 to 25 month.................................. 61,473 6.14 11.46
30 to 48 month.................................. 27,239 6.38 5.08
60 month or more................................ 47,820 6.99 8.91
Other.............................................. 1,507 5.46 0.28
------------------------- ------ -----------
Total.............................................. $536,687 4.78% 100.00%
------------------------- ------ -----------
------------------------- ------ -----------
</TABLE>
The following table sets forth the time deposits of Palmetto Federal
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
RATE 1996 1995 1994
- ---------------------------------------------------------------- ------------ ---------- ----------
<S> <C> <C> <C>
Less than 4.00%................................................. $ 16,985 $ 20,943 $ 67,689
4.01--6.00%................................................... 254,986 165,733 201,388
6.01--8.00%................................................... 101,219 165,057 52,195
Above 8.00%..................................................... 11,488 11,460 20,088
------------ ---------- ----------
$ 384,678 $ 363,193 $ 341,360
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
16
<PAGE>
The following table sets forth the amount and scheduled maturities of
time deposits at December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
----------------------------------------------------------
LESS THAN AFTER
ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
------------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Less than 5.25%.................................... $ 64,560 $ 1,432 $ 330 $ 16 $ 66,338
5.25--7.00%....................................... 172,465 67,601 20,695 14,769 275,530
7.01--9.00%....................................... 26,762 3,485 2,289 2,566 35,102
9.01--11.00%...................................... 2,223 5,011 474 0 7,708
------------- --------- --------- --------- ----------
Total scheduled maturities......................... $ 266,010 $ 77,529 $ 23,788 $ 17,351 $ 384,678
------------- --------- --------- --------- ----------
------------- --------- --------- --------- ----------
</TABLE>
The following table sets forth the maturities of time certificates in
amounts of $100,000 or more.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
----------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$12,563 $ 10,525 $ 6,351 $ 18,765 $ 48,204
----------- --------- --------- ----------- ---------
----------- --------- --------- ----------- ---------
</TABLE>
BORROWING ACTIVITIES. At December 31, 1996, Palmetto Federal had
advances totaling approximately $68.4 million from the Federal Home Loan Bank
of Atlanta ("FHLBA") at rates from 5.30% to 6.95% payable at various dates
through September 1998. The short-term borrowings by Palmetto Federal at the
end of and during the periods indicated and the maximum amount outstanding at
any month-end during each period are set forth in the following table.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total short-term borrowings at the end of period:
FHLBA advances................................................................... $ 57,900 $ 81,500 $ 98,200
Weighted average interest rate at end of period:
FHLBA advances................................................................... 6.01% 6.59% 6.38%
Average amounts outstanding:
FHLBA advances................................................................... $ 57,215 $ 82,135 $ 88,792
Maximum amount outstanding at any month:
FHLBA advances................................................................... $ 77,300 $ 90,200 $ 98,200
</TABLE>
17
<PAGE>
PALFED INVESTMENT SERVICES
PALFED Investment Services, Inc., formerly PALFED Financial Services,
Inc. ("PALFED Investment"), a wholly-owned subsidiary of PALFED, offers
retail securities brokerage services and sells tax-deferred annuities and
consumer insurance products. Net pre-tax income of PALFED Investment in 1996
was approximately $327,000 on revenues of $817,000, compared to pre-tax income
of $300,000 and revenues of $757,000 in 1995. In 1996 PALFED Investment opened
an office in Charleston, South Carolina to complement the retail offices in
that market.
PALFED Investment sells certain tax deferred annuities through Family
Financial Life Insurance Company ("Family Financial"), a Louisiana insurance
company that is directly or indirectly controlled by service corporations or
subsidiaries of savings institutions and their holding companies. PALFED
Investment also sells annuities through other insurance companies.
Additionally, Palmetto Federal sells credit life and mortgage insurance
through Family Financial. PALFED Investment owns, directly or indirectly,
approximately 19 percent of the outstanding stock of Family Financial with an
investment in Family Financial stock of approximately $653,000. PALFED
Investment received approximately $29,000 in dividends and distributions from
Family Financial in 1996. W. Barry Adams, Executive Vice President of
Palmetto Federal and Senior Vice President of PALFED Investment, serves as a
director of Family Financial.
EFFECTS OF PURCHASE ACCOUNTING
Palmetto Federal acquired First Federal Savings and Loan Association of
Beaufort, South Carolina ("First Federal") in August, 1982. This acquisition,
accounted for using the purchase method of accounting, increased the assets
and liabilities of Palmetto Federal by approximately $107 million each and
added seven branches to its system, two of which have since been closed. In
December 1993, the Company changed its method of amortizing goodwill by
adopting the provisions of SFAS No. 72, "Accounting For Certain Acquisitions
of Banking or Thrift Institutions", effective January 1, 1993. SFAS 72
(issued after the First Federal acquisition) requires goodwill to be
amortized over the estimated life of the interest-earning assets acquired
using the level yield method. The Company believes the change in accounting
principle is preferable because it provides a better matching of the
amortization of goodwill with the amortization of purchased discount on the
acquired interest-earning assets from the First Federal acquisition. The
change in accounting principle resulted in a $10.5 million noncash charge to
1993 earnings, reflecting the cumulative effect of this change for the
periods prior to January 1, 1993. This change also reduced the amount of
goodwill amortization recognized in 1993 by approximately $649,000.
Management reviews the amortization periods (estimated lives) of the
intangible assets periodically and makes adjustments as needed.
The Company was amortizing the core deposit intangible asset of $5.4
million acquired in the First Federal acquisition on a straight-line basis
over 25 years. At September 30, 1996, this core deposit intangible totalled
$2.4 million and had an estimated remaining life of approximately 11 years.
As a result of the SAIF special assessment on September 30, 1996, management
reassessed the carrying value of this intangible asset, concluded that the
asset was impaired and wrote-off the remaining balance in December 1996.
18
<PAGE>
The following table sets forth the actual effect on the Company's
operations for 1982 through 1996 of the First Federal acquisition and the
sale or repayment of loans acquired in such acquisition. The table also
reflects the pro forma effect on future periods' results of operations of the
accretion and amortization of the valuation adjustments recorded in
connection with Palmetto Federal's acquisition of First Federal on the basis
of certain assumptions as to the fair value of the assets and liabilities and
an assumption that there will be no sales of or prepayments on the acquired
loans. If these assumptions are not realized, the actual effects of the
accretions and amortization of these valuation adjustments will vary.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET INCOME
----------------------------------------------------------
AMORTIZATION AMORTIZATION
ACCRETION OF OF OTHER
OF LOAN INTANGIBLES PREMIUMS AND NET
ACTUAL DISCOUNTS AND GOODWILL DISCOUNTS EFFECT
- -------------------------------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
1982--1992......................... $ 25,109,356 $ (9,270,431) $ 214,388 $ 16,053,313
1993............................... 125,545 (10,761,947) 12,396 (10,624,006)
1994............................... 57,915 (260,825) 12,396 (190,514)
1995............................... 77,765 (281,391) 12,396 (191,230)
1996............................... 35,524 (2,650,406) 12,396 (2,602,486)
Pro Forma
- --------------------------------------
1997............................... 27,724 0 12,396 40,120
1998............................... 8,530 0 12,396 20,926
1999............................... 19,803 0 12,396 32,199
2000--2007......................... 54,838 0 21,840 76,678
------------- -------------- ------------- ------------
Total................................. $ 25,517,000 $ (23,225,000) $ 323,000 $ 2,615,000
------------- -------------- ------------- ------------
------------- -------------- ------------- ------------
</TABLE>
The 1996 amortization of intangibles and goodwill includes the $2.4
million write-off of the remaining core deposit intangible asset.
19
<PAGE>
REAL ESTATE DEVELOPMENT
Palmetto Service Corporation ("PSC"), a wholly-owned subsidiary of Palmetto
Federal, has engaged in real estate development activities since 1980, but
currently is not engaged in any new real estate development activities. Woodside
Development Company of Aiken, Inc. ("WDC"), a wholly-owned subsidiary of PSC,
was the original developer of the Woodside Plantation development. Effective
November 1993, PSC transferred to WDC certain real estate properties in projects
it previously developed. PSC currently provides real estate appraisal services
in the Bank's market areas, engages in real estate brokerage services, and has
an investment in a real estate partnership. At December 31, 1996, Palmetto
Federal's investment in PSC was approximately $6.3 million and it had extensions
of credits (including intercompany receivables and accounts payable) of
approximately $225,000 to PSC and WDC.
At December 31, 1996, PSC and WDC had a total investment as set forth below
in the following real estate developments and partnerships:
<TABLE>
<CAPTION>
<S> <C>
Woodside Plantation......................... $4,483,000
The Rapids.................................. 915,000
Other developments.......................... 459,000
Real estate partnership..................... 457,000
----------
$6,314,000
----------
----------
</TABLE>
Woodside Plantation. Woodside Plantation is a single family planned unit
development of over 2,000 acres that includes a country club, two eighteen hole
golf courses and over 1,800 single family lots as well as developed outparcels.
Since the project's inception in 1986 through December 31, 1993, WDC developed
913 homesites and sold 693 homesites and certain outparcels at Woodside
Plantation providing revenues after closing costs of approximately $27.3
million. In December 1990, WDC sold the Woodside Plantation clubhouse, related
golf courses, tennis and swimming facilities and amenities to Woodside
Plantation Country Club, Inc. ("WPCC"), a subsidiary of Club Corporation of
America, for approximately $6.8 million. Concurrent with the sale of the club
and related amenities, WDC entered into a membership agreement with WPCC to
purchase club memberships. In October 1993, WDC sold the assets of Woodside
Cable, an operating division of WDC that provided cable television services, for
approximately $1.1 million.
In December 1993, WDC sold the remaining developed lots at Woodside
Plantation, together with seven outparcels, the development and sales offices at
Woodside Plantation, and the stock of Woodside Realty, Inc., a wholly-owned
subsidiary of WDC that provided real estate brokerage services for Woodside
Plantation. In addition, the purchaser, Woodside Development Limited Partnership
(the "Purchaser"), assumed WDC's liabilities related to the obligation to
purchase memberships at Woodside Plantation Country Club. The Purchaser also
entered into a two year option agreement to acquire from WDC approximately 1,000
acres of undeveloped land at Woodside Plantation. Palmetto Federal provided
nonrecourse financing to the Purchaser of the developed lots and other assets of
WDC in an aggregate amount of approximately $3.6 million. In addition, Palmetto
Federal subsequently provided the Purchaser a $500,000 construction loan to
build townhouses at Woodside Plantation and six separate construction loans in
an aggregate amount of approximately $976,000 for further construction at
Woodside Plantation.
Due to slower than anticipated lot sales, the Purchaser was unable to
service its acquisition debt and completed a restructuring of the
indebtedness to the Bank in September 1995. The restructuring included the
following terms: (1) the Company acquired 35 lots and reduced principal on
the Purchaser's outstanding loans by $492,000; (2) the Company agreed to pay
up to $330,000 toward joint marketing efforts over three years related to the
35 lots it received; (3) the Company granted a two year extension until
December 31, 1997 of the Purchaser's option to purchase the remaining
undeveloped acreage at Woodside Plantation; and (4) the Company paid $184,500
to WPCC under the membership agreement. The Company paid $110,000 and $98,000
toward joint marketing in 1995 and 1996, respectively. There are no
assurances the Purchaser will exercise its option to acquire any of the
undeveloped acreage at Woodside Plantation and the Purchaser may exercise the
option to acquire only a portion of the optioned acreage.
20
<PAGE>
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners at Woodside
Plantation, comprised of real estate held for development, acquisition and
development loans, foreclosed real estate and a 50 percent interest in a
partnership. The carrying values of these components were as follows at December
31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Undeveloped land: 1,000 acres........................................ $ 3,733 $ 3,733 $ 3,733
2 outparcels......................................................... 750 750 750
WPCC loans........................................................... 4,393 4,454 4,584
Loans to Woodside Development Limited Partnership.................... 2,308 3,311 3,100
Lots received in loan restructuring, including subsequent
improvements....................................................... 708 492
Development loan to unrelated borrower............................... 150 525
Investment in and loans to partnership adjacent to Woodside
Plantation......................................................... 457 613 698
------- ------- -------
$12,499 $13,878 $12,865
------- ------- -------
------- ------- -------
</TABLE>
The ability of WPCC to repay its loans to the Bank also is based in part on
real estate sales at Woodside Plantation, which provides additional memberships
for the Woodside Plantation County Club. Effective April 1, 1996, the Bank
modified its loans to WPCC from amortizing to interest only for one year. See
Note 10 of the Consolidated Financial Statements, including in the Company's
1996 Annual Report and incorporated herein by reference.
The Rapids. PSC developed The Rapids project, a planned unit development of
single family homesites located in North Augusta, South Carolina. In 1991, PSC
sold part of the land and completed development of all of the 115 homesites it
planned to develop at this project. Since the project's inception in 1986
through December 31, 1996, PSC has sold 77 homesites and 4 outparcels providing
revenues after closing costs of $3.7 million. As of December 31, 1996, WDC has
38 homesites and two outparcels remaining held for sale at this project at a
carrying value of $915,000. At December 31, 1996, Palmetto Federal had two
outstanding construction loans to PSC for the construction of "spec" homes on
two of the homesites at this project. The Company recently sold one of these
homes and may build two additional speculative homes to facilitate the sale of
these lots.
Real Estate Partnerships. During 1996, PSC sold its interest in one real
estate partnership. At December 31, 1996, PSC had an investment in one real
estate partnership totaling $211,000. In 1996 that partnership had a net loss of
approximately $1,400. The Bank had one outstanding loan to that partnership of
$246,000 at December 31, 1996.
21
<PAGE>
REGULATION
General
The Company is a savings and loan holding company subject to regulation,
examination, supervision and reporting requirements of the OTS. As a savings
association, Palmetto Federal is subject to extensive regulation by the OTS.
The lending activities and other investments of Palmetto Federal must comply
with various federal regulatory requirements, including regulations that
require the maintenance of reserves against deposits, limiting the nature of
loans and interest that may be charged thereon and restricting investments
and other activities. In addition, federal and state regulatory agencies also
have the authority to prevent a savings association from paying a dividend or
engaging in any other activity that, in the opinion of the regulators, would
constitute an unsafe or unsound practice. The OTS and FDIC periodically
examine Palmetto Federal for compliance with various regulatory requirements,
and Palmetto Federal must file reports with the OTS describing its activities
and financial condition. Palmetto Federal is also subject to examination by
the FDIC and must meet certain reserve requirements promulgated by the FRB.
This supervision and regulation is intended primarily for the protection of
depositors and the federal deposit insurance fund. The regulatory structure
gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company and its operations.
The Company also is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which include
the filing of annual, quarterly and other reports with the Securities and
Exchange Commission ("SEC").
Federal Savings and Loan Holding Company Regulation
As the owner of all of the stock of Palmetto Federal, the Company is a
savings and loan holding company subject to regulation by the OTS under the Home
Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company
owning only one savings association, the Company generally is allowed to engage
and invest in a broad range of business activities not permitted to commercial
bank holding companies or multiple savings and loan holding companies; provided
that Palmetto Federal continues to qualify as a "Qualified Thrift Lender." See
"Regulation of Palmetto Federal--Qualified Thrift Lender ("QTL") Test." In the
event of any acquisition by the Company of another insured institution
subsidiary, except for a supervisory acquisition, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage.
The Company is prohibited from directly or indirectly acquiring control of
any savings institution or savings and loan holding company without prior
approval from the OTS or from acquiring more than 5% of any voting stock of any
savings institution or savings and loan holding company which is not a
subsidiary. No entity can acquire more than 10% of the stock of the Company
without prior OTS approval (unless the acquisition is for investment purposes
only and for not more than 24.9% of the Company's stock, and the required
filings are made with the OTS). The HOLA provides that no company may acquire
"control" of a savings association without the prior approval of the OTS.
"Control" is generally denoted by a greater than 25% ownership interest in the
savings association or its holding company. Any company that acquires such
control becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS.
Regulation of Palmetto Federal
Supervisory Agreement. In connection with the 1992 OTS Report of
Examination, which noted certain deficiencies and concerns regarding Woodside
Plantation, the level of criticized assets and capital levels, the OTS
exercised its discretion to treat Palmetto Federal as an institution
requiring more than normal supervision under the provisions of OTS Regulatory
Bulletin ("RB") 3a-1. Effective March 23, 1993, Palmetto Federal entered into
a Supervisory Agreement with the OTS to ensure the correction of deficiencies
noted by the OTS in the 1992 Examination. The Supervisory Agreement contained
provisions related to the management and reduction of Palmetto Federal's loans
22
<PAGE>
to and investments in Woodside Plantation; adoption and implementation of
procedures and policies regarding the identification and reporting of
troubled debt restructuring and accrual of interest on delinquent loans;
preparation of detailed plans for disposing of troubled assets; preparation
of strategic plans and capital maintenance plans for the Bank; and
maintenance of a $7.2 million level of general valuation allowances. The Bank
submitted to the OTS within the time periods provided in the Supervisory
Agreement the budgets, strategic plans and appraisals mandated by the
Supervisory Agreement, and adopted and implemented the policies and
procedures required by the Supervisory Agreement.
Following the 1994 OTS Examination, the OTS terminated the restrictions of
RB 3a-1 in August 1994. In December 1994, the OTS terminated the remaining
provisions of the Supervisory Agreement, subject to the Bank's continuing the
policies and procedures that encompassed the intent of the Supervisory Agreement
and continuing to adhere to the projections contained in the Bank's plans
previously submitted to the OTS. Both actions by the OTS significantly reduced
the level of regulatory restrictions on the Bank's operations. Additionally, the
termination of the RB 3a-1 restrictions lowered the FDIC insurance premium rate
paid by the Bank.
Regulatory Capital Requirements. OTS regulations (the "Regulatory Capital
Regulations") specify capital standards for thrifts consisting of three
components, a "core capital" requirement, a "tangible capital" requirement and a
"risk-based capital" requirement. The Regulatory Capital Regulations require
savings associations to maintain core capital in an amount not less than 3% of
adjusted total assets (the "leverage ratio") and to maintain tangible capital in
an amount not less than 1.5% of adjusted total assets. Under the Regulatory
Capital Regulations, thrifts are required to maintain capital equal to 8% of
risk-weighted assets. The OTS requires assets to be weighted on the basis of
risk and assigned a weighing factor of between 0% and 100%. Approximately
one-half of risk-based capital must consist of core capital and one-half may
consist of other preferred stock, a portion of general loan loss reserves and
other hybrid capital instruments such as convertible and subordinated
debentures. In determining compliance with the Regulatory Capital Regulations,
all of a savings association's investments in and extensions of credit to any
subsidiary engaged in activities not permissible for a national bank are
deducted from the savings association's capital. For additional information
concerning the Bank's compliance with the Regulation Capital Regulations, see
Note 8 of the Consolidated Financial Statements, included in the Company's 1996
Annual Report and incorporated herein by reference.
Included in the calculations of the Bank's capital requirements are
judgments and estimates of management. These judgments and estimates are subject
to review and scrutiny by the OTS and FDIC.
Prompt Corrective Action. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") required each federal banking regulator to
adopt a system of prompt corrective action, which provides for certain
mandatory supervisory actions as well as additional discretionary supervisory
actions if an institution's capital falls below certain levels. Under these
regulations, each depository institution must be classified into one of five
capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized) based on such institution's capitalization with respect to
the capital measures established by the applicable regulatory agency. An
institution is deemed to be (i) "well-capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a core capital ratio of 6.0%
or more, has a tangible capital ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure. All institutions are prohibited from making any capital
distributions or paying a management fee to any controlling person if such
action would cause the institution to fall into one of the undercapitalized
categories. The OTS at its discretion may reclassify a savings association's
capital category to the next lowest level (but not to the "critically
undercapitalized" level) if it deems that association to be in an unsafe and
unsound condition or if the savings association has received and not
corrected a less than satisfactory rating for asset quality, management,
earnings or liquidity in its most recent regulatory examination. The
regulation also requires the regulators to take certain specified actions for
institutions that are determined to fall within any of the three categories
below the "adequately capitalized" level. These actions range from
prohibiting an institution from making any capital distributions or paying
management fees if the action would cause the institution to fall into the
"undercapitalized category" to the appointment of a conservator or receiver
for an institution that becomes "critically undercapitalized". Management
believes Palmetto Federal is presently considered "well capitalized" under
the FDIC's prompt corrective action guidelines.
FDICIA directed the OTS and other federal banking agencies to revise
their risk-based capital standards to ensure that the standards (i) take
adequate account of interest rate risk, concentration of credit risk and the
risks of
23
<PAGE>
nontraditional activities, and (ii) reflect the actual performance and
expected risk of loss of multifamily mortgages. Institutions with an
"above-normal" degree of interest rate risk are required to maintain an
additional amount of capital. In March 1995, the OTS delayed indefinitely the
implementation of the interest rate risk component of the risk-based capital
standard, which had been scheduled to be effective September 30, 1994.
Safety and Soundness Standards. Federal banking regulations prescribe
for all insured depository institutions and their holding companies standards
relating to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, asset quality, earnings, compensation, fees and benefits and
such other operational and managerial standards as the agency deems
appropriate. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholders. In addition, the regulations authorize, but do not require, an
agency to order an institution that has been given notice by an agency that
it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If an institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted compliance
plan, the agency must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to
which an undercapitalized association is subject under the "prompt corrective
action" provisions of FDICIA. If an institution fails to comply with such an
order, the agency may seek to enforce such order in judicial proceedings and
to impose civil money penalties. The federal bank regulatory agencies also
proposed guidelines for asset quality and earnings standards.
Liquidity Requirements. Palmetto Federal is
required to maintain average daily balances of liquid assets
(cash, certain time deposits, bankers' acceptances, highly rated corporate
debt and commercial paper, securities of certain mutual funds and specified
U.S. government, state or federal agency obligations) equal to not less than
a specified percentage (currently 5%) of the average daily balance during the
preceding calendar month of its net withdrawable accounts plus short-term
borrowings. Member institutions are also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%)
of the average daily balance during the preceding calendar month of the total
of their net withdrawable accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet liquidity
requirements. At December 31, 1996 the long-term liquidity ratio of Palmetto
Federal was 7.9% and the Bank was in compliance with its short-term liquidity
requirement.
Loans to One Borrower. With certain exceptions, the statutory provision
limiting the ability of national banks to make loans to a single borrower is
now applicable to savings associations in the same manner and to the same
extent as it applies to national banks. In general, national banks may make
loans to one borrower equal to 15% of the bank's unimpaired capital and
unimpaired surplus, plus an additional 10% of capital and surplus for loans
secured by readily marketable collateral. At December 31, 1996, the current
limit of 15% of capital and surplus equated to a limit of approximately $8.4
million.
Equity Risk Investments. In addition to the Regulatory Capital
Requirements, Palmetto Federal is subject to an "equity risk" regulation
which limits the aggregate amount of its equity risk investments, which are
defined to include investments in real estate, service corporations,
operating subsidiaries and equity securities, as well as land loans and
nonresidential construction loans with loan-to-value ratios greater than 80%.
The regulation also imposes certain qualitative restrictions on otherwise
permissible investments in equity securities. Under the regulation, the
equity risk investments of thrift institutions which meet their minimum
regulatory capital requirements and have "tangible capital" (i.e., equity
capital, as determined in accordance with generally accepted accounting
principles, minus goodwill and other intangible assets, plus qualifying
subordinated debt and qualifying nonpermanent preferred stock) equal to or
greater than 6% of total assets may make aggregate equity risk investments in
an amount up to three times their tangible capital. A thrift institution that
meets its regulatory capital requirements and has tangible capital of less
than 6% of total assets may make aggregate equity risk investments in an
amount equal to the greater of 3% of total assets or two and one-half times
tangible capital. Regulatory approval is required if an institution's equity
risk investments exceed the foregoing limitations or for any equity risk
investments by institutions which fail to meet their minimum Regulatory
Capital Requirements. At December 31, 1996, Palmetto Federal's level of
equity risk investments complied with the foregoing requirements.
24
<PAGE>
Qualified Thrift Lender ("QTL") Test. All savings associations are required
to qualify as a qualified thrift lender ("QTL") to avoid certain restrictions on
their operations. If Palmetto Federal should in the future fail to maintain its
status as a QTL (in three of four calendar quarters in two of every three
years), Palmetto Federal would be subject to certain penalties, including
conversion to a bank charter or compliance with the restrictions imposed for
noncompliance.
Under current OTS regulations implementing the QTL Test, Palmetto Federal
either must qualify as a domestic building and loan association under the
Internal Revenue Code or maintain at least 65% of portfolio assets in certain
investments ("Qualified Thrift Investments"). Qualified Thrift Inestments must
equal or exceed 65% of portfolio assets on a monthly average basis in nine out
of every twelve months, and include (i) domestic residential or manufactured
housing loans, (ii) home equity loans, (iii) mortgage-backed securities backed
by residential or manufactured housing collateral, (iv) obligations issued by
the federal deposit insurance agencies, and (v) shares of stock issued by any
federal home loan bank. Part of the regulatory relief provisions of the SAIF
recapitalization legislation liberalized the lending authority of thrifts and
amended the QTL Test to count education, small business and credit card loans in
the same manner as mortgage loans for satisfying the QTL Test and to expand the
amount of consumer loans that count as Qualified Thrift Investments. At December
31, 1996, approximately 66.7% of Palmetto Federal's portfolio assets were
invested in Qualified Thrift Investments.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), Palmetto Federal has an affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the
types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. In its most recent CRA examination of Palmetto Federal in 1993,
the OTS assigned the Bank an "Outstanding" regulatory evaluation for the
Bank's fulfillment of the requirements of the CRA.
Dividends. OTS regulations limit the payment of dividends on common stock
by Palmetto Federal to PALFED. Interest on deposit accounts must be paid
prior to payment of dividends on common stock. Income appropriated to bad
debt reserves and deducted for federal income tax purposes cannot be used to
pay cash dividends without the payment of federal income taxes by Palmetto
Federal on the amount of such income removed from reserves at the then
current income tax rate. Under regulations enforced by the OTS, Palmetto
Federal is not permitted to pay dividends on its common stock if its
regulatory capital would thereby be reduced below the amount required for the
liquidation account or the Regulatory Capital Requirements prescribed for
institutions insured by the FDIC. Under OTS regulations, the ability of a
savings association to make capital distributions, such as dividends, is tied
to an institution's capital or "Tier" ranking. Payment of dividends by the
Bank to the Company is subject to certain restrictions and would require
prior notice to and approval of the OTS. In 1995 and 1996 Palmetto Federal
did not pay or declare any dividends to PALFED.
Transactions with Affiliates. Transactions between Palmetto Federal and
an affiliate are subject to Sections 23A and 23B of the Federal Reserve Act,
as amended (the "FRA"). FRA Section 23A limits the aggregate amount of
certain transactions with any single affiliate to 10% of the capital and
surplus of the financial institution and the aggregate amount of such
transactions with all affiliates to 20% of the institution's capital and
surplus. Certain transactions with affiliates, such as loans to affiliates or
guaranties, acceptances and letters of credit issued on behalf of affiliates,
are required to be collateralized by collateral in an amount and of a type
described in the statute. The purchase of low quality assets from affiliates
is generally prohibited. FRA Section 23B requires all transactions with
affiliates, including loans and asset purchases, to be on arms-length terms.
In addition, thrifts may not (i) make any loan or other extension of credit
to an affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies; and (ii) purchase or invest in
securities issued by an affiliate, other than securities of a subsidiary. The
OTS may for reasons of safety and soundness impose more stringent
restrictions on savings associations than those set forth in Sections 23A and
23B.
Palmetto Federal's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk
of repayment. Regulation
25
<PAGE>
O also places individual and aggregate limits on the amount of loans
the FRA may make to such persons based, in part, on its capital position.
Additional OTS restrictions, in part, require that a savings association retain
detailed records of transactions with affiliates and in certain circumstances,
to notify the OTS prior to any transactions with affiliates.
Deposit Insurance
Deposits of Palmetto Federal are insured by the FDIC and are subject to the
deposit insurance assessments of the SAIF. Under the FDIC's risk-based premium
system, the Palmetto Federal's deposit insurance premium generally depends upon
the amount of Palmetto Federal's deposits and the risk that Palmetto Federal
poses to the SAIF. Under these risk-related insurance regulations, an
institution is classified according to capital and supervisory factors.
Institutions are assigned to one of three capital groups: "well capitalized,"
"adequately capitalized" or "under capitalized." Within each capital group,
institutions are assigned to one of three supervisory subgroups. There are nine
combinations of groups and subgroups (or assessment risk classifications) to
which varying assessment rates are applicable.
Deposit insurance premiums for members of both the Bank Insurance Fund
("BIF") and the SAIF were established for each fund to achieve a 1.25%
designated ratio of reserves to insured deposits. The BIF reached the 1.25%
reserve level in 1995 and in August 1995, the FDIC reduced the premiums for BIF
member banks. The Deposit Insurance Funds Act of 1996, signed by the President
on September 30, 1996, recapitalized the SAIF through a special assessment to
bring it up to the same reserve level as the BIF. The Bank's $3.3 million
assessment equaled 65.7 cents per $100 of insured deposits outstanding as of
March 31, 1995. Following the SAIF recapitalization, the FDIC reduced deposit
insurance premiums for thrifts. For the semi-annual period beginning January 1,
1997, the assessments imposed on all FDIC deposits for deposit insurance have an
effective rate ranging from 0 to 27 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
Palmetto Federal has been notified that its SAIF assessment rate is 3 cents for
the period from January 1, 1997 to June 30, 1997.
The SAIF recapitalization legislation also provides that the assessment
base for the bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation
would be expanded to include deposits of both BIF-insured and SAIF-insured
institutions. Previously, the thrifts paid the entire cost of these bond
payments. In addition to the deposit insurance premiums, banks and thrifts
will pay 1.29 cents and 6.48 cents, respectively, per $100 of deposits. After
January 1, 2000, both banks and thrifts will pay 2.43 cents per $100 of
deposits. These rates are only for FICO interest and further premiums could
be assessed.
In addition to deposit insurance premiums, savings institutions also must
bear a portion of the administrative costs of the OTS through an assessment
based on the level of total assets of each insured institution.
Federal Home Loan Bank System
Palmetto Federal continues to be a member of the FHLBS, which consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLBA, Palmetto
Federal is required to acquire and hold shares of capital stock in the FHLBA in
an amount at least equal to the greater of 1.0% of its residential mortgage
loans or 5% of outstanding FHLBA advances. Palmetto Federal was in compliance
with this requirement with an investment in FHLBA stock at December 31, 1996 of
approximately $10.9 million valued at cost. On January 3, 1997, the FHLBA
redeemed approximately $7.0 million of the Company's FHLBA stock which was in
excess of the Bank's required minimum amount.
The FHLBA serves as a reserve or central bank for member institutions within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLBS. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLBA. Long-term advances may be made only for the purpose of
providing funds for financing residential housing. As of December 31, 1996
Palmetto Federal had approximately $68.4 million in advances from the FHLBA.
26
<PAGE>
Federal Reserve System
Pursuant to regulations of the FRB, a thrift institution must maintain
average daily reserves equal to a percentage of deposits specified by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1996 Palmetto Federal met its
reserve requirement of $1.4 million.
CERTAIN RESTRICTIONS ON ACQUISITION OF PALFED
Regulatory Restrictions
Federal laws and regulations contain a number of provisions which affect the
direct or indirect acquisition of savings institutions such as Palmetto Federal
and, consequently, The OTS regulations generally require prior approval of the
OTS for acquisitions of control of savings institutions or savings and loan
holding companies. Control is conclusively presumed to exist if, among other
things, a person acquires more than 25% of any class of voting stock of the
institution or holding company or controls in any manner the election of a
majority of the directors of the insured institution or the holding company.
Control is rebuttably presumed to exist if, among other things, a person
acquires more than ten percent of any class of voting stock (or 25% of any class
of stock) and is subject to any of certain specified "control factors". See
"Regulation--Federal Savings and Loan Holding Company Regulation."
Restrictions in the Articles of Incorporation and Bylaws
Several provisions of PALFED's Articles of Incorporation and Bylaws
concerning matters of corporate governance and certain rights of shareholders
might be deemed to have a potential "antitakeover" effect. These provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors, but which individual shareholders of
PALFED may deem to be in their best interest or in which shareholders may
receive a substantial premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current Board of Directors and management more
difficult.
Board of Directors. The Board of Directors of PALFED is divided into
three classes, each of which contains approximately one-third of the
aggregate number of the members of the Board. Each class serves a staggered
term, with approximately one-third of the total number of directors being
elected each year. A classified board of directors could make it more
difficult for shareholders, including those holding a majority of the
outstanding shares, to force an immediate change in the composition of a
majority of the board of directors. Since the terms of only one-third of the
incumbent directors expire each year, it requires at least two annual
elections for the shareholders to change a majority, whereas a majority of a
non-classified board may be changed in one year.
Cumulative Voting. The Articles of Incorporation of PALFED prohibit
cumulative voting for the election of directors.
Business Combination Provision. PALFED's Articles of Incorporation
provide that PALFED may engage in certain "Business Combination" transactions
(as defined) with an "Interested Shareholder" (as defined) only if approved
by the holders of not less than 80% of the outstanding PALFED stock, unless
(i) the Business Combination is approved by a majority of the "Continuing
Directors" or (ii) the consideration to be received by the shareholders of
PALFED satisfies certain "fair price" criteria. If either of the above two
exemptions to the 80% shareholder vote required is present, the shareholder
vote required to approve the Business Combination will be lower. The primary
purpose of this supermajority shareholder vote requirement for a Business
Combination is to discourage attempts by other corporations or groups to
acquire control of PALFED through the acquisition of a substantial number of
shares followed by a forced merger. In such a situation shareholders may not
receive a fair price for their shares as determined through arms-length
negotiations. This provision is designed to prevent a purchaser from
utilizing two-tier pricing and similar tactics in an
27
<PAGE>
attempt to take over PALFED, and helps to assure that all shareholders of
PALFED will be treated equally if a merger or other business combination is
effected.
Authorized Shares. The Articles of Incorporation authorize the issuance
of 10,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Shareholders of PALFED do not have preemptive rights to subscribe for or to
purchase additional shares of PALFED stock which may be issued. The Board of
Directors has sole authority to determine the terms of any one or more series
of the preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for
a series of preferred stock, the Board has the power to issue a series of
preferred stock to persons friendly to management in order to attempt to
block a post-tender offer merger or other transaction by which a third party
seeks control, and thereby assist management to retain its position.
Anti-Takeover Effects of Management Contracts and Stock Plans
Certain provisions of the Company's executive salary continuation
agreements, stock option plans, restricted stock grant plan, and the Employee
Savings and Stock Ownership Plan, particularly those pertaining to payments,
benefits and acceleration of vesting periods in the event of a change in
control, may discourage a takeover attempt as a result of the increased cost
to be incurred by the Company and the amount of Common Stock which would be
controlled directly by the directors, officers and employees of the Company
and its subsidiaries and indirectly through the Company's stock plans.
South Carolina Control Share Acquisition Act
Sections 35-2-101 through 35-2-111 of the Code of Laws of South Carolina
1976 (the "Control Share Acquisition Act" or the "Act") provide that if a
person acquires in one or a series of related transactions an amount of stock
equal to one-fifth or more of all of the voting power of a corporation
subject to the Act in a "control share acquisition" (as defined in the Act),
such shares have only such voting rights as are accorded them by resolution
adopted by the majority of shareholders of the corporation. As a South
Carolina corporation, PALFED is subject to the Control Share Acquisition Act.
Under the Control Share Acquisition Act, "control shares" are shares that
except for the Act would have voting power that would entitle a person
immediately after acquisition of such shares to exercise or direct voting
power in the election of directors within any of the following ranges of
voting power, (1) one-fifth or more but less than one-third of all voting
power, (2) one-third or more but less than a majority of all voting power, or
(3) a majority or more of all voting power. Pursuant to the Act, a person who
makes a control share acquisition may deliver to a corporation subject to the
Act an acquiring person statement which sets forth (i) the identity of the
acquiring person, (ii) a statement that the acquiring person statement is
given pursuant to the Act, (iii) the number of shares owned by the acquiring
person, and each other member of the acquiring person group, and (iv) the
range of voting power (more than one-fifth but less than one-third, more than
one-third but less than a majority, or a majority or more) under which the
control share acquisition falls. Upon receipt of an acquiring person
statement, then the voting rights to be accorded the control shares must be
presented at the next annual or special meeting of shareholders.
28
<PAGE>
TAXATION
PALFED and its subsidiaries file consolidated federal income tax returns on
a December 31 tax year. Prior to 1996, savings institutions, such as Palmetto
Federal, that met certain definitional tests and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), were allowed to
determine its bad debt deduction for tax purposes based on either the experience
method (the "bad debt reserve method") or the percentage of taxable income
method (limited to 8.0% of taxable income before such deduction). The Company
used the experience method in 1995 and 1994 since this method provided a more
favorable bad debt deduction.
The Small Business Job Protection Act of 1996 repealed the bad debt reserve
method for thrifts effective January 1, 1996 and suspends recapture of bad debt
reserves taken through 1987 (i.e., the base year reserve), but requires thrifts
to recapture or repay bad debt deductions taken after 1987 over 6 years
beginning in 1996. As of December 31, 1995, PALFED's bad debt reserves subject
to recapture, for which deferred taxes previously have been provided, totalled
$3.0 million. Thrifts meeting certain home mortgage lending tests may defer
repayment for an additional 2 years, and the Company believes it will qualify
for this additional 2-year deferral. As a result, all thrifts, including the
Bank, will be required to change from the reserve method to either the specific
chargeoff method (available to all thrifts) or the experience method (available
only to thrifts that qualify as "small banks," i.e., under $500 million in
assets measured on a controlled group basis) to compute the tax bad debt
deduction.
During 1994, the Internal Revenue Service completed an examination of the
Company's consolidated federal income tax returns through 1991. The examination
resulted in an income tax refund of $1.2 million and interest on the refund of
approximately $800,000, net of related fees and expenses. Subsequent to the
completion of the IRS examination, Palmetto Federal filed amended South Carolina
state income tax returns and received funds and related interest of
approximately $285,000 in 1994.
PALFED and its subsidiaries are subject to South Carolina and Georgia state
income taxes which are imposed at a rate of 6% of taxable income. Both South
Carolina and Georgia taxable income are computed in the same manner as federal
taxable income with certain modifications.
Accounting for Income Taxes. Under SFAS No. 109, "Accounting for Income
Taxes," the Company is not required to recognize a deferred tax liability with
respect to the base year reserve, unless it becomes apparent that this temporary
difference will reverse in the foreseeable future. This temporary difference
will become taxable in the event the Company no longer qualifies as a bank for
Federal income tax purposes. The cumulative amount of this temporary difference
for which the Company is not required to recognize a deferred tax liability is
equal to the amount of its tax base year reserve as of December 31, 1987 of
approximately $2.9 million. See Notes 1 and 7 to the Company's Consolidated
Financial Statements, included in the Company's 1996 Annual Report and
incorporated herein by reference.
29
<PAGE>
Item 2. Properties.
The Company's corporate headquarters is located at 107 Chesterfield Street
South, Aiken, South Carolina. Palmetto Federal has an operations center in Aiken
and operates 22 full service banking offices. The Bank's mortgage lending
division operates eight mortgage lending offices in Aiken, Beaufort, Charleston,
Columbia, Hilton Head Island, North Augusta, and Lexington, South Carolina, and
in Martinez, Georgia. A list of the Company's properties is set forth on page
46 of the Company's 1996 Annual Report and is incorporated herein by
reference.
The Bank owns its headquarters and operations center and 12 of its 21 branch
banking offices. The Bank leases its branches that are located in Kroger
Supermarkets in North Augusta and Aiken, its branch located in a Wal-Mart
Superstore in Columbia, and its branches in Beaufort, Burton, Charleston and
Mount Pleasant. The Bank also leases one of its branches in Hilton Head Island.
In 1996, the Bank opened 3 new banking offices in Lexington, Charleston and
Mount Pleasant, South Carolina and one mortgage office in Columbia, South
Carolina. The Bank purchased its Lexington office for approximately $300,000 and
is leasing the other new offices. The Company's capital expenditures for its
four new offices opened in 1996 were $398,000, principally for computers, office
equipment and furniture.
Data Processing Systems. Palmetto Federal owns and leases data processing
equipment consisting of computers, terminals and communications equipment.
Palmetto Federal also owns personal computers used for new account setup,
accounting spreadsheets, personnel records, and word processing. Palmetto
Federal conducts in-house data processing of its deposits and loans on a
mainframe computer through the use of applications software licensed by a third
party vendor. The system, which operates in both an on-line, real-time
environment as well as a proof-of-deposit environment, supports teller terminals
and video display terminals located in Palmetto Federal offices and branches. In
1996, the Company upgraded its branch network computer equipment and software
for approximately $240,000.
At December 31, 1996, the net book value of premises and equipment owned by
the Company was approximately $6.0 million. The information set forth in
Notes 1 and 10 of the Company's Consolidated Financial Statements, included
in the Company's 1996 Annual Report, is incorporated herein by reference.
Item 3. Legal Proceedings.
The Bank is periodically involved as plaintiff or defendant in various legal
actions incident to its business, none of which are believed by management to be
material to the financial condition of the Company or its subsidiaries.
On August 3, 1995, the Company and Palmetto Federal filed suit against the
United States in the U.S. Court of Federal Claims seeking damages arising out of
the breach of agreements with the Federal Home Loan Bank Board for the inclusion
of supervisory goodwill in Palmetto Federal's regulatory capital. The suit
relates to the 1982 acquisition by Palmetto Federal of First Federal and the
supervisory goodwill arising from that acquisition. No prediction can be made as
to whether the suit will be successful, or if successful, what damages might be
awarded.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted by the Company to a vote of its shareholders during
the fourth quarter ended December 31, 1996.
30
<PAGE>
Executive Officers of PALFED and its Subsidiaries
The executive officers of PALFED and its subsidiaries are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH
NAME AGE PALFED OR PALMETTO FEDERAL
- ------------------- --- ---------------------------------------------
<S> <C> <C>
W. Barry Adams 48 Executive Vice President,
Community Banking and Marketing,
of Palmetto Federal, Senior Vice
President of PALFED Investment
Patrick D. Cunning 49 Director, Executive Vice President,
Asset Management, of Palmetto Federal,
President of PSC and WDC
Joe W. DeVore 63 Executive Vice President and Senior
Lending Officer of Palmetto Federal
Howard M. Hickey, Jr. 49 Executive Vice President, General Counsel
and Corporate Secretary
Holly Z. Johnson 40 Executive Vice President, Director of Human
Affairs and Training, of Palmetto Federal
Darrell R. Rains 40 Executive Vice President, Treasurer and Chief
Financial Officer
Michael B. Smith 40 Senior Vice President and Controller
John C. Troutman 57 President and Chief Executive Officer
</TABLE>
Messrs. Troutman, Rains, Hickey and Smith serve in the same capacity for
Palmetto Federal as they do for PALFED.
W. Barry Adams was named an Executive Vice President, Community Banking and
Marketing, of Palmetto Federal in 1992. From 1984 to 1992 he was a Senior Vice
President, Deposit Services, of Palmetto Federal. Mr. Adams joined Palmetto
Federal in 1974.
Patrick D. Cunning is an Executive Vice President of Palmetto Federal and
serves as President of Woodside Development Company of Aiken, Inc. and Palmetto
Service Corporation. Prior to being named President of Palmetto Service
Corporation, Mr. Cunning was Chief Appraiser and Vice President of Palmetto
Service Corporation, which he joined in 1975.
Joe W. DeVore was named Executive Vice President and Senior Lending Officer
of Palmetto Federal in January 1995. Mr. DeVore previously served as Senior Vice
President and Senior Lending Officer of Palmetto Federal since June 1990. Prior
to being named Senior Lending Officer, Mr. DeVore was Senior Vice President,
Consumer/Commercial Lending of Palmetto Federal. He joined Palmetto Federal in
December 1981.
31
<PAGE>
Howard M. Hickey, Jr. has served as General Counsel of PALFED since 1986 and
as Secretary of PALFED since April 1988. Mr. Hickey joined Palmetto Federal in
1986 as a Vice President and General Counsel, was named Senior Vice President in
1988, and was named an Executive Vice President, Regulatory Affairs, Compliance
and Security in 1992.
Holly Z. Johnson was named Executive Vice President of Human Affairs and
Training of Palmetto Federal in January 1997. She previously had served as a
Senior Vice President since January 1994. Ms. Johnson joined Palmetto Federal in
1986 as Director of Human Resources, was named Assistant Vice President in 1987
and was named Vice President in 1990.
Darrell R. Rains serves as Executive Vice President, Chief Financial Officer
and Treasurer of PALFED. Prior to being named an Executive Vice President in
1992, Mr. Rains had served as Senior Vice President and Chief Financial Officer
of PALFED since April 1990 and as Treasurer of PALFED since 1989. Mr. Rains
joined Palmetto Federal in June 1984.
Michael B. Smith has served as Senior Vice President since January 1994. Mr.
Smith joined PALFED in April 1989 as Vice President and Controller. From
December 1987 to April 1989, he was an agency accountant with the Federal Home
Loan Bank of Atlanta.
John C. Troutman became the President and Chief Executive Officer of PALFED
and Palmetto Federal on March 1, 1993. Prior to 1993, he held a number of
positions with Citizens and Southern National Bank (now NationsBank), most
recently as the Southeast Florida Commercial Division Manager for NationsBank.
From 1989 to 1992 he was Regional Executive Vice President, East Coast of
Florida for Citizens and Southern National Bank of Florida.
32
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
PALFED's Common Stock is traded in the over-the-counter market and is quoted
in the Nasdaq National Market under the symbol "PALM". As of February 12, 1997,
there were approximately 579 shareholders of record. The following table sets
forth the high and low closing prices of the Company's Common Stock for the
periods indicated as reported on the Nasdaq National Market System.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
---------------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1996 First Quarter $13.25 $11.25
Second Quarter 13.50 11.88
Third Quarter 14.75 11.63
Fourth Quarter 15.25 13.00
1995 First Quarter $ 9.63 $ 7.00
Second Quarter 11.25 8.63
Third Quarter 12.25 11.00
Fourth Quarter 13.25 11.00
</TABLE>
The Company's ability to pay dividends is limited only by certain
requirements generally imposed on South Carolina corporations. Under South
Carolina law, corporations generally may pay dividends only out of unreserved
and unrestricted earned surplus. In 1996, the Company paid a quarterly cash
dividend of $0.02 per share and aggregate cash dividends of $418,000. In
January, 1997 the Company increased the quarterly cash dividend to $0.03 per
share.
Payment of dividends by the Bank to the Company is subject to certain
restrictions and would require prior notice to and approval of the OTS.
Item 6. Selected Financial Data.
The selected financial data set forth under "Selected Financial Data"
appearing on page 6 of the Company's 1996 Annual Report is incorporated herein
by reference in response to the information required by this Item.
Item 7. Management's Discussion and analysis of Financial
Condition and Results of Operations.
The information set forth under "Management's Discussion and Analysis"
appearing on pages 7 through 17 of the Company's 1996 Annual Report is
incorporated herein by reference in response to the information required by this
Item.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of PALFED, Inc. and Subsidiaries,
together with a report thereon of Coopers & Lybrand L.L.P. dated February 22,
1997, which report includes an explanatory paragraph concerning changes in the
Company's methods of accounting for impaired loans and mortgage servicing rights
in 1995, appearing on pages 18 to 42 of the Company's 1996 Annual Report are
incorporated herein by reference in response to the information required by this
Item.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
PALFED has not, within the twenty-four months preceding its financial
statements as of December 31, 1996, filed or been required to file a Form 8-K
(i) reporting a change of accountants, or (ii) reporting a disagreement on any
matter of accounting principles or practices or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of PALFED and the executive officers
who are directors of PALFED is set forth in PALFED's Proxy Statement for the
1997 Annual Meeting of Shareholders to be held on April 22, 1997 (the "1997
Proxy Statement") under the caption entitled "Election of Directors--
Information as to Nominees and Other Directors" and is incorporated herein by
reference in response to the information required by this Item.
Information concerning executive officers of PALFED is contained in a
separate section entitled "Executive Officers of PALFED and its Subsidiaries" in
Part I of this Report and is incorporated herein by reference in response to the
information required by this Item.
The information concerning compliance with section 16(a) of the Exchange Act
appearing on page 5 of the 1997 Proxy Statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated herein by reference
in response to the information required by this Item.
Item 11. Executive Compensation.
The information set forth at pages 12 to 17 in the 1997 Proxy Statement
under the heading entitled "Executive Compensation and Other Information" is
incorporated herein by reference in response to the information required by this
Item.
Pursuant to Item 402(a)(9) of Regulation S-K, as promulgated by the SEC, the
material appearing in the 1997 Proxy Statement on pages 8 to 11 under the
headings "Compensation Committee Report" and "Shareholder Return" shall not be
deemed to be "soliciting material" to be "filed" with the SEC or to be subject
to Regulations 14A or 14C, other than as provided in Item 402, or to the
liabilities of Section 18 of the Exchange Act, and no general incorporation of
such material by reference, whether made before or after the date hereof, shall
be deemed to specifically request that it be treated as soliciting material or
specifically incorporate it by reference into a filing under the Securities Act
of 1933, as amended, or the Exchange Act within the meaning of Item 402(a)(9).
34
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning the security ownership of the Company's Common Stock
is set forth in the 1997 Proxy Statement under the heading "Security Ownership
of Certain Beneficial Owners and Management" and is incorporated herein by
reference in response to the information required by this Item.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Transactions with Officers and
Directors" on pages 17 and 18 in the 1997 Proxy Statement is incorporated herein
by reference in response to the information required by this Item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents.
The consolidated financial statements of PALFED, Inc. and Subsidiaries
contained in the Company's 1996 Annual Report incorporated by reference in this
report are listed below in response to the information required by this item:
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
(1) Financial Statements:
Report of Independent Accountants................... 18
Consolidated Statements of Financial Condition...... 19
Consolidated Statements of Income................... 20
Consolidated Statements of Shareholders' Equity..... 21
Consolidated Statements of Cash Flows............... 22
Notes to Consolidated Financial Statements.......... 24
</TABLE>
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is either
inapplicable or shown in the consolidated financial statements or notes thereto.
35
<PAGE>
(3) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
3.1 Restated Articles of Incorporation of PALFED, Inc.(1)
3.2 Bylaws of PALFED, Inc., as amended.(2)
10.1* Amended and Restated Incentive Stock Option Plan.(3)
10.2* PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)
10.3* PALFED, Inc. Amended and Restated Director Stock Plan.(5)
10.4* PALFED, Inc. 1993 Stock Option Plan.(6)
10.5* PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)
10.6* PALFED, Inc. 1995 Stock Option Plan (8)
10.7 Membership Agreement dated December 27, 1990 between Woodside Development Company of
Aiken, Inc. and Woodside Plantation Country Club, Inc. for the purchase of club
memberships.(9)
10.8 Option Agreement dated December 30, 1993 by and between Woodside Development Company
of Aiken, Inc. and Woodside Development Limited Partnership.(10)
10.9* Form of Executive Salary Continuation Agreement dated as of November 1, 1996 among
PALFED, Inc., Palmetto Federal Savings Bank of South Carolina and each of the
following officers: John C. Troutman, W. Barry Adams, Patrick D. Cunning, Joe W.
DeVore, Howard M. Hickey, Jr., Holly Z. Johnson, John Mullen, III, Darrell R. Rains
and Michael B. Smith.(11)
11 Statement Regarding Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31, 1996 (except for those
portions which are expressly incorporated by reference in this filing) is furnished
for the information of the SEC and is not to be deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for PALFED, Inc. Employee Savings and Stock Ownership Plan
(to be filed by amendment).
</TABLE>
- ------------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's Registration
Statement on Form S-2, File Number 33-65338, filed with the Commission on
July 1, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's Current Report
on Form 8-K dated October 21, 1996, filed with the Commission on October 22,
1996.
(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
Statement on Form S-8, File Number 33-23667, filed with the Commission on
August 10, 1988.
(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65482,
filed with the Commission on September 16, 1994.
36
<PAGE>
- ------------------------
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-93276,
filed with the Commission on May 20, 1996.
(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65484,
filed with the Commission on May 20, 1996.
(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65480,
filed with the Commission on May 20, 1996.
(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
Statement on Form S-8, File Number 333-00615, filed with the Commission on
February 1, 1996.
(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's Annual Report
on Form 10-K for the year ended December 31, 1990, as amended by Form 8,
filed with the Commission on May 24, 1993.
(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual Report on Form
10-K for the year ended December 31, 1993, filed with the Commission on
March 31, 1994.
(11) Incorporated by reference to Exhibit 10.1 to PALFED's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, filed with the
Commission on November 14, 1996.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the fourth
quarter ended December 31, 1996:
(i) Form 8-K dated October 21, 1996 reporting the adoption of amendments to
the Company's Bylaws; and
(ii) Form 8-K dated November 20, 1996 reporting the receipt of a
shareholder proposal for inclusion in the Company's proxy statement for the
1997 Annual Meeting of Shareholders.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PALFED, INC.
By: /s/ John C. Troutman March 25, 1997
--------------------------------
John C. Troutman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Albert H. Peters, Jr. March 25, 1997
--------------------------------
Albert H. Peters, Jr.
Chairman of the Board
By: /s/ John C. Troutman March 25, 1997
--------------------------------
John C. Troutman, President
and Chief Executive Officer
By: /s/ Darrell R. Rains March 25, 1997
--------------------------------
Darrell R. Rains, Executive Vice
President, Treasurer and Chief
Financial Officer
By: /s/ Michael B. Smith March 25, 1997
--------------------------------
Michael B. Smith, Senior
Vice President and Controller
By: /s/ William F. Cochrane March 25, 1997
--------------------------------
William F. Cochrane,
Director
By: /s/ Patrick D. Cunning March 25, 1997
--------------------------------
Patrick D. Cunning,
Director
(Signatures continued on next page)
38
<PAGE>
By: /s/ Edward Larry Hutto March 25, 1997
--------------------------------
Edward Larry Hutto,
Director
By: March 25, 1997
--------------------------------
Harold D. Kingsmore,
Director
By: /s/ R. Bruce McBratney March 25, 1997
--------------------------------
R. Bruce McBratney,
Director
By: /s/ Ambrose L. Schwallie March 25, 1997
--------------------------------
Ambrose L. Schwallie,
Director
By: /s/ Charles E. Simons, III March 25, 1997
--------------------------------
Charles E. Simons, III,
Director
* * *
39
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
INDEX TO EXHIBITS PAGE
----------------- -----------
<S> <C> <C>
3.1 Restated Articles of Incorporation of PALFED, Inc.(1)
3.2 Bylaws of PALFED, Inc., as amended.(2)
10.1* Amended and Restated Incentive Stock Option Plan.(3)
10.2* PALFED, Inc. Employee Savings and Stock Ownership Plan.(4)
10.3* PALFED, Inc. Amended and Restated Director Stock Plan.(5)
10.4* PALFED, Inc. 1993 Stock Option Plan.(6)
10.5* PALFED, Inc. 1993 Restricted Stock Incentive Award Plan.(7)
10.6* PALFED, Inc. 1995 Stock Option Plan (8)
10.7 Membership Agreement dated December 27, 1990 between Woodside
Development Company of Aiken, Inc. and Woodside Plantation Country Club,
Inc. for the purchase of club memberships.(9)
10.8 Option Agreement dated December 30, 1993 by and between Woodside
Development Company of Aiken, Inc. and Woodside Development Limited
Partnership.(10)
10.9* Form of Executive Salary Continuation Agreement dated as of November
1, 1996 among PALFED, Inc., Palmetto Federal Savings Bank of South
Carolina and each of the following officers: John C. Troutman, W. Barry
Adams, Patrick D. Cunning, Joe W. DeVore, Howard M. Hickey, Jr., Holly
Z. Johnson, John Mullen, III, Darrell R. Rains and Michael B. Smith.(11)
11 Statement Regarding Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31, 1996
(except for those portions which are expressly incorporated by reference
in this filing) is furnished for the information of the SEC and is not
to be deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for PALFED, Inc. Employee Savings and Stock
Ownership Plan (to be filed by amendment).
</TABLE>
- ------------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 4.1 to PALFED's Registration
Statement on Form S-2, File Number 33-65338, filed with the Commission on
July 1, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to PALFED's Current Report
on Form 8-K dated October 21, 1996, filed with the Commission on October 22,
1996.
40
<PAGE>
- ------------------------
(3) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
Statement on Form S-8, File Number 33-23667, filed with the Commission on
August 10, 1988.
(4) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65482,
filed with the Commission on September 16, 1994.
(5) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-93276,
filed with the Commission on May 20, 1996.
(6) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65484,
filed with the Commission on May 20, 1996.
(7) Incorporated herein by reference to Exhibit 4.0 to PALFED's Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, File Number 33-65480,
filed with the Commission on May 20, 1996.
(8) Incorporated herein by reference to Exhibit 4.0 to PALFED's Registration
Statement on Form S-8, File Number 333-00615, filed with the Commission on
February 1, 1996.
(9) Incorporated herein by reference to Exhibit 10.4 to PALFED's Annual Report
on Form 10-K for the year ended December 31, 1990, as amended by Form 8,
filed with the Commission on May 24, 1993.
(10) Incorporated by reference to Exhibit 10.9 to PALFED's Annual Report on Form
10-K for the year ended December 31, 1993, filed with the Commission on
March 31, 1994.
(11) Incorporated by reference to Exhibit 10.1 to PALFED's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, filed with the
Commission on November 14, 1996.
41
<PAGE>
EXHIBIT 11
PALFED, Inc.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Weighted average shares outstanding........................................ 5,133,285 5,095,811 5,136,668
Stock options outstanding.................................................. 336,713 184,233 186,000
Shares assumed repurchased................................................. (227,693) (117,474) (152,946)
---------- ---------- ----------
Average common and common equivalent shares(1)............................. 5,242,305 5,162,570 5,169,722
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Stock options outstanding less shares assumed repurchased are common
equivalent shares.
<PAGE>
[LOGO] PALFED, INC.
1 9 9 6 A N N U A L R E P O R T
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
To Our Shareholders............................... 1
Selected Financial Data........................... 6
Management's Discussion and Analysis of Financial
Condition and
Results of Operations............................ 7
Report of Independent Accountants................. 18
Consolidated Financial Statements................. 19
Notes to Consolidated Financial Statements........ 24
Board of Directors................................ 43
Principal Officers................................ 45
Office Locations.................................. 46
Corporate Information............................. 47
</TABLE>
COMPANY PROFILE
- -------------------------------------------------------------------------
PALFED, Inc. (together with its subsidiaries, the "Company") is a South Carolina
corporation whose principal subsidiary, Palmetto Federal Savings Bank of South
Carolina ("Palmetto Federal" or the "Bank") is a federal stock savings bank,
originally chartered in 1951. As of December 31, 1996 the Bank operated 21
banking and seven mortgage lending offices in South Carolina, one mortgage
lending office in Georgia and, in March 1997, opened its 22nd branch in Hilton
Head Island, South Carolina. The Company's other subsidiary is PALFED Investment
Services, Inc., a South Carolina corporation that offers retail securities
brokerage services and consumer insurance products.
EQUAL EMPLOYMENT OPPORTUNITY
- -------------------------------------------------------------------------
It is the Company's policy to grant equal employment opportunities to all
qualified persons without regard to race, creed, color, religion, age, national
origin, citizenship status, physical or mental handicap, or veteran's status. To
deny a qualified person the chance to contribute to our effort because he or she
is a member of a minority group is unfair, not only to the individual but to our
Company and our nation as well. It is our intent and desire to provide equal
opportunities in employment, promotion, wages, benefits, and all other
privileges, terms and conditions of employment. This policy has the support of
the highest levels of our management team.
ANNUAL MEETING NOTICE
- -------------------------------------------------------------------------
All shareholders are cordially invited to the Annual Meeting of Shareholders on
Tuesday, April 22, 1997 at 10:00 a.m. at the Aiken City Hall Meeting Room, 214
Park Avenue, Aiken, South Carolina, 29801.
MISSION
- -------------------------------------------------------------------------
Our mission is to maximize shareholder value as South Carolina's Bank.
We shall maximize shareholder value by:
-providing the best service for our customers, communities, employees and
shareholders.
-
growing our franchise through internal and new market expansion.
Our vision is for PALFED to be the best independent financial institution in
South Carolina.
<PAGE>
TO OUR SHAREHOLDERS:
- -------------------------------------------------------------------------
We are extremely pleased with our results for 1996. Our third consecutive
year of record operating earnings confirms that our strategy of internal
growth and market expansion is working to build current and long-term
shareholder value.
Shareholder value is our number one priority. We are confident that as
our problem assets, investment in real estate, and their related expenses
reach normal industry standards, Palmetto
Federal will be a high performance bank
and our shareholders will continue to
benefit accordingly.
Our shareholders have been richly
rewarded in the marketplace with a stock
value that has increased from $5.50 at
the time of our rights offering in 1993
to $15.00 as of our record date in
February. In a collaborative effort with
the Company's independent financial
advisors, we have identified a number of
opportunities to further enhance
shareholder value over the near and
intermediate term. We intend to pursue
these initiatives and believe that, when
realized, they will add to the value of
our stock.
[PHOTO]
Our growth strategy has served us well
over the last four years as we have grown
from sixteen branches to twenty-two and
from five mortgage offices to eight. During 1996, we opened full-service
banking centers in downtown Charleston, Lexington, and Mt. Pleasant, as
well as a mortgage office in Columbia. In March of this year we opened
our second full-service banking center on Hilton Head Island. These new
offices made an immediate impact on balance sheet growth and earnings and
will continue to make a positive impact in the future. During 1996,
approximately 33% of mortgage originations, 33% of deposit growth and 67%
of the growth in consumer and commercial loans came from the Bank's new
markets.
The industry-wide FDIC Savings Association Insurance Fund ("SAIF")
recapitalization assessment reduced earnings in 1996 by $3.3 million
($2.2 million after tax) and also resulted in an additional $2.4 million
non-cash charge related to the write-off of Palmetto Federal's remaining
core deposit intangible. Although the SAIF assessment and deposit
intangible charges significantly reduced 1996 income, future annual
earnings will be improved by reduced insurance premiums of nearly
$825,000 and reduced intangible amortization expenses of approximately
$250,000. The core deposit intangible write-off had no impact on
regulatory capital levels and neither charge affected the Bank's "well
capitalized" status.
1
<PAGE>
The PALFED team is very proud of the progress made since 1993 when some tough
decisions were made to position the Company for the future. The graphs below
illustrate the positive trends the Company has experienced in the very important
areas of operating income, deposit and loan growth, and reduction in
non-performing assets.
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
OPERATING INCOME
<S> <C>
1993 $ (2,632,000.00)
1994 $ 3,754,000.00
1995 $ 4,145,000.00
1996 $ 4,700,000.00
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DEPOSITS
<S> <C>
1993 $ 477,218,000
1994 $ 478,248,000
1995 $ 496,746,000
1996 $ 540,128,000
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LOANS
<S> <C>
1993 $ 445,058,000
1994 $ 447,991,000
1995 $ 464,281,000
1996 $ 524,120,000
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
<S> <C>
1993 $ 45,500,000
1994 $ 35,859,000
1995 $ 27,424,000
1996 $ 18,022,000
</TABLE>
It is easy to see that as we continue to implement our "classic banking
turnaround," the future is very bright for the Company and its shareholders.
Your Board, Management, and staff have achieved our growth in share value by
hard work and dedication. We shareholders owe them our thanks for a job well
done.
2
<PAGE>
Let me share one last graph with you -- the outstanding performance of your
Company's stock.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PALFED, INC. STOCK PRICE
<S> <C>
1993 $7.00
1994 $7.13
1995 $11.88
1996 $14.00
</TABLE>
Our stock, in recent years, has consistently been among the top performers in
South Carolina. We believe that we will continue to have a top performing stock
as a high performance bank.
3
<PAGE>
The PALFED story is a success story, and we have made giant strides in
solving the Company's problems and building a very valuable franchise. Our
strategic growth plan is working. We still have work to do with the remaining
assets that do not make a satisfactory contribution to earnings, but we intend
to continue to make progress in this area. Every day we see new opportunities to
expand our franchise. When the latest announced bank merger is consummated, we
will be the second largest thrift and the fourth largest independent bank in
South Carolina. Our plan is to continue to grow the Company, strengthen our
franchise and increase shareholder value.
We believe that well-managed community banks can generate superior returns
for shareholders. We also believe that Palmetto Federal, by offering exceptional
customer service, can outperform its larger, regional competitors.
Senator Strom Thurmond and Judge Charles Simons founded Palmetto Federal
forty-six years ago to build a strong community bank to serve South Carolina. We
believe that there is an important role for community banks and that all the
fundamentals are present in your Company to achieve greatness for those it was
created to serve: shareholders, customers, communities, and employees as "SOUTH
CAROLINA'S BANK."
Thank you for your continued support.
[LOGO]
John C. Troutman
President and
Chief Executive Officer
PALMETTO FEDERAL MANAGEMENT COMMITTEE
HOWARD M. HICKEY, JR., JOE W. DEVORE, JOHN C. TROUTMAN,
HOLLY Z. JOHNSON, PATRICK D. CUNNING, DARRELL R. RAINS, W. BARRY ADAMS.
4
<PAGE>
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------
The selected financial data presented below for and as of the end of each of the
years in the five year period ended December 31, 1996 have been derived from the
Company's consolidated financial statements.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
(dollars and shares in thousands, except per share
amounts)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Total interest income $ 50,735 $ 50,530 $ 46,937 $ 48,191 $ 58,480
Total interest expense 28,517 30,530 26,514 30,837 41,079
Net interest income 22,218 20,000 20,423 17,354 17,401
Provision for estimated losses on loans 1,154 1,322 2,329 6,289 6,557
Net interest income after provision for losses on loans 21,064 18,678 18,094 11,065 10,844
Noninterest income 4,492 4,178 3,334 1,400 8,422
FDIC SAIF special assessment 3,300
Write-off of core deposit intangible 2,407
Other noninterest expenses 18,388 16,454 15,917 16,166 16,514
Provision (benefit) for income taxes 1,349 2,257 1,757 (1,069) 1,229
Income (loss) before cumulative effect of a change in
accounting principle 112 4,145 3,754 (2,632) 1,523
Cumulative effect of a change in accounting principle (10,454) 1,086
Net income (loss) $ *112 $ 4,145 $ 3,754 $(13,086) $ 2,609
- ---------------------------------------------------------------------------------------------------------
AT DECEMBER 31
Total assets $665,257 $646,024 $662,425 $647,606 $746,362
Interest-earning assets 621,176 598,863 618,019 592,945 652,090
Loans receivable (including those held-for-sale) 524,120 464,281 447,991 445,058 453,891
Mortgage-backed securities 59,977 77,844 106,273 106,563 125,129
Intangible assets 2,650 2,932 3,193 13,955
Deposits 540,128 496,746 478,249 477,218 520,613
FHLB advances and other borrowed money 68,400 91,500 135,800 119,459 181,264
Shareholders' equity $ 51,823 $ 51,485 $ 45,156 $ 45,125 $ 39,375
Number of banking offices 21 18 16 16 16
- ---------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (loss) $ *0.02 $ 0.80 $ 0.73 $ (6.12) $ 1.80
Cash dividends declared 0.08
Tangible book value $ 9.91 $ 9.57 $ 8.32 $ 8.16 $ 17.33
Average outstanding shares used to compute net income
(loss) per share 5,242 5,163 5,170 2,137 1,446
- ---------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average assets *0.02% 0.64% 0.57% (1.93)% 0.35%
Return on average shareholders' equity *0.21 8.54 8.35 (31.94) 6.86
Net interest margin 3.59 3.14 3.37 2.95 2.74
Average shareholders' equity to average assets 8.26 7.44 6.84 5.96 5.06
Dividend payout ratio NM
- ---------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.33% 1.81% 1.83% 2.22% 1.82%
Net charge-offs to average loans outstanding 0.54 0.24 0.90 1.03 1.48
Nonperforming assets to total loans and foreclosed real
estate 3.32 3.47 4.54 6.76 3.64
General allowance for loan losses to nonperforming
assets and restructured loans 36.90 26.35 19.31 16.84 17.46
Allowance for loan losses and shareholders' equity to
nonperforming assets and restructured loans 332.95 218.43 148.83 120.89 115.40
- ---------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS
Tangible capital 6.6% 6.8% 5.9% 5.6% 3.6%
Core capital 6.6 6.8 6.3 6.1 5.0
Risk-based capital 10.4 11.4 11.2 10.5 9.3
- ---------------------------------------------------------------------------------------------------------
NM Not meaningful
* Excluding the SAIF special assessment and the write-off of core deposit intangible results in net
income of $4.7 million, net income per share of $0.90, a return on average assets of 0.73% and a
return on average shareholders' equity of 8.86%.
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW
In 1996, PALFED, Inc. reported its third consecutive year of record earnings
from operations. "Core" earnings (earnings excluding the SAIF special assessment
and the core deposit intangible write-off) were $4.7 million or $0.90 per common
share, an increase of 13% over 1995. As a result of the Company's improved
operating performance, in January the Board of Directors increased the quarterly
dividend to $0.03 per share. The Savings Association Insurance Fund ("SAIF")
assessment of approximately $3.3 million ($2.2 million after tax) and the $2.4
million write-off of the Bank's remaining core deposit intangible reduced net
income for 1996 to $112,000, or $0.02 per share, compared to $4.1 million or
$0.80 per share in 1995.
The Company continued to pursue opportunities to expand the Bank's franchise
into adjacent markets, thereby reducing the Company's exposure to the Central
Savannah River Area (the "CSRA") economy. Declining employment levels at the
U.S. Department of Energy's Savannah River Site ("SRS"), the area's largest
employer, continue to affect the CSRA economy. Located outside Aiken, employment
at SRS has decreased from 22,000 in 1993 to approximately 15,000 currently. SRS
recently announced additional staff reductions of 1,500. Although employment
levels may stabilize at SRS, further reductions are possible.
Since 1993 the Company's strategy of planned growth and diversification into
new markets has reduced its reliance on the CSRA economy, while expanding the
Company's franchise. In 1995 and 1996, the Company opened six new full service
banking centers in the greater Charleston and Columbia markets and in March 1997
the Company opened its twenty-second full service branch on the north end of
Hilton Head Island. Consolidations and mergers in the banking industry have
allowed the Company to minimize the capital costs of this expansion by acquiring
or leasing offices vacated by other banks. Opening offices in existing banking
facilities also has reduced start up costs and allowed the Company to leverage
the "Palmetto Federal" name as South Carolina's Bank.
The six offices opened since 1994 have generated significant new business.
During 1996 nearly 33% of mortgage division originations, 33% of the growth in
deposit balances and 67% of the loan growth in the Bank's consumer and
commercial division came from the Bank's presence in new markets.
Reductions in problem assets continued to be a high priority. As a result of
ongoing efforts, $6.6 million of troubled loans and real estate acquired through
foreclosure were sold during 1996, which contributed to a reduction in
nonperforming assets and restructured loans of $9.4 million. The Company's
strategic focus includes continued enhancement of the credit administration
functions, and a philosophy of continuous improvement in systems to identify and
quickly resolve troubled loans.
The Company continues to be mindful of the intense competition for customer
deposits from both bank and nonbank institutions. Accordingly, the Company
continues to promote and look for ways to expand its retail brokerage and tax
deferred annuity sales business. Recently, the Company's subsidiary PALFED
Investment Services opened an office in Charleston, South Carolina in order to
complement the retail offices in that market. Additionally, the Company offers
trust services to its customers through an outsourcing arrangement.
Technology continues to change the manner in which customers expect financial
services to be rendered and the products required to meet those expectations. As
a part of an ongoing process to address these issues, the Company upgraded the
computer equipment and software for its teller and customer service
representative platforms in 1996. The new systems resulted in faster processing,
enhanced transaction controls, and improved balancing procedures for branch
personnel. In addition, the Company improved its existing telephone banking
system so that customers can now order checks, make loan payments, transfer
funds, obtain account information and current rates, and transact a variety of
other services 24 hours a day by telephone. In 1996 the Company began offering
an automated bill paying service through an outside specialty phone vendor. In
1997 the Company will begin to offer VISA debit cards to its checking and ATM
customers and intends to add a home page on the Internet.
Palmetto Federal places a high priority on meeting its Community Reinvestment
Act responsibilities and meeting the credit needs of the communities it serves.
In 1996 the Bank continued to maintain its "Outstanding" rating for its CRA
efforts. This rating reflects the many efforts the Bank's officers and directors
have made in making affordable housing available in the markets served.
7
<PAGE>
COMPARISON OF 1996 AND 1995 OPERATING RESULTS
NET INTEREST INCOME
The Company's primary determinant of earnings is net interest income. During
1996, the Company pursued a strategy of selling investment and mortgage-backed
securities to fund loan growth and to repay Federal Home Loan Bank advances.
This activity, combined with deposit growth in established and new markets,
resulted in significant increases to both the net interest margin and the net
yield. As a result, net interest income increased from $20.0 million in 1995 to
$22.2 million in 1996 despite declines in the Company's level of average
interest-earning assets and average interest-bearing liabilities.
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 for purposes of
calculating the average yield on loans receivable.
<TABLE>
<CAPTION>
Interest Interest Interest
--------------------- --------------------- -----------------------
INCOME/ YIELD/ Income/ Yield/ Income/ Yield/
1996 EXPENSE RATE 1995 Expense Rate 1994 Expense Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Interest-earning:
Interest bearing
deposits $ 4,456 $ 233 5.23% $ 6,370 $ 360 5.65% $ 4,577 $ 153 3.34%
Loans receivable and
held-for-sale 491,379 43,756 8.90 456,939 40,677 8.90 444,634 37,752 8.49
Mortgage-backed
securities 64,077 4,337 6.77 95,803 6,335 6.61 106,602 6,237 5.85
Total investments
(taxable) 29,003 1,620 5.59 42,945 2,369 5.52 40,079 2,124 5.30
FHLB stock 10,884 789 7.25 10,884 789 7.25 10,873 671 6.17
- --------------------------------------------------------------------------------------------------------------------------------
Total
interest-earning 599,799 50,735 8.46% 612,941 50,530 8.24% 606,765 46,937 7.73%
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning
assets 41,845 39,187 50,457
- --------------------------------------------------------------------------------------------------------------------------------
Total average
assets $ 641,644 $ 652,128 $ 657,222
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE LIABILITIES &
EQUITY:
Interest-bearing:
Retail savings
deposits $ 32,381 $ 838 2.59% $ 31,074 827 2.66% $ 31,409 $ 836 2.66%
Brokered time
deposits 1,862 178 9.55
Retail time deposits 374,934 21,692 5.79 365,020 21,169 5.80 323,498 15,971 4.94
Demand deposits 106,611 1,882 1.77 98,666 1,684 1.71 115,615 1,805 1.56
FHLB Advances 69,335 4,105 5.92 104,042 6,850 6.58 135,125 7,724 5.72
- --------------------------------------------------------------------------------------------------------------------------------
Total
interest-bearing 583,261 28,517 4.89 598,802 30,530 5.10% 607,509 26,514 4.36%
- --------------------------------------------------------------------------------------------------------------------------------
Other 5,373 4,814 4,779
Shareholders' equity 53,010 48,512 44,934
- --------------------------------------------------------------------------------------------------------------------------------
Total average
liabilities and
equity $ 641,644 $ 652,128 $ 657,222
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,218 $ 20,000 $ 20,423
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.57% 3.14% 3.37%
- --------------------------------------------------------------------------------------------------------------------------------
Net yield 3.70% 3.26% 3.37%
- --------------------------------------------------------------------------------------------------------------------------------
</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
8
<PAGE>
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).
<TABLE>
<CAPTION>
1996 VERSUS 1995 1995 VERSUS 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
- ------------------------------------------------------------------------------------------------------
RATE/ Rate/
VOLUME RATE VOLUME TOTAL Volume Rate Volume Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Changes In:
Interest revenue:
Loans receivable $ 3,066 $ 12 $ 1 $3,079 $ 692 $ 2,188 $ 45 $ 2,925
Mortgage-backed securities (2,071) 109 (36) (1,998) (667) 857 (92) 98
Investments (997) 169 (48) (876) 244 301 25 570
- ------------------------------------------------------------------------------------------------------
Total interest income (2) 290 (83) 205 269 3,346 (22) 3,593
- ------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 918 (179) (7) 732 890 3,819 181 4,890
Other borrowed money (2,285) (690) 230 (2,745) (1,777) 1,173 (270) (874)
- ------------------------------------------------------------------------------------------------------
Total interest expense (1,367) (869) 223 (2,013) (887) 4,992 (89) 4,016
- ------------------------------------------------------------------------------------------------------
Net interest income (expense) $ 1,365 $ 1,159 $(306) $2,218 $ 1,156 $(1,646) $ 67 $ (423)
- ------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
Noninterest income increased by $314,000 or 7.5% in 1996 compared to 1995,
primarily due to increases in gains on sales of loans and securities, other
income and financial services fees, offset in part by a decrease in gains from
trading account securities and checking transaction fees.
Gains on sales of loans and securities increased by $669,000 to $1.0 million
in 1996 and resulted primarily from mortgage servicing rights recorded under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights", of $244,000 and a gain of $162,000
from the sale of Federal National Mortgage Association ("FNMA") stock. The
Company adopted SFAS No. 122 effective October 1, 1995.
Miscellaneous other income increased $94,000 during 1996 primarily due to
receipt of $100,000 in interest on a federal income tax refund. Additionally,
fees on products such as wire transfers, money orders, travelers checks and
ATM's increased by $74,000 or 21.2% due to a greater volume of transactions and
a new ATM fee charged to noncustomers. Additional accretion related to purchased
loans decreased by $43,000 or 55.1% due to slower repayment of the related
loans.
NONINTEREST EXPENSES
Noninterest expenses in 1996 increased $7.7 million, primarily attributable to
the FDIC SAIF special assessment of $3.3 million and the write-off of the $2.4
million core deposit intangible asset. Additionally, other noninterest expenses
increased due primarily to the Company's expansion into new markets.
Increases in compensation and employee benefits were due to: $771,000 or
10.0% in costs due to normal merit wage adjustments and increased staffing at
new offices; an increase of $365,000 in incentive program costs; an increase of
$125,000 or 15.8% in medical and retirement costs resulting from increased
medical claims in 1996 combined with increased staffing levels. These increases
were offset by an increase of $95,000 or 8.5% in capitalized loan costs
resulting from greater loan origination volume. Additional capitalized costs
result in more fixed costs associated with loan originations being deferred over
the life of the loans rather than being recognized as a current expense.
The primary components of compensation and employee benefits for the years
ended December 31 follow:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------
(in thousands)
<S> <C> <C>
Salaries $ 8,507 $ 7,736
Incentive programs 928 563
Medical and retirement expenses 915 790
Payroll and other taxes 646 593
Other expenses 126 122
- -------------------------------------------------------------
11,122 9,804
Capitalized costs of loan originations (1,215) (1,120)
- -------------------------------------------------------------
Compensation and employee benefits $ 9,907 $ 8,684
- -------------------------------------------------------------
</TABLE>
9
<PAGE>
The 15.5% increase in occupancy and equipment expenses resulted primarily
from $235,000 in costs directly related to new offices opened in late 1995 and
1996. The Company opened 3 new banking offices and one mortgage office in 1996
at an average capital investment of approximately $100,000 per office. The
Company purchased its Lexington branch for approximately $300,000 and is leasing
the other new offices.
An increased number of loan accounts and direct mailings resulted in
increased postage and supplies expense of $36,000 and $65,000, respectively.
Other expenses include a loss of $290,000 related to a commercial checking
account.
The 15.5% increase in professional and outside service fees was primarily
attributable to an increase of $112,000 or 31.0% in legal fees, an increase of
$28,000 or 33.3% in financial printing and stock transfer agent expenses and an
increase of $57,000 or 19.3% in outside service fees paid primarily to temporary
and part-time employees as the Company sought to avoid the costs of adding
full-time employees.
INCOME TAXES
The effective tax rate was 92.3% in 1996 compared to 35.3% in 1995. The
significant increase resulted from the previously discussed write-off of an
intangible asset, which is nondeductible under the Internal Revenue Code.
FOURTH QUARTER RESULTS OF OPERATIONS
The fourth quarter net loss was $1.1 million in 1996 compared to earnings of
$1.1 million in 1995. The principal reason for the decrease in 1996 fourth
quarter earnings was the write-off of the $2.4 million core deposit intangible
asset. Additionally, losses from real estate operations increased $413,000 due
to an increased provision for loss on foreclosed real estate and compensation
and employee benefits increased $325,000.
Positive factors in the 1996 quarter included an increase of $948,000 in net
interest income and a decline of $132,000 in federal deposit insurance premiums.
LENDING ACTIVITIES
Loans comprise the major interest-earning assets of the Company, accounting for
82% and 75% of average interest-earning assets in 1996 and 1995, respectively.
The Bank's loan portfolio consists of real estate mortgage and construction
loans, home equity lines of credit, consumer loans including mobile home loans,
commercial real estate, commercial and multifamily loans. Single family loan
originations consist of both fixed and adjustable rate loans. The Company
generally retains all adjustable rate loans, construction loans, fixed rate
loans with original terms of 20 years or less and balloon loans in portfolio.
FHA, VA and 30 year fixed rate loans are typically originated for sale and
either securitized and sold in the secondary market as mortgage backed
securities or sold for cash through an established investor network.
Compared with balances at December 31, 1995, net loans receivable grew by
11%. Loan originations increased significantly in 1996 over 1995 levels. In
1996, the Bank originated loans of $227.1 million, compared to $172.2 million in
1995. Although residential mortgage originations comprise the majority of
originations, a significant portion of originations during 1995 and 1996 were
commercial real estate and construction loans. Total residential originations in
1996 were $149.9 million, compared to $106.4 million in 1995. The Bank
originated $36.2 million in commercial and commercial real estate loans in 1996,
compared to $30.9 million in 1995. During 1995, the Bank changed its lending
strategy to increase the origination of larger commercial real estate loans,
including those loans greater than $1.0 million. These loans typically involve
more risk than associated with residential lending. The 1996 originations
included 8 such loans, totalling $10.9 million, compared to 8 loans of this
scope totalling $13.1 million in 1995.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The primary objective of the Company in managing the investment portfolio is to
maintain a portfolio of high quality, liquid investments with returns
competitive with short term US treasury or agency securities. The objective with
respect to mortgage-backed securities and collateralized mortgage obligations is
generally to maintain a portfolio of highly rated (generally AAA) securities
with a significant amount of monthly repayment of principal at an attractive
yield spread to comparable treasuries at time of purchase. The Bank's strategy
has been to decrease levels of investments and redeploy these funds into retail
loans and reductions in FHLB advances. As a result of this strategy investment
and mortgage-backed securities decreased $35.1 million or 29.8% to $82.7 million
at December 31, 1996.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting For
Certain Debt and Equity Securities", which included a transition provision
allowing all entities to reassess the appropriateness of the classifications of
all securities held and account for any resulting reclassifications at fair
value. In response to the Special Report, the Company transferred securities
with a carrying value of $42.8 million from held-to-maturity to
available-for-sale.
10
<PAGE>
ASSET/LIABILITY MANAGEMENT
Asset and liability management is the process by which Palmetto Federal attempts
to maximize net interest income while minimizing the adverse effects of
potential interest rate changes (interest rate risk). The Company presently does
not utilize financial derivative products such as futures, options or interest
rate swaps as part of its asset and liability management process.
The Company's Asset and Liability Committee makes weekly pricing and
marketing decisions on deposit and loan products in conjunction with managing
the Company's interest rate risk. The Investment Committee of the Board of
Directors reviews the Bank's investment and mortgage-backed securities
portfolios, FHLB advances and other borrowings as well as the Company's asset
and liability policies. Additionally, the Investment Committee monitors the
interest rate risk of the Bank's balance sheet.
The Company's primary method used to analyze interest rate risk is balance
sheet modeling. Because rate changes in adjustable rate mortgages and certain
securities and liabilities tend to lag changes in interest rates, management
utilizes computer asset and liability simulation models as another analytical
tool to estimate the effects of interest rate changes on net interest income and
net portfolio value ("NPV") that would result from possible changes in interest
rates. Management utilizes these simulation models to analyze the estimated
impact of various strategies on the Bank's interest rate risk exposure before
implementing such strategies. Palmetto Federal's NPV ratio change, referred to
as the "sensitivity measure", increased from 1.02% at December 31, 1995 to 1.33%
at December 31, 1996, indicating an increase in interest rate risk. Management's
objective is to maintain the sensitivity measure at or below 2.0%. As the
Company is liability sensitive, the sensitivity measure generally increases when
market interest rates rise. During 1996, the benchmark 30 year Treasury bond
yield increased 69 basis points. The Office of Thrift Supervision ("OTS") uses a
similar computer simulation model to calculate interest rate risk on
institutions it regulates.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
The Company marked a third consecutive year of reducing nonperforming assets and
restructured loans in 1996 with a reduction of $9.7 million. The decrease was
primarily attributable to sales of certain nonaccrual loans and foreclosed real
estate.
The table below sets forth the amounts and categories of Palmetto Federal's
nonaccrual and restructured loans and foreclosed real estate at the dates
indicated. Restructured loans include loans restructured under the provisions of
both SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" and SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan".
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 4,302 $ 8,391 $ 12,466 $ 23,790 $ 12,209
Foreclosed real estate 7,187 8,015 8,269 6,775 4,563
Restructured loans 6,562 12,210 16,412 17,158 25,511
- ----------------------------------------------------------------------------------------------
18,051 28,616 37,147 47,723 42,283
Less specific valuation allowances (360) (1,192) (1,288) (2,223) (1,030)
- ----------------------------------------------------------------------------------------------
$ 17,691 $ 27,424 $ 35,859 $ 45,500 $ 41,253
- ----------------------------------------------------------------------------------------------
General allowance for loan losses as a
percentage of the total 36.2% 26.3% 19.3% 16.8% 17.5%
Total as a percentage of loans
receivable, net 3.4% 5.9% 8.1% 10.2% 9.1%
Total as a percentage of total assets 2.7% 4.2% 5.4% 7.0% 5.5%
- ----------------------------------------------------------------------------------------------
</TABLE>
Potential problem loans represent loans that are current as to payment of
principal and interest, but where management has doubts about the borrower's
ability to comply with present repayment terms. These loans, which are primarily
commercial real estate loans, are not included in nonperforming assets and
restructured loans. These loans totalled approximately $14.5 million and $9.4
million at December 31, 1996 and 1995, respectively. The increase is due
primarily to the upgrade of certain assets which were previously nonperforming
or restructured, but which management continues to monitor closely.
11
<PAGE>
Changes in the components of nonperforming assets and restructured loans, net
of specific valuation allowances, during the year ended December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Restructured Nonaccrual Foreclosed
Loans Loans Real Estate Total
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1995 $ 11,553 $ 7,856 $ 8,015 $ 27,424
Performing loans which became
nonperforming 1,310 2,385 1,289 4,984
Upgrades due to performance (3,561) (797) (4,358)
Sales (1,420) (5,214) (6,634)
Charge-offs and other (852) (899) (1,751)
Cash repayments of principal (629) (1,345) (1,974)
Nonaccrual loans which became
restructured 376 (376)
Nonaccrual loans which became
foreclosures (2,821) 2,821
Restructured loans which became
foreclosures (1,175) 1,175
Restructured loans which became
nonaccrual loans (1,341) 1,341
- --------------------------------------------------------------------------------------------
December 31, 1996 $ 6,533 $ 3,971 $ 7,187 $ 17,691
- --------------------------------------------------------------------------------------------
</TABLE>
Although restructured loans include earning assets, there is more than normal
risk associated with these loans due to the fact that some were made to
facilitate the sale of foreclosed real estate and some were restructured because
the borrower could not meet the original loan terms. The following table lists
Palmetto Federal's three largest restructured loans at December 31, 1996. These
loans represent approximately 67% of the Bank's restructured loans.
<TABLE>
<CAPTION>
Amount Description
- ----------------------------------------------------------------------------------
(in thousands)
<C> <S>
$ 2,187 Loan collateralized by a 102 unit apartment complex in Myrtle Beach,
South Carolina. The 1994 restructuring included a principal charge-off
of approximately $624,000, a new borrower and new repayment terms.
1,562 Loans to finance the December 1993 sale of the remaining lots, seven
outparcels and the development and sales offices at Woodside
Plantation. The 1995 restructuring included: the Company acquired 35
lots and reduced principal by $492,000; agreed to pay $330,000 in
joint marketing expenses and $184,500 to Woodside Plantation Country
Club under the membership agreement; and granted a 2 year extension of
the option to purchase the remaining undeveloped acreage.
654 Loan to finance the sale of several units within a condominium project
in Columbia, South Carolina. The 1994 restructuring included a
write-off of principal and a reduction in the interest rate.
- ----------------------------------------------------------------------------------
$ 4,403
- ----------------------------------------------------------------------------------
</TABLE>
Palmetto Federal's nonaccrual loans at December 31, 1996 include one $1.0
million loan collateralized by a 40 unit townhouse type apartment complex in
Charleston, South Carolina. A 1994 restructuring of this loan included a
principal charge-off of approximately $314,000, a change in repayment terms and
a decrease in the interest rate. The remaining nonaccrual loans are primarily
comprised of loans collateralized by real estate, none of which individually
exceeds $400,000.
The following table lists Palmetto Federal's five largest foreclosed
properties at December 31, 1996. These properties represent approximately 48% of
the Bank's foreclosed properties.
<TABLE>
<CAPTION>
Amount Description
- ----------------------------------------------------------------------------------
(in thousands)
<C> <S>
$ 949 Undeveloped commercial land comprised of two tracts of 76 acres and
13.3 acres, respectively. The tracts are located south of Aiken, South
Carolina adjacent to Woodside Plantation.
839 A 26,024 square foot office building located within a commercial
office park in Aiken, South Carolina.
708 Thirty-three single family residential lots in Woodside Plantation
acquired in a 1995 debt restructuring. A single family house was built
on one lot in 1996. See REAL ESTATE DEVELOPMENT ACTIVITIES.
505 Sixteen single family residential lots and 75 acres of vacant land
south of Aiken, South Carolina.
450 Single family residence located in Aiken, South Carolina.
- ----------------------------------------------------------------------------------
$ 3,451
- ----------------------------------------------------------------------------------
</TABLE>
The Asset Classification and Review Committee reviews quarterly all loan
relationships and REO greater than $250,000, and is responsible for the
appropriate classification of assets in accordance with OTS regulations.
Palmetto
12
<PAGE>
Federal uses the quarterly classifications as well as historical charge-offs in
its determination of the allowance for loan losses. The Credit Administration
Department monitors lending relationships whose balances exceed $100,000,
exclusive of debt collateralized by a primary residence.
The determination of individual asset classifications depends on the degree
of risk associated with the asset and the likelihood of repayment or orderly
liquidation. The portion of a loan or other asset classified as "loss" is
considered uncollectible and a specific valuation allowance is established in
the amount of that portion. A "doubtful" asset has a high possibility of loss
but certain pending factors preclude the estimation of a specific valuation
allowance. Palmetto Federal classifies an asset as "substandard" if the asset
exhibits a defined weakness and is inadequately protected either by the paying
capacity of the borrower or the value of the underlying collateral. "Special
mention" assets are those assets that have potential weaknesses which, if not
corrected, could increase the risk of financial loss. The Bank's total
criticized assets include its nonperforming assets and restructured loans of
$18.0 million as well as its potential problem loans of $14.5 million. The
following table summarizes the Bank's criticized assets at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Special mention $ 13,278 $ 9,867 $ 11,050
Substandard 17,702 25,450 30,138
Doubtful 364
Loss 1,220 1,462 1,822
- ------------------------------------------------------------------------
$ 32,564 $ 36,779 $ 43,010
- ------------------------------------------------------------------------
</TABLE>
The following table summarizes Palmetto Federal's loan loss experience for
each of the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans for the year $ 491,379 $ 456,939 $ 444,634 $ 450,732 $ 499,816
- ---------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of
the year $ 8,417 $ 8,213 $ 9,883 $ 8,232 $ 9,054
- ---------------------------------------------------------------------------------------------------
Charge-offs:
Permanent residential 228 124 404 344 550
Second mortgages 24 68 64 9 3
Commercial real estate 1,414 671 3,150 3,382 5,746
Consumer 1,193 829 564 766 870
Commercial 185 78 390 378 406
- ---------------------------------------------------------------------------------------------------
Total charge-offs 3,044 1,770 4,572 4,879 7,575
- ---------------------------------------------------------------------------------------------------
Recoveries:
Permanent residential 13 36 58 9 51
Second mortgage 5 10
Commercial real estate 288 441 332 142
Consumer 131 102 103 84 134
Commercial 19 73 70 6 11
- ---------------------------------------------------------------------------------------------------
Total recoveries 456 652 573 241 196
- ---------------------------------------------------------------------------------------------------
Net charge-offs for the year (2,588) (1,118) (3,999) (4,638) (7,379)
Provision for loan losses 1,154 1,322 2,329 6,289 6,557
- ---------------------------------------------------------------------------------------------------
Allowance for loan losses, end of the
year $ 6,983 $ 8,417 $ 8,213 $ 9,883 $ 8,232
- ---------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans 0.53% 0.24% 0.90% 1.03% 1.48%
- ---------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses in 1996, 1995 and 1994 reflected the decreases
in nonperforming assets and restructured loans and classified loans. The
provision for loan losses for 1992 and 1993 averaged $6.4 million due to the
significant increase in nonperforming assets and restructured loans as well as a
significant increase in classified assets. These increases were principally
caused by the general weakening of certain commercial real estate loans and
single family development loans, which resulted in increased delinquencies and
loan restructurings.
Charge-offs in 1996 increased principally due to increases in charge-offs of
commercial real estate and consumer loans. The increase in the commercial real
estate sector occurred primarily because of one charge-off of approximately
$481,000 on a previously restructured loan. The underlying collateral of this
loan was sold to a new borrower and the loan modified to market terms. The 1996
increase in the consumer sector resulted from an increase of $514,000 in mobile
home loan charge-offs. In 1995, the Company began aggressively repossessing the
collateral related to these delinquent loans and in
13
<PAGE>
1996 repossessed 51 mobile homes with a carrying value of $504,000 and sold 75
mobile homes with a carrying value of $758,000. The Company has also tightened
underwriting standards related to this type of lending and the portfolio
declined by $3.8 million to $18.4 million, after declining $3.1 million in 1995.
Charge-offs in 1995 declined principally due to a decline of $2.4 million in
commercial real estate loan charge-offs. In 1994, as in 1993 and 1992, portions
of several commercial real estate loans were charged-off as those loans were
restructured or written off as uncollectible. Charge-offs in other categories
declined as well in 1995, except for consumer loans, for which charge-offs
increased $265,000. This increase occurred primarily due to an increase of
$166,000 or 70.6% in mobile home loan charge-offs resulting from increased
collection efforts.
The provision for loan losses is a reflection of actual losses experienced
during the year and management's judgment as to the adequacy of the allowance
for loan losses to absorb future losses in loans currently outstanding. Some of
the factors considered by management in determining the amount of the provision
and resulting allowance include: (1) credit reviews of individual loans and
relationships; (2) net charge-offs over the prior three years; (3) growth in and
composition of the loan portfolio; (4) the current level of the allowance in
relation to total loans and to historical loss levels; (5) the level of
classified assets; (6) fair value of collateral property; and (7) management's
estimate of future economic conditions and the resulting impact on the Company.
Management's determination of the adequacy of the allowance for loan losses
requires the use of judgments and estimates that may change in the future.
Unfavorable changes in the factors used by management to determine the adequacy
of the allowance, or the availability of new information, could cause the
allowance for loan losses to be increased or decreased in future periods. In
addition, bank regulatory agencies, as part of their examination process, may
require additions to the allowance for loan losses based on their judgments and
estimates.
REAL ESTATE DEVELOPMENT ACTIVITY
At December 31, 1996, real estate acquired for development and sale (including
partnership interests) totalled $6.3 million compared to $6.4 million in 1995.
Approximately $4.5 million of the total consists of 2 outparcels and
approximately 1,000 acres of undeveloped land surrounding a golf course at
Woodside Plantation in Aiken, South Carolina.
Approximately $915,000 relates to 2 houses and 38 single family lots in the
Rapids subdivision in North Augusta, South Carolina. The Company recently sold
one of these homes and may build two additional speculative homes to facilitate
the sale of these lots.
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual home owners, comprised of
real estate held for development, acquisition and development loans, foreclosed
real estate and a 50% ownership in a partnership. The carrying values of these
components were as follows at December 31:
<TABLE>
<S> <C> <C>
1996 1995
<CAPTION>
- -------------------------------------------------------------
(in thousands)
<S> <C> <C>
1,000 acres $ 3,733 $ 3,733
2 outparcels 750 750
WPCC loans 4,393 4,454
Woodside Development L.P. loans 2,308 3,311
Lots received in restructuring,
including subsequent improvements 708 492
Development loan to unrelated borrower 150 525
Investment in and loans to partnership
adjacent to Woodside Plantation 457 613
- -------------------------------------------------------------
$ 12,499 $ 13,878
- -------------------------------------------------------------
</TABLE>
The Company was the original developer of the Woodside Plantation project, a
development planned to contain a country club and over 1,800 single family lots
as well as developed outparcels. The Company sold the country club in 1990 and
sold the remaining 219 lots and certain other outparcels to Woodside Development
L.P. (the "Purchaser") in December 1993. In addition, the Purchaser assumed
liabilities related to the purchase of memberships at Woodside Plantation
Country Club ("WPCC") and also entered into an option agreement, which expires
December 31, 1997, to acquire parcels of the undeveloped land at Woodside
Plantation. There are no assurances the Purchaser will acquire the entire 1,000
acres under the option agreement. During 1996, the Purchaser's indebtedness to
the Bank declined $1.0 million or 30.3% as a result of sales of lots and houses.
The Purchaser's ability to repay its indebtedness is primarily based on the
volume and timing of lot sales. Although there are no assurances that lot sales
will be sufficient to repay the debt, the Purchaser's business plan is targeted
primarily to the national retiree market, and therefore, current and future
sales are less reliant on the local economy.
14
<PAGE>
Similarly, the ability of WPCC to repay its loans to Palmetto Federal depends
in part on the success of real estate sales, which in turn provides cash flow
through additional initiation deposits and membership fees to the Club.
Effective April 1, 1996, Palmetto Federal modified its loans to WPCC from
amortizing to interest only for one year.
LIQUIDITY AND CAPITAL RESOURCES
Palmetto Federal's principal sources of funds are deposits, principal and
interest payments on loans, investment and mortgage-backed securities, proceeds
from sales of investment and mortgage-backed securities, FHLB advances, other
borrowings, and retained earnings. Palmetto Federal's liquidity 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 of 6.5% was in excess of the required amount
of 5.0% for December 1996.
Shareholders' equity increased by 0.7% from December 31, 1995 to December 31,
1996, principally due to earnings of $112,000 and issuance of 130,000 shares of
common and treasury stock. The shareholders' equity to assets ratio decreased
from 7.97% at December 31, 1995 to 7.79% at December 31, 1996.
The Company's capital expenditures for its four new offices opened in 1996
were $398,000, principally for computers, office equipment and furniture.
Additionally, the company upgraded its branch network computer equipment and
software for approximately $240,000. Management does not expect significant
capital expenditures related to the opening of additional offices in 1997.
SAIF ASSESSMENT AND CORE DEPOSIT INTANGIBLE WRITE-OFF
On September 30, 1996, the President signed legislation to recapitalize the SAIF
through a special assessment to bring it up to the same reserve level as the
Bank Insurance Fund. The $3.3 million assessment equaled 65.7 cents per $100 of
insured deposits outstanding as of March 31, 1995. Following the SAIF
recapitalization, the FDIC reduced deposit insurance premiums for thrifts. As a
result, Palmetto Federal will pay 3 cents per $100 of deposits in 1997, compared
to 26 cents per $100 of deposits in 1996, resulting in estimated savings of
$825,000.
In addition, the costs of the Financing Corporation ("FICO") bonds will be
shared by the bank and thrift industries. Previously, the thrifts paid the
entire cost of these bond payments. Banks and thrifts will pay 1.29 cents and
6.48 cents, respectively, per $100 of deposits. After January 1, 2000, both
banks and thrifts will pay 2.43 cents per $100 of deposits. These rates are only
for FICO interest and further premiums could be assessed.
On the date the SAIF assessment was enacted, the remaining core deposit
intangible asset which resulted from the 1982 acquisition of another savings
institution totalled $2.4 million and had an estimated remaining life of
approximately 11 years. As a result of the SAIF assessment, management
reassessed the carrying value of this intangible asset, concluded that the asset
was impaired and wrote-off the remaining balance in December 1996.
RECENT ACCOUNTING AND REPORTING CHANGES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and extinguishments of Liabilities", which the
Company is required to adopt effective January 1, 1997. SFAS No. 125 establishes
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. After a transfer of financial assets,
the Company recognizes the financial and servicing assets it controls and the
liabilities it has incurred and derecognizes financial assets when control has
been surrendered and derecognizes liabilities when extinguished. SFAS No. 125
also provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. Management
believes the adoption of SFAS No. 125 will not have a significant effect on the
financial condition or results of operations of the Company.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". SFAS No. 127 defers until
January 1, 1998, certain provisions of SFAS No. 125.
EFFECT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements and related data have been
prepared in accordance with generally accepted accounting principles that
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, noninterest expenses do
reflect general levels of inflation.
15
<PAGE>
COMPARISON OF 1995 AND 1994 OPERATING RESULTS
PALFED recorded net earnings of $4.1 million or $0.80 per share in 1995 compared
to $3.8 million or $0.73 per share in 1994. Total assets were $646.0 million and
$662.4 million at December 31, 1995 and 1994, respectively.
NET INTEREST INCOME
Net interest income in 1995 was $20.0 million, a decrease of 2.1% from 1994.
Total interest income in 1995 was $50.5 million compared to $46.9 million in
1994, an increase of $3.6 million. Total interest expense in 1995 was $30.5
million compared to $26.5 million in 1994. During 1995, the Company's level of
average interest-earning assets increased while average interest-bearing
liabilities decreased, which improved earnings by $1.2 million. However, rates
paid on liabilities increased faster than rates earned on assets, which
decreased earnings by $1.6 million.
PROVISION FOR ESTIMATED LOSSES ON LOANS
Due principally to the decrease in the level of problem assets during the year,
the provision for estimated loan losses decreased from $2.3 million in 1994 to
$1.3 million in 1995. Net charge-offs in 1995 were $1.1 million or $0.2 million
less than the provision, resulting in an increase in the allowance for estimated
loan losses to $8.4 million or 1.81% of loans receivable at December 31, 1995
compared to $8.2 million or 1.83% of loans receivable at December 31, 1994.
NONINTEREST INCOME
Noninterest income increased by $844,000 in 1995 compared to 1994. The increase
was primarily attributable to: (1) decline of $1.5 million in losses from real
estate operations; (2) an increase of $406,000 in gains on sales of investment
and mortgage-backed securities and loans; and (3) an increase of $118,000 in
late charge and other fees. These factors were offset by a decrease of $1.0
million in other income.
The decrease in the loss from real estate operations resulted primarily from
the decrease of $1.1 million in the provision for loss on foreclosed real
estate, a decrease of $176,000 in expenses associated with foreclosed real
estate, and a decrease of $139,000 in expenses associated with real estate at
Woodside Plantation.
Gains on sales of investment and mortgage-backed securities and loans
increased due to increased sales of such assets. Additionally, in the fourth
quarter of 1995, the Company adopted Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights", resulting in a gain of
$153,000.
Late charges on loans and other fees increased by $118,000 or 29.7% in 1995
primarily as a result of an increase of $98,000 in collections of reimbursable
fees from borrowers on credit bureau reports and appraisals.
Other income decreased $1.0 million during 1995 primarily due to the 1994
receipt of $923,000, net of related expenses, in interest on federal and state
income tax refunds. Additionally, insurance commissions on credit life insurance
sales decreased by $64,000 or 40.5% and miscellaneous fees decreased by $50,000
or 58.1%.
NONINTEREST EXPENSES
Noninterest expenses for 1995 were $16.5 million compared to $15.9 million for
1994, an increase of $537,000. Compensation and employee benefits increased
$673,000 or 8.4% and advertising and public relations increased by $296,000 or
67.6%. The net increase in compensation and benefits was due to: lower loan
origination volume resulting in $222,000 more in fixed costs associated with
loan originations recognized as current expense rather than deferred over the
life of the loans; $297,000 or 4.0% more in costs due to normal merit wage
adjustments and increased incentive programs costs of $159,000 due to increased
earnings. The increase in advertising and public relations resulted from the
introduction of a new multimedia advertising campaign to position Palmetto
Federal as "The Bank of Choice" in South Carolina.
These increases were offset primarily by decreases of $352,000 and $195,000
in professional and outside service fees and federal insurance premiums and
assessments, respectively. The decrease in professional and outside service fees
was primarily attributable to decreased consultant fees of $155,000 and to
decreased legal fees of $111,000.
INCOME TAXES
The effective tax rate was 35.3% in 1995 compared to 31.9% in 1994. During 1994,
the Internal Revenue Service completed its audit of the Company's consolidated
federal income tax returns through 1991. The audit resulted in federal income
tax refunds of $1.2 million plus $162,000 in related state income tax refunds
which reduced the 1994 effective tax rate.
16
<PAGE>
INFORMATION IN THIS ANNUAL REPORT, OTHER THAN HISTORICAL INFORMATION, CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT
NOT LIMITED TO, THE IMPACT OF FUTURE REGULATORY ACTIONS OF THE FDIC REGARDING
FEDERAL DEPOSIT INSURANCE RATES, THE TIMING AND SUCCESS OF CERTAIN BUSINESS
INITIATIVES BY THE COMPANY, THE SUCCESS OF THE COMPANY'S EFFORTS IN REDUCING ITS
INVESTMENT IN REAL ESTATE AND LEVELS OF NONPERFORMING ASSETS, AND THE COMPANY'S
INTEREST RATE RISK POSITION. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
AND ADVERSELY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE READER
MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996 FOR A MORE COMPLETE ANALYSIS OF THE COMPANY'S OPERATIONS.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
<TABLE>
<S> <C>
To the Board of Directors and Shareholders
PALFED, Inc.
We have audited the accompanying consolidated statements of financial condition of
PALFED, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PALFED, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their
operations and cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed
its methods of accounting for impaired loans and mortgage servicing rights in 1995.
[LOGO]
Atlanta, Georgia
February 22, 1997
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES DECEMBER 31, 1996 1995
--------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
--------------------------------------------------------------------------------------
Cash and due from banks $ 16,942 $ 15,471
Interest-bearing deposits with other banks 3,465 5,854
Investment and mortgage-backed securities:
Available-for-sale 24,007 55,550
Held-to-maturity 58,700 62,293
Loans held-for-sale 11,241 2,836
Loans receivable, net 512,879 461,445
Investment in real estate, net 13,501 14,448
Investment in Federal Home Loan Bank stock 10,884 10,884
Premises and equipment, net 5,958 5,350
Accrued interest receivable 3,835 4,256
Other assets 3,845 7,637
--------------------------------------------------------------------------------------
$ 665,257 $ 646,024
--------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing accounts $ 30,577 $ 27,333
Savings and NOW accounts 121,432 105,329
Certificates of deposit 384,678 363,193
Accrued interest payable 3,441 891
--------------------------------------------------------------------------------------
Total deposits 540,128 496,746
Federal Home Loan Bank advances 68,400 91,500
Other liabilities 4,906 6,293
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 613,434 594,539
--------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $1 par value; authorized 10,000,000 shares; issued
5,231,317 and 5,142,166 shares; 5,231,317 and 5,101,297
shares outstanding, respectively 5,231 5,142
Additional paid-in capital 28,115 26,904
Retained earnings 20,320 20,626
Unearned compensation (1,128)
Net unrealized loss on securities, net of tax benefit of $369
and $456, respectively (715) (884)
Treasury stock, at cost (40,869 shares) (303)
--------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 51,823 51,485
--------------------------------------------------------------------------------------
$ 665,257 $ 646,024
--------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
--------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 43,756 $ 40,677 $ 37,752
Mortgage-backed securities 4,337 6,335 6,237
Investment securities 2,409 3,158 2,795
Other 233 360 153
--------------------------------------------------------------------------------
Total interest income 50,735 50,530 46,937
--------------------------------------------------------------------------------
Interest expense:
Deposits 24,412 23,680 18,790
Other borrowings 4,105 6,850 7,724
--------------------------------------------------------------------------------
Total interest expense 28,517 30,530 26,514
--------------------------------------------------------------------------------
Net interest income 22,218 20,000 20,423
Provision for estimated losses on loans 1,154 1,322 2,329
--------------------------------------------------------------------------------
Net interest income after provision for losses on
loans 21,064 18,678 18,094
--------------------------------------------------------------------------------
Noninterest income:
Checking transaction fees 2,433 2,621 2,824
Financial services fees 817 756 752
Late charge and other fees 490 515 397
Net trading account gains and losses 335 374 129
Gain on sales of available-for-sale securities 239 145 1
Gain on sales of loans 380 50 33
Real estate operations (1,087) (1,074) (2,596)
Other 885 791 1,794
--------------------------------------------------------------------------------
Total noninterest income 4,492 4,178 3,334
--------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee benefits 9,907 8,684 8,011
Occupancy and equipment 3,036 2,629 2,516
FDIC SAIF special assessment 3,300
Write-off of core deposit intangible asset 2,407
Federal insurance premiums and assessments 1,294 1,401 1,596
Professional and outside service fees 1,370 1,186 1,538
Data processing 861 880 813
Advertising and public relations 695 734 438
Amortization of intangible assets 243 281 261
Other 982 659 744
--------------------------------------------------------------------------------
Total noninterest expenses 24,095 16,454 15,917
--------------------------------------------------------------------------------
Income before provision for income taxes 1,461 6,402 5,511
--------------------------------------------------------------------------------
Provision (benefit) for income taxes:
Current 726 359 (30)
Deferred 623 1,898 1,787
--------------------------------------------------------------------------------
Total provision for income taxes 1,349 2,257 1,757
--------------------------------------------------------------------------------
Net income $ 112 $ 4,145 $ 3,754
--------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.02 $ 0.80 $ 0.73
--------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES
Unrealized
Additional Gain (Loss) on
Common Paid-In Retained Unearned Securities, Treasury
Stock Capital Earnings Compensation Net Stock
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 5,138 $ 26,881 $ 12,727 $379
Issuance of common stock 4 57
Purchase of treasury stock $ (480)
Change in unrealized loss on securities,
net (3,304)
Net income 3,754
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 5,142 26,938 16,481 (2,925) (480)
Issuance of treasury stock (34) 177
Change in unrealized loss on securities,
net 2,041
Net income 4,145
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 5,142 26,904 20,626 (884) (303)
Issuance of common stock 89 1,117
Issuance of treasury stock 303
Incentive stock grants issued $ (1,275)
Amortization of unearned compensation 94 147
Change in unrealized loss on securities,
net 169
Payment of cash dividends ($0.08 per
share) (418)
Net income 112
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 5,231 $ 28,115 $ 20,320 $ (1,128) $(715) $ 0
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES
Total
Shareholders'
Equity
- ---------------------------------------------------------------------
(in thousands)
<S> <C>
Balance, December 31, 1993 $ 45,125
Issuance of common stock 61
Purchase of treasury stock (480)
Change in unrealized loss on securities,
net (3,304)
Net income 3,754
- -----------------------------------------------------------------------------------
Balance, December 31, 1994 45,156
Issuance of treasury stock 143
Change in unrealized loss on securities,
net 2,041
Net income 4,145
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1995 51,485
Issuance of common stock 1,206
Issuance of treasury stock 303
Incentive stock grants issued (1,275)
Amortization of unearned compensation 241
Change in unrealized loss on securities,
net 169
Payment of cash dividends ($0.08 per
share) (418)
Net income 112
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 51,823
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112 $ 4,145 $ 3,754
Adjustments to reconcile net income to cash
provided by operations:
Provision for deferred income taxes 623 1,898 1,787
Write-off of core deposit intangible asset 2,407
Depreciation and amortization 900 863 946
Provision for estimated losses on loans and real 2,385 2,913 4,819
estate
Other gains, net (749) (869) (77)
Proceeds from sales of loans held-for-sale 20,579 13,508 14,738
Origination of loans held-for-sale (43,477) (33,007) (31,623)
Proceeds from sales of trading account securities 28,141 25,486 22,761
Gain on sales of available-for-sale securities (239) (145) (1)
Change in:
Accrued interest receivable, net (252) (1,722) (1,414)
Accrued interest payable 2,550 249 (225)
Other assets 727 (1,155) 1,390
Other liabilities (excluding deferred income) (870) 3,120 (2,733)
Other, net 966 282 811
------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,803 15,566 14,933
------------------------------------------------------------------------------
INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (7,925) (10,763) (44,791)
Proceeds from sales of available-for-sale 26,053 37,934 21,848
securities
Principal collections on available-for-sale 14,287 4,711 6,512
securities
Net increase in loans receivable (69,922) (34,779) (26,514)
Purchases of held-to-maturity securities (6,852) (11,043)
Principal collections and maturities of 9,966 14,003 16,168
held-to-maturity securities
Proceeds from sales of foreclosed real estate 2,936 3,366 4,877
Purchase of office premises and equipment (1,451) (981) (1,375)
Other, net 1,118 (260) 20
------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (31,790) 13,231 (34,298)
------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
<TABLE>
<CAPTION>
PALFED, INC.
AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
--------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 40,832 18,249 1,256
Proceeds from FHLB advances and other borrowed 129,650 68,200 123,100
money
Repayments of FHLB advances and other borrowed (152,750) (112,500) (106,759)
money
Payment of cash dividends (418)
(Purchase) sale of treasury stock 108 (480)
Other, net (353) 248 355
--------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 17,069 (25,803) 17,472
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH (918) 2,994 (1,893)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,325 18,331 20,224
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,407 $ 21,325 $ 18,331
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 25,967 $ 30,283 $ 26,739
Income taxes 1,217 1,100
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Securitizations of mortgage loans 27,806 33,833 41,593
Conversion of adjustable rate and construction
loans receivable to 30 year fixed rate mortgage 13,589 5,373 2,391
loans held-for-sale
Loans foreclosed or in-substance foreclosed 4,742 9,017 3,099
Financed sales of foreclosed real estate 2,730 6,215 2,603
Transfers of investment and mortgage-backed
securities from available-for-sale to
held-to-maturity 91,574
Transfers of investment and mortgage-backed
securities from held-to-maturity to
available-for-sale 42,842
Issuance of treasury stock as compensation 47 172 31
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALFED, INC. Following is a description of the more significant
AND SUBSIDIARIES accounting and financial reporting policies followed by
the Company in preparing and presenting its consolidated
financial statements.
NOTE 1: PRINCIPLES OF CONSOLIDATION
SUMMARY OF The consolidated financial statements include the
SIGNIFICANT accounts of PALFED, Inc. ("PALFED"); its wholly owned
ACCOUNTING subsidiaries, Palmetto Federal Savings Bank of South
POLICIES Carolina ("Palmetto Federal" or the "Bank") and PALFED
Investment Services, Inc.; Palmetto Federal's subsidiary,
Palmetto Service Corporation ("PSC"); and PSC's
subsidiary, Woodside Development Company of Aiken, Inc.
(collectively referred to as the "Company"). All
significant intercompany accounts and transactions have
been eliminated.
PALFED is a savings and loan holding company. The
Company's principal line of business is community
banking. The Company also has lines of business in real
estate and retail securities brokerage. The principal
markets for the Company's products and services are
individuals and families, professionals, and small and
medium sized businesses in South Carolina.
CASH AND CASH EQUIVALENTS
For purposes of presentation in the consolidated
statements of cash flows, cash and cash equivalents
include cash and due from banks and interest-bearing
deposits with other banks. Cash and due from banks
include all noninterest-bearing deposits with other
banks.
TRADING SECURITIES
Mortgage-backed securities held for sale in conjunction
with mortgage banking activities are classified as
trading securities and recorded at their fair values.
Unrealized gains and losses on trading account securities
are included in income. The Company held no trading
securities at December 31, 1996 or 1995.
SECURITIES HELD-TO-MATURITY
Bonds, notes and mortgage-backed securities for which the
Company has the positive intent and ability to hold to
maturity are carried at cost, adjusted for premiums and
discounts that are recognized in interest income using
the interest method over the period to maturity.
SECURITIES AVAILABLE-FOR-SALE
Available-for-sale securities consist of bonds, equity
and mortgage-backed securities not classified as held-to-
maturity or trading. Unrealized holding gains and losses
on available-for-sale securities are reported net of
income taxes as a separate component of shareholders'
equity until realized.
In November 1995, the Financial Accounting Standards
Board ("FASB") issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting For Certain
Debt and Equity Securities", which included a transition
provision allowing all entities to reassess the
appropriateness of the classifications of all securities
held and account for any resulting reclassifications at
fair value. Reclassifications from the held-to-maturity
category resulting from this one-time reassessment did
not call into question, or "taint", the intent of the
entity to hold other debt securities to maturity in the
future. In accordance with this Special Report, the
Company transferred securities with an amortized cost of
$42.8 million from held-to-maturity to available-for-sale
in December 1995. The transfer was effected at the fair
value of the securities and the unrealized loss on these
securities at the time of transfer was not significant.
Gains and losses on sales of securities are determined
using the specific identification method. Premiums and
discounts are recognized in interest income using the
interest method over the period to maturity.
LOANS HELD-FOR-SALE
Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by
charges to income.
24
<PAGE>
<TABLE>
<S> <C>
LOANS RECEIVABLE
Loans receivable that management has the intent and
ability to hold for the foreseeable future or until
maturity or payoff are reported at their outstanding
principal adjusted for charge-offs, the allowance for
loan losses and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased
loans.
The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan experience,
known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral,
and current economic conditions. While management uses
its best judgment in establishing the allowances for
losses, future adjustments to the allowances may be
necessary if economic conditions differ substantially
from the assumptions used in making the evaluations.
On January 1, 1995, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 114,
"Accounting By Creditors for Impairment of a Loan", as
amended by SFAS No. 118, "Accounting By Creditors For
Impairment of a Loan -- Income Recognition and
Disclosures, an Amendment of SFAS No. 114". Under these
new standards, a loan is considered impaired, based on
current information and events, if it is probable that
the Company will be unable to collect the scheduled
payments of principal and interest when due according to
the contractual terms of the loan agreement.
The Company uses several factors in determining if a loan
is impaired under SFAS No. 114. Quarterly asset
classification procedures generally include a review of
significant loans and lending data, including loan
payment status and borrowers' financial data and
operating factors, such as cash flows and operating
income or loss. The measurement of impaired loans is
generally based on the present value of expected future
cash flows discounted at the historical effective
interest rate of the loan, except that collateral
dependent loans are measured for impairment at the fair
value of the collateral. The adoption of SFAS No. 114
resulted in no additional provision for credit losses at
January 1, 1995.
Interest income is recognized under the interest method.
The accrual of interest on loans, including impaired
loans, in excess of 90 days past due is generally
discontinued and previously recognized interest income is
reversed until the loans become current. Additionally,
the Bank discontinues the accrual of interest on any loan
when it is determined that collection of interest is not
probable.
Loan origination and commitment fees and certain direct
origination costs are recognized as an adjustment of the
yield over the life of the related loan.
LOAN SERVICING
The Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights", effective October 1, 1995.
SFAS No. 122 requires that the right to service mortgage
loans for others be recognized as an asset, whether that
servicing right is acquired or originated. The total cost
of mortgage loans sold or securitized is allocated to the
loans and to the mortgage servicing rights based upon
their relative fair values. The Company evaluates
mortgage servicing rights for impairment based on the
fair value of those rights. The servicing rights are
stratified based on the weighted average interest rates
of the underlying loans on an aggregate loan basis. The
Company amortizes the mortgage servicing rights over the
period of the estimated net servicing income. Servicing
rights of $153,000 were recorded during 1995 as a result
of adopting this standard, resulting in a gain of
$101,000 net of income taxes. The Company capitalized
$483,000 and amortized $87,000 in originated mortgage
servicing rights during 1996.
The Company typically sells loans on a nonrecourse basis.
Gains and losses on sales of loans are recognized at the
time of sale, as determined by: (1) the difference
between the net sale proceeds and the book value of the
loans sold, and (2) the estimated present value
associated with excess or deficient servicing fees. Gains
and losses related to excess or deficient servicing fees
are amortized on the level yield method over the
estimated lives of the related mortgage loans as a
reduction or increase, respectively, in income on
servicing fees received.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
INVESTMENT IN REAL ESTATE
Investment in real estate includes real estate acquired
in settlement of loans ("REO"), real estate acquired for
development and sale, and equity in and loans to
partnerships.
Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis.
After foreclosure, valuations are periodically performed
by management and the real estate is carried at the lower
of cost or fair value minus estimated costs to sell.
Revenue and expenses from operations and additions to the
valuation allowance are included in real estate
operations.
Real estate acquired for development and sale is carried
at the lower of cost or estimated net realizable value.
Profits from the sales of real estate are recognized
under either the full accrual method or the percentage of
completion method, whichever is appropriate under the
terms and conditions of the sales transaction.
From time to time, as a result of the Company's various
investments in real estate, potential liabilities for
environmental remediation may arise. Liabilities are
recorded when environmental assessments and/or remedial
efforts are probable and the cost can be reasonably
estimated. At December 31, 1996 and 1995, no such
liabilities were recorded.
PREMISES AND EQUIPMENT
Premises and equipment consist principally of furniture,
fixtures and equipment and office buildings. Land is also
included in premises and equipment and is carried at
cost. Other premises and equipment are carried at cost
and are depreciated using straight-line and declining
balance methods over the estimated lives of the related
assets (20 to 40 years for buildings and 3 to 10 years
for equipment). Gains and losses on disposal are
reflected in income. Accumulated depreciation was $10.6
million and $9.9 million at December 31, 1996 and 1995,
respectively.
CORE DEPOSIT INTANGIBLE
The Company used the purchase method of accounting for
the acquisition of a savings institution in 1982. The
goodwill resulting from this acquisition has been
substantially amortized in prior years. The core deposit
intangible asset acquired of $5.4 million was being
amortized on a straight-line basis over 25 years and, at
September 30, 1996, totalled $2.4 million and had an
estimated remaining life of approximately 11 years. As a
result of the SAIF special assessment on September 30,
1996, management reassessed the carrying value of this
intangible asset. As a result of this reassessment,
management concluded that the asset was impaired and
wrote-off the remaining balance in December 1996.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No.
123 establishes a fair value based method of accounting
for stock-based compensation. SFAS No. 123 allows for the
continued use of the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". The Company continues to
account for stock-based compensation under the provisions
of Opinion No. 25.
ADVERTISING COSTS
The Company expenses the production costs of advertising
the first time the advertising takes place. The costs of
communicating the advertising, such as television air
time or print media space, is capitalized and amortized
over the period of use. Direct-response advertising is
expensed as incurred due to the relatively minor nature
of such costs.
At December 31, 1996 and 1995, no advertising costs were
reported as assets. Advertising expense was $416,000,
$335,000 and $236,000 in 1996, 1995 and 1994,
respectively.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
INCOME TAXES
The Company uses the asset and liability approach for
financial accounting and reporting for income taxes.
Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities
are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income
taxes.
EARNINGS PER SHARE
Earnings per share is based on the weighted average
number of common shares outstanding, plus common stock
equivalents (principally equivalent common shares
calculated for stock options outstanding). Allocated
shares owned by the PALFED, Inc. Employee Savings and
Stock Ownership Plan are included in shares outstanding.
The weighted average number of shares used in the
computation for 1996, 1995 and 1994 was approximately
5,242,000, 5,163,000 and 5,170,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported
amounts of income and expenses during the reporting
periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain accounts have been reclassified in the 1995 and
1994 financial statements to conform to the 1996
presentation. Included in these accounts are net
reclassifications between operating and investing
activities in the statements of cash flows of $6.0
million and $5.9 million in 1995 and 1994, respectively,
relating to loans held-for-sale and trading securities.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amounts
approximate fair value.
Investment and mortgage-backed securities: Fair values
are based on quoted market prices or dealer quotes, where
available. If quoted market prices are not available,
fair values are estimated using quoted market prices for
similar securities.
Loans held-for-sale: Fair values are based on quoted
market prices, dealer quotes or forward sales
commitments.
Loans receivable: The fair values are estimated by
discounting the future cash flows using the current
interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
Accrued interest receivable and payable: The fair values
approximate the carrying values.
Investment in FHLB stock: The fair value approximates
the carrying value of this investment as this is the
amount which would be received upon sale of the stock.
Mortgage servicing rights: The fair value is estimated
by discounting net cash flows from servicing rights using
the discount rates that approximate current market rates.
Deposits: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar
remaining maturities.
FHLB advances: The carrying amounts reported for
short-term advances approximate those liabilities' fair
values. The fair value of long-term advances is estimated
using the rates currently offered for these liabilities
of similar remaining maturities.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
Commitments to originate loans, unused lines of credit
and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit
worthiness of the counterparties. The fair value of
letters of credit is based on fees currently charged for
similar agreements with the counterparties at the
reporting date.
SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments",
requires disclosures about derivative financial
instruments -- futures, forward, swap and option
contracts, and other financial instruments with similar
characteristics. As of December 31, 1996 and 1995, the
Company did not hold, and had not issued, instruments
which are subject to the disclosure requirements of SFAS
No. 119.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", effective January 1,
1997. SFAS No. 125 establishes accounting and reporting
standards for transfers and servicing of financial assets
and extinguishments of liabilities. After a transfer of
financial assets, the Company recognizes the financial
and servicing assets it controls and the liabilities it
has incurred, derecognizes financing assets when control
has been surrendered, and derecognizes liabilities when
extinguished. SFAS No. 125 also provides consistent
standards for distinguishing transfers of financial
assets that are sales from transfers that are secured
borrowings. Management believes the adoption of SFAS No.
125 will not have a significant effect on the financial
condition or results of operations of the Company.
In December 1996, the FASB issued SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB
Statement No. 125". SFAS No. 127 defers until January 1,
1998, certain provisions of SFAS No. 125.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
NOTE 2: Investment and mortgage-backed securities are summarized as follows:
INVESTMENT AND
MORTGAGE-BACKED
SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE Cost Gains Losses Value
----------------------------------------------------------------------------------------
(in thousands)
December 31, 1996:
U.S. Treasury and agency obligations $ 15,964 $ 30 $ 226 $ 15,768
FNMA, FHLMC and GNMA securities 6,374 90 30 6,434
Other mortgage-backed securities 1,787 18 1,805
----------------------------------------------------------------------------------------
$ 24,125 $ 138 $ 256 $ 24,007
----------------------------------------------------------------------------------------
December 31, 1995:
U.S. Treasury and agency obligations $ 31,230 $ 86 $ 256 $ 31,060
FNMA, FHLMC and GNMA securities 20,799 165 114 20,850
Other mortgage-backed securities 3,584 56 3,640
----------------------------------------------------------------------------------------
$ 55,613 $ 307 $ 370 $ 55,550
----------------------------------------------------------------------------------------
HELD-TO-MATURITY
December 31, 1996:
U.S. government agency obligations $ 6,962 $ 12 $ 27 $ 6,947
FNMA, FHLMC and GNMA securities 34,166 307 276 34,197
Other mortgage-backed securities 17,572 506 18,078
----------------------------------------------------------------------------------------
$ 58,700 $ 825 $ 303 $ 59,222
----------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
December 31, 1995:
U.S. government agency obligations $ 8,940 $ 5 $ 66 $ 8,879
FNMA, FHLMC and GNMA securities 36,971 488 1 37,458
Other mortgage-backed securities 16,382 851 17,233
----------------------------------------------------------------------------------------
$ 62,293 $1,344 $ 67 $ 63,570
----------------------------------------------------------------------------------------
The change in the unrealized gain (loss) on investment and mortgage-backed securities
for the years ended December 31, 1994, 1995 and 1996 is as follows:
</TABLE>
<TABLE>
<CAPTION>
Available- Held-To- Income Tax
For-Sale Maturity Effect Total
----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 575 $ (196) $ 379
Net change in unrealized losses (2,833) 964 (1,869)
Unrealized loss on securities
transferred from available-for-sale $(2,519) 856 (1,663)
Amortization of unrealized loss on
transferred securities 347 (119) 228
----------------------------------------------------------------------------------------
Balance at December 31, 1994 (2,258) (2,172) 1,505 (2,925)
----------------------------------------------------------------------------------------
Net change in unrealized losses 2,195 (745) 1,450
Unrealized loss on securities
transferred from available-for-sale 486 (165) 321
Amortization of unrealized loss on
transferred securities 409 (139) 270
----------------------------------------------------------------------------------------
Balance at December 31, 1995 (63) (1,277) 456 (884)
----------------------------------------------------------------------------------------
Net change in unrealized losses (55) 18 (37)
Amortization of unrealized loss on
transferred securities 312 (106) 206
----------------------------------------------------------------------------------------
Balance at December 31, 1996 $ (118) $ (965) $ 368 $ (715)
----------------------------------------------------------------------------------------
Proceeds from sales of investment and mortgage-backed securities during the years ended
December 31, 1996, 1995 and 1994, as well as the gross gains and gross losses realized,
are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES 1996 1995 1994
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Proceeds from sales $ 26,053 $ 37,934 $ 21,848
----------------------------------------------------------------------------
Gross gains $ 272 $ 150 $ 14
----------------------------------------------------------------------------
Gross losses $ 33 $ 4 $ 13
----------------------------------------------------------------------------
The amortized cost and estimated market value of investments at December 31,
1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without call or prepayment penalties.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
After one year through five years $ 3,967 $ 3,980 $15,561 $15,335
After five years through ten years 2,995 2,967
After ten years 403 433
Mortgage-backed securities 51,738 52,275 8,161 8,239
-----------------------------------------------------------------------------
$58,700 $59,222 $24,125 $24,007
-----------------------------------------------------------------------------
NOTE 3: Loans receivable are summarized as follows at December 31:
LOANS
RECEIVABLE
</TABLE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
---------------------------------------------------------------
<CAPTION>
(in thousands)
<S> <C> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage $ 224,955 $ 204,835
Construction 54,816 38,114
Second mortgage 56,022 52,313
Commercial 145,685 128,051
Loans collateralized by other property:
Consumer 34,903 39,585
Commercial 16,209 16,080
Loans collateralized by savings account 4,725 4,769
---------------------------------------------------------------
537,315 483,747
Less:
Loans in process (16,263) (13,141)
Unamortized yield adjustments (1,190) (744)
Allowance for estimated losses (6,983) (8,417)
---------------------------------------------------------------
$ 512,879 $ 461,445
---------------------------------------------------------------
Weighted average yield on loans 8.73% 8.87%
---------------------------------------------------------------
Changes in the allowance for estimated losses on loans are
summarized as follows for each of the years ended December 31:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 8,417 $ 8,213 $ 9,883
Provision 1,154 1,322 2,329
Charge-offs (3,044) (1,770) (4,572)
Recoveries 456 652 573
------------------------------------------------------------------------
Balance, end of year $ 6,983 $ 8,417 $ 8,213
------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
At December 31, 1996 and 1995, the recorded investment in loans for
which impairment has been recognized in accordance with SFAS No. 114
totalled approximately $8.2 million and $13.0 million, respectively. Of
these amounts, $2.2 million and $6.1 million, respectively, related to
loans with corresponding valuation allowances of $401,000 and $1.1
million, respectively. The impaired loans at December 31, 1996 and 1995
were measured for impairment using the fair value of the collateral as
substantially all of these loans were collateral dependent. The average
recorded investment in impaired loans during 1996 and 1995 was
approximately $10.9 million and $14.5 million, respectively. The
interest income recognized on impaired loans during 1996 and 1995 was
$537,000 and $743,000, respectively. Impaired loans are summarized as
follows at December 31:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Construction loans $ 557 $ 844
Commercial real estate loans 7,150 11,300
Residential mortgage 515 899
-------------------------------------------------------------
$ 8,222 $ 13,043
-------------------------------------------------------------
Troubled debt restructurings, resulting primarily from
commercial real estate loans, had principal balances of
approximately $3.0 million and $6.1 million at December 31,
1996 and 1995, respectively. The amount of interest income on
these restructured loans included in net earnings for 1996
and 1995 was approximately $208,000 and $428,000,
respectively. The additional interest income that would have
been recorded if these loans had been current in accordance
with their original terms and had been outstanding throughout
the years would have been $160,000 and $222,000 in 1996 and
1995, respectively.
The Company was servicing first mortgage loans of
approximately $248.1 million and $237.1 million at December
31, 1996 and 1995, respectively, which had been sold to
investors on a nonrecourse basis, and approximately $4.4
million and $5.3 million, at December 31, 1996 and 1995,
respectively, which had been sold to investors on a recourse
basis. Mortgage loans serviced for others are not included in
the accompanying consolidated statements of financial
condition.
NOTE 4: The Company's investment in real estate is summarized as
INVESTMENT IN follows at December 31:
REAL ESTATE
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Acquired in settlement of loans $ 7,896 $ 8,286
Less allowance for estimated losses (709) (271)
-------------------------------------------------------------
7,187 8,015
-------------------------------------------------------------
Acquired for development and sale 6,257 6,083
Less allowance for estimated losses (400) (370)
-------------------------------------------------------------
5,857 5,713
-------------------------------------------------------------
Equity in and loans to partnerships 457 720
-------------------------------------------------------------
$ 13,501 $ 14,448
-------------------------------------------------------------
Real estate acquired for development and sale at December 31,
1996 consisted principally of 2 outparcels and approximately
1,000 acres of undeveloped land at Woodside Plantation, a
real estate project located in Aiken, South Carolina, subject
to a purchase option that expires December 31, 1997.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
Changes in the allowance for estimated losses on real estate
are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Development
REO and Sale Total
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 118 $ 230 $ 348
Provision for loss 1,388 100 1,488
Charge-offs (1,062) (1,062)
Recoveries 90 90
--------------------------------------------------------------------------
Balance at December 31, 1994 534 330 864
Provision for loss 374 40 414
Charge-offs (637) (637)
--------------------------------------------------------------------------
Balance at December 31, 1995 271 370 641
Provision for loss 528 30 558
Charge-offs (90) (90)
--------------------------------------------------------------------------
Balance at December 31, 1996 $ 709 $ 400 $ 1,109
--------------------------------------------------------------------------
Real estate operations for each of the years ended December 31 consists of
the following:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Provision for estimated losses on real
estate held for development $ (30) $ (40) $ (100)
Real estate expenses, including
provision for estimated losses on REO (1,098) (1,129) (2,515)
Other 41 95 19
------------------------------------------------------------------------
$ (1,087) $ (1,074) $ (2,596)
------------------------------------------------------------------------
NOTE 5: A summary of certificates of deposit by interest rate at December 31
DEPOSITS follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Under 4.00% $ 16,985 $ 20,943
4.01%-6.00% 254,986 165,733
6.01%-8.00% 101,219 165,057
Above 8.00% 11,488 11,460
----------------------------------------------------------------------
$384,678 $363,193
----------------------------------------------------------------------
A summary of certificates of deposit at December 31 by contractual
maturities follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Within one year $ 265,915 $ 244,206
1-2 years 77,555 69,330
2-3 years 23,826 18,168
3-4 years 10,802 17,671
4-5 years 4,028 10,540
Over 5 years 2,552 3,278
---------------------------------------------------------------------------------
$ 384,678 $ 363,193
---------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
The aggregate amount of time deposits greater than or equal to $100,000 was $90.5
million and $82.9 million at December 31, 1996 and 1995, respectively. The
weighted average interest rate on savings deposits was 4.78% and 4.98% at
December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, certain certificates of deposit were
collateralized by certain investment and mortgage-backed securities aggregating
$32.6 million and $33.0 million, respectively.
Interest expense on savings deposits is summarized as follows for the years ended
December 31:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Regular and statement savings $ 838 $ 827 $ 823
NOW/IFA accounts 1,878 1,685 1,819
Certificates of deposit 21,794 21,289 16,238
-----------------------------------------------------------------------------
24,510 23,801 18,880
Penalties for early withdrawal (98) (121) (90)
-----------------------------------------------------------------------------
$24,412 $23,680 $18,790
-----------------------------------------------------------------------------
NOTE 6: Maturities and interest rates of FHLB advances were as follows at December
FEDERAL HOME LOAN 31:
BANK ADVANCES
</TABLE>
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
INTEREST Interest
AMOUNT RATE Amount Rate
--------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
One year $ 57,900 5.30 - 6.95% $ 81,500 5.73 - 9.10%
Two years 10,500 5.39 - 5.87 10,000 6.37
--------------------------------------------------------------------------------------
$ 68,400 5.94% $ 91,500 6.56%
--------------------------------------------------------------------------------------
At December 31, 1996 and 1995, advances were collateralized by $145.6 million and
$160.4 million of specifically identified unencumbered first mortgage loans and
mortgage-backed securities, respectively. The weighted average interest rate on short
term advances was 6.01% and 6.59% at December 31, 1996 and 1995, respectively.
NOTE 7: Actual income taxes differ from income taxes computed at the federal corporate
FEDERAL AND STATE statutory rate of 34% as shown below for the years ended December 31:
INCOME TAXES
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Tax expense at statutory federal income tax rate $ 497 $ 2,177 $ 1,874
Amortization and accretion of discounts, premiums
and intangible assets related to purchase
adjustments 901 96 89
State income tax refund (53) (162)
Other, net (49) 37 (44)
------------------------------------------------------------------------------------
Provision for income taxes $ 1,349 $ 2,257 $ 1,757
------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Under the liability method of accounting for income taxes, deferred income tax
expense arises from temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. The tax effects
of temporary differences that give rise to significant portions of deferred tax
assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses $ 2,555 $ 3,002
Deferred loan fees 312 143
Basis difference in acquired assets 59 76
Unrealized securities losses 449 616
Deferred income 14 30
Other 339 250
-------------------------------------------------------------------------------------
$ 3,728 $ 4,117
-------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax bad debt reserve in excess of base year reserve $ 1,034 $ 1,034
Recognition of profits on sales of real estate 137 137
Differences in depreciation methods for premises and equipment 90 90
Deferred loan fees 967 630
FHLB stock dividends not recognized for tax 1,006 1,006
Unrealized securities gains 558 534
Other 50 29
-------------------------------------------------------------------------------------
$ 3,842 $ 3,460
-------------------------------------------------------------------------------------
The Company files a consolidated federal income tax return. Prior to 1996, the
Company was allowed to determine its bad debt deduction for tax purposes based on
either the experience method (the "bad debt reserve method") or the percentage of
taxable income method (limited to 8.0% of taxable income before such deduction). The
Company used the experience method in 1995 and 1994 since this method provided a more
favorable bad debt deduction.
The "Small Business Job Protection Act of 1996" repealed the bad debt reserve method
for thrifts effective January 1, 1996. The legislation suspends recapture of bad debt
reserves taken through 1987 (i.e., the base year reserve), but requires thrifts to
recapture or repay bad debt deductions taken after 1987 over 6 years beginning in
1996. As of December 31, 1995, PALFED's bad debt reserves subject to recapture, for
which deferred taxes have previously been provided, totalled $3.0 million. Thrifts
meeting certain home mortgage lending tests are allowed to defer repayment for an
additional 2 years. The Company qualified for the first year of the deferral period.
Under SFAS No. 109, "Accounting for Income Taxes", the Company is not required to
recognize a deferred tax liability with respect to the base year reserve, unless it
becomes apparent that this temporary difference will reverse in the foreseeable
future. This temporary difference will become taxable in the event the Company no
longer qualifies as a bank for federal income tax purposes. The cumulative amount of
this temporary difference for which the Company is not required to recognize a
deferred tax liability is equal to the amount of its tax base year reserve as of
December 31, 1987 of approximately $2.9 million.
During 1994, the Internal Revenue Service completed an examination of the Company's
consolidated federal income tax returns through 1991. The examination resulted in an
income tax refund of $1.2 million and interest on the refund of approximately
$800,000, net of related fees and expenses. Both the refund and related interest were
received in 1994. Subsequent to the completion of the IRS examination, Palmetto
Federal filed amended South Carolina state income tax returns and received refunds
and related interest of approximately $285,000 in 1994.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
The Bank is subject to various regulatory capital requirements administered by the
NOTE 8: federal banking agencies. Failure to meet minimum capital requirements can initiate
REGULATORY MATTERS certain mandatory and discretionary actions by regulators that, if undertaken, could
have a material adverse effect on the Company. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, Palmetto Federal must meet
specific capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
As of December 31, 1996, the FDIC categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain risk-based, core and tangible capital ratios of
10.0%, 6.0% and 5.0%, respectively. There are no conditions or events since that
notification that management believes have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the dates
indicated:
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
DECEMBER 31, 1996
Risk-based Capital
(to risk weighted assets) $48,008 10.4% $36,791 8.0% $45,989 10.0%
Core Capital
(to adjusted tangible assets) 43,361 6.6 19,726 3.0 39,449 6.0
Tangible Capital
(to tangible assets) 43,361 6.6 9,862 1.5 32,873 5.0
DECEMBER 31, 1995
Risk-based Capital
(to risk weighted assets) $48,425 11.4% $33,865 8.0% $42,335 10.0%
Core Capital
(to adjusted total assets) 43,375 6.8 19,172 3.0 38,345 6.0
Tangible Capital
(to tangible assets) 43,375 6.8 9,586 1.5 31,954 5.0
----------------------------------------------------------------------------------------------------
The payment of dividends by the Bank to PALFED is subject to substantial restrictions and would
require prior notice to and approval of the OTS.
NOTE 9: The Company maintains a trusteed, noncontributory defined benefit pension plan which covers
EMPLOYEE BENEFIT substantially all full-time employees with one year of service. The formula used to determine
PLANS benefits paid to retired employees is based upon their length of service and their average
compensation during the final years of their employment. The plan's assets are invested primarily in
equity and bond mutual funds. The plan also owns 21,118 shares of PALFED common stock at December
31, 1996 and 1995 with a fair value of approximately $296,000 and $251,000, respectively. The
Company funds pension costs based upon the amount allowable or deductible for federal income tax
purposes. The actuarial method used in accounting for pension costs is the projected unit credit
method.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
The following tables set forth the plan's funded status and certain amounts recognized in the
Company's consolidated financial statements at December 31, 1996, 1995 and 1994, respectively.
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefits
including vested benefits of $1,714, $1,475 and
$1,403, respectively: $ 1,828 $ 1,604 $ 1,479
------------------------------------------------------------------------------------
Fair value of plan assets $ 3,083 $ 2,455 $ 1,892
Projected benefit obligation (3,150) (2,669) (2,141)
Unrecognized prior service cost (348) (368) (388)
Unrecognized net loss (from past experiences
different from assumed) 775 781 814
Additional transition liability recognized (net of
amortization) 1 1 1
------------------------------------------------------------------------------------
Prepaid pension costs $ 361 $ 200 $ 178
------------------------------------------------------------------------------------
Assumed rates used in actuarial computations:
Weighted average discount rate 7.25% 7.25% 7.50%
Rate of increase in compensation 4.50 4.50 5.00
Rate of increase in Social Security wage base 4.00 4.00 4.00
Expected return on plan assets 8.50 8.00 6.00
------------------------------------------------------------------------------------
For the years ended December 31 1996 1995 1994
------------------------------------------------------------------------------------
Service cost $ 271 $ 205 $ 246
Interest cost 202 172 136
Expected return on assets (311) (155) (107)
Net amortization and deferral 100 23 6
------------------------------------------------------------------------------------
Net pension expense $ 262 $ 245 $ 281
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
The Company maintains an Employee Savings and Stock Ownership Plan ("401(k) Plan")
for all full-time employees with one year of service who choose to participate. At
December 31, 1996, the 401(k) Plan owned 209,536 allocated shares and owned no
committed-to-be-released shares, unearned or suspense shares of PALFED common stock.
At December 31, 1996, there was no obligation to repurchase 401(k) Plan shares. The
Company's matching contribution varies according to the level of net income attained
by the Company. The Company's expense was $164,000, $126,000 and $90,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The Company maintains an Executive Incentive Bonus Plan (the "Bonus Plan") for
certain officers who have been employed by the Company for at least one year.
Bonuses are awarded considering the individual's contribution to the Company's
performance. The Company accrued bonus expense of $750,000, $424,000 and $279,000
for the years ended December 31, 1996, 1995 and 1994, respectively, related to this
Bonus Plan.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NOTE 10: The Company has operating leases for certain branch banking facilities and equipment.
COMMITMENTS AND Future minimum rental commitments under these leases as of December 31, 1996, are
CONTINGENCIES approximately as follows:
Year Amount
-------------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 294,000
1998 161,000
1999 161,000
2000 137,000
2001 91,000
Thereafter 250,000
-------------------------------------------------------------------------------------------
Total minimum payments required $ 1,094,000
-------------------------------------------------------------------------------------------
Rental expense for the years ending December 31, 1996, 1995, and 1994 was approximately
$573,000, $454,000 and $473,000, respectively.
The Company has salary continuation agreements with nine officers which grant these
officers the right to receive 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 for salary continuation under these
agreements is approximately $2.9 million at December 31, 1996.
At December 31, 1996 and 1995, the Company had outstanding commitments to sell loans of
$10.6 million and $2.3 million, respectively.
Concurrent with the 1990 sale of the Woodside Plantation Country Club ("WPCC"), the Company
entered into an agreement with WPCC to purchase club memberships. This obligation to
purchase memberships, based on future lot sales, is subject to an annual limitation and
depends upon whether full or partial memberships are purchased. The maximum liability under
this contingency, assuming the annual limitation is met and partial memberships are
purchased, is approximately $1.2 million. In 1993, the Company sold the remaining lots and
other real estate at Woodside Plantation and the purchaser assumed the Company's
obligations under this agreement. The Company remains contingently liable under this
agreement.
The Company continues to have a significant concentration of risk at Woodside Plantation,
exclusive of loans to individual homeowners, comprised of acquisition and development
loans, real estate held for development, a 50% interest in a partnership and foreclosed
real estate. The total carrying value of these assets was $12.4 million and $13.9 million
at December 31, 1996 and 1995, respectively. Included in these assets are aggregate loans
of $6.7 million and $7.8 million at December 31, 1996 and 1995, respectively, to WPCC and
the purchaser of the remaining lots. The ability of these borrowers to repay their
indebtedness is primarily based upon the success of real estate sales at Woodside
Plantation. There are no assurances that real estate sales will be sufficient for these
borrowers to service their debt. During 1995, Palmetto Federal restructured the
indebtedness to the purchaser of the remaining lots. In addition, effective April 1, 1996,
Palmetto Federal modified its loans to WPCC from amortizing to interest only for one year.
PALFED has a significant concentration of customers in and around Aiken and Barnwell
Counties, South Carolina, the location of the U.S. Department of Energy's Savannah River
Site ("SRS"). Employment at SRS has decreased from 22,000 in 1993 to approximately 15,000
currently. SRS recently announced additional staff reductions of 1,500. Further reductions
at SRS could have a significant adverse effect on the local economy and the Company.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
The Company has granted options to purchase its common stock to certain officers and key
NOTE 11: employees under the 1985 Incentive Stock Option Plan, the 1993 Stock Option Plan and the
STOCK OPTIONS AND 1995 Stock Option Plan. Substantially all outstanding options were issued at the market
STOCK GRANTS value of PALFED common stock on the date of grant. The outstanding options become vested
over a period of either one, three, or five years from the date of issuance. An aggregate
of 250,000 and 100,000 shares have been authorized for issuance under the 1993 Stock Option
Plan and the 1995 Stock Option Plan, respectively, of which 50,616 and 61,725 shares,
respectively, remained available at December 31, 1996. The 1985 Incentive Stock Option Plan
terminated on September 24, 1995, although outstanding options remain exercisable according
to their terms. During the year ended December 31, 1996, the following options were
exercised: options issued under the 1985 Plan to purchase 1,250 shares at $12.80 per share,
14,500 shares at $5.75 per share and 5,478 shares at $6.50 per share; options issued under
the 1993 Plan to purchase 534 shares at $6.38 per share and 183 shares at $7.75 per share.
During the year ended December 31, 1995, options issued under the 1993 Plan to purchase 667
shares at $6.38 per share were exercised. During the year ended December 31, 1994, no
options were exercised.
The Company's Amended and Restated Directors Stock Plan provides for the grant of stock
options and shares of Company Stock to directors, consulting directors and advisory
directors who are not employees subject to certain restrictions. An aggregate of 250,000
shares of common stock are authorized for issuance of which 175,000 shares remained
available at December 31, 1996. On April 24, 1996, 36,000 options were granted at market
value, or $12.75 per share. On April 26, 1995, 13,000 shares and 39,000 options were
granted at market value, or $9.88 per share.
At December 31, 1996, the Company had the following options outstanding:
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercisable Option
Grant Date Options Shares Price Expiration Date
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
February 24, 1987 23,750 23,750 $12.80 February 24, 1997
April 26, 1988 6,875 6,875 11.80 April 26, 1998
February 20, 1992 35,022 35,022 6.50 February 20, 1997
November 16, 1993 64,533 64,533 6.38 November 16, 2003
November 15, 1994 49,117 32,745 7.75 November 15, 2004
April 26, 1995 36,000 36,000 9.88 April 26, 1998
November 14, 1995 75,000 25,000 12.78 November 14, 2005
April 24, 1996 36,000 0 12.75 April 24, 1999
April 24, 1996 14,500 0 5.75 April 24, 2006
November 19, 1996 50,000 0 14.50 November 19, 2006
-------------------------------------------------------------------------------------------
The Company's 1993 Restricted Stock Incentive Award Plan ("the Plan") provides for the
grant of shares of the Company's common stock to officers and other key employees subject
to certain restrictions. An aggregate of 200,000 shares of Common Stock are authorized for
issuance of which 69,445 shares remained available at December 31, 1996. During the years
ended December 31, 1996, 1995, and 1994, 106,345, 10,464, and 4,606 shares were granted
under the provisions of the Plan, respectively. On the dates of grants, the market value of
PALFED common stock was $12.75 per share in 1996, $7.38 per share in 1995 and $6.63 per
share in 1994.
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
The Company has elected the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1996 and 1995,
consistent with the provisions of SFAS No. 123, the Company's net income and earnings per
share amounts would have been reduced to the pro forma amounts indicated below (in
thousands):
</TABLE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------
Net income -- as reported $ 112 $ 4,145
Net income (loss) -- pro forma $ (180) $ 4,056
Earnings per share -- as reported $ 0.02 $ 0.80
Earnings (loss) per share -- pro forma $ (0.03) $ 0.79
-----------------------------------------------------------------------------------------------
The pro forma amounts reflected above are not representative of the effects on reported net
income in future years because, in general, the options granted typically do not vest for
several years and additional awards are generally made each year.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------
Expected dividend yield 0.81% 0.81%
Expected stock price volatility 39.28% 53.15%
Risk-free interest rate 5.97% 5.97%
Expected life of options 3.6 YEARS 4.0 years
--------------------------------------------------------------------------------------------
The weighted average fair value of options granted during 1996 and 1995 was $3.91 and $3.65
per share respectively.
NOTE 12: The estimated fair values of the Company's financial instruments at December 31 are as
FINANCIAL INSTRUMENTS follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
FAIR CARRYING Fair Carrying
VALUE VALUE Value Value
-------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 20,407 $ 20,407 $ 21,325 $ 21,325
Investment and mortgage-backed securities 83,229 82,707 119,120 117,843
Loans receivable and held-for-sale 525,330 524,120 461,269 464,281
Accrued interest receivable 3,835 3,835 4,256 4,256
FHLB stock 10,884 10,884 10,884 10,884
Mortgage servicing rights 547 547 151 151
-------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits $ 539,593 $ 536,687 $ 499,070 $ 495,855
Accrued interest payable 3,441 3,441 891 891
FHLB advances 68,346 68,400 1,886 91,500
-------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Commitments to originate loans $ (252) $ (135)
Unused lines of credit (520) (483)
Standby letters of credit (4) (3)
-------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
A summary of the notional amounts of the Company's financial instruments with
off-balance-sheet risk at December 31 is as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Commitments to originate loans $ 32,908 $ 13,460
---------------------------------------------------------------------------------------------
Unused lines of credit $ 35,560 $ 31,639
---------------------------------------------------------------------------------------------
Standby letters of credit $ 1,004 $ 713
---------------------------------------------------------------------------------------------
The Company is a party to financial instruments with off- balance-sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments are for purposes
other than trading and include loan commitments, unused lines of credit, and standby letters
of credit. The instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the financial statements.
The Company's exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for loan commitments and standby letters of credit is represented by
the contractual amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments. The
Bank's lending is concentrated in South Carolina, its primary market area.
Since many of the loan commitments may expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is
based on management's credit evaluation of the counter-party. Collateral held varies but may
include real estate and improvements, marketable securities, accounts receivable, inventory,
equipment and personal property.
The credit risk associated with issuing letters of credit is essentially the same as that
associated with extending loan facilities to customers.
Palmetto Federal's risk with respect to mortgage servicing losses results from unrecoverable
advances of delinquent principal, interest and tax payments made on behalf of mortgagors. The
Bank's loan administration department controls the risk of this portfolio on an ongoing
basis. To date, the Bank has not suffered significant losses from its mortgage servicing
activities.
NOTE 13: PALFED's statement of financial condition at December 31, 1996 and 1995 and related
FINANCIAL INFORMATION statements of income and cash flows for the years ended December 31, 1996, 1995 and 1994 are
OF PALFED, INC. as follows:
(PARENT ONLY)
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION 1996 1995
--------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents $ 1,593 $ 1,590
Investment in and amounts due from banking subsidiary 49,233 49,026
Investment in and amounts due from other subsidiary 864 699
Other assets 133 170
--------------------------------------------------------------------------------------
TOTAL ASSETS $ 51,823 $ 51,485
--------------------------------------------------------------------------------------
Common stock $ 5,231 $ 5,142
Additional paid-in capital 28,115 26,904
Retained earnings 20,320 20,626
Deferred compensation (1,128)
Unrealized loss on debt securities, net (715) (884)
Treasury stock (303)
--------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,823 $ 51,485
--------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME 1996 1995 1994
------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Income (expenses), net of related income taxes $ 39 $ 41 $ (130)
Equity in earnings of subsidiaries 73 4,104 3,884
------------------------------------------------------------------------------------------------
Net income $ 112 $ 4,145 $ 3,754
------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENTS OF CASH FLOWS 1996 1995 1994
------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112 $ 4,145 $ 3,754
Less equity in earnings of subsidiaries (73) (4,104) (3,884)
Other, net (3) (10) (186)
------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 36 31 (316)
------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in subsidiaries, net (1,151)
Other, net 150 9
------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 150 (1,151) 9
------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (480)
Payment of cash dividends (418)
Other, net 235 (29) 61
------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (183) (29) (419)
------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3 (1,149) (726)
------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 1,590 2,739 3,465
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,593 $ 1,590 $ 2,739
------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Income taxes $ 1,217 $ 1,100
Supplemental schedule of noncash investing and financing
activities:
Issuance of common stock as compensation 47 172 $ 31
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
41
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
NOTE 14: The following tables summarize the consolidated quarterly results of operations for each of the
CONSOLIDATED CONDENSED years ended December 31, 1996 and 1995 (in thousands except per share data):
QUARTERLY RESULTS
OF OPERATIONS
(UNAUDITED)
<CAPTION>
Quarter ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Total interest income $ 12,315 $ 12,413 $ 12,764 $ 13,243
Net interest income 5,053 5,405 5,735 6,025
Provision for estimated losses on loans 339 247 313 255
Net income (loss) 1,092 1,131 (978) (1,133)
Earnings (loss) per share $ 0.21 $ 0.22 $ (0.19) $ (0.22)
Average shares outstanding 5,207 5,231 5,228 5,251
------------------------------------------------------------------------------------------------
1995
Total interest income $ 12,347 $ 12,725 $ 12,820 $ 12,638
Net interest income 4,936 4,893 5,094 5,077
Provision for estimated losses on loans 238 209 451 424
Net income 965 1,021 1,068 1,091
Earnings per share $ 0.19 $ 0.20 $ 0.21 $ 0.21
Average shares outstanding 5,116 5,160 5,178 5,185
------------------------------------------------------------------------------------------------
The 1996 third quarter includes a $3.3 million SAIF assessment ($2.2 million after tax). The
1996 fourth quarter includes a $2.4 million write-off of the core deposit intangible asset.
</TABLE>
42
<PAGE>
PALMETTO
[LOGO] FEDERAL
<PAGE>
OFFICE LOCATIONS
- -------------------------------------------------------------------------
PALMETTO FEDERAL
[MAP]
SAVINGS BANK
OF SOUTH CAROLINA
22 Banking Offices
8 Mortgage Lending Offices
AIKEN - MAIN OFFICE
107 Chesterfield Street South
MANAGER: W. LARRY RICKS
(803) 642-1400
AIKEN MORTGAGE CENTER
1359 Silver Bluff Road, Bldg C, Suite A-1
MANAGER: CHRISTINA H. HAMRICK
(803) 642-1441
AIKEN - OPERATIONS CENTER
237 Park Avenue
(803) 642-1340
SOUTH AIKEN
1799 Whiskey Road
MANAGER: BENNIE L. NEWMAN, JR.
(803) 642-1300
SOUTH AIKEN - KROGER
441 Silver Bluff Road
MANAGER: MELISSA L. CLARK
(803) 642-1350
AUGUSTA/MARTINEZ GA. MORTGAGE CENTER
4107 Columbia Road, Suite B
MANAGER: FRANK L. CUNNINGHAM III
(706) 863-3090
BARNWELL
1680 Jackson Street
MANAGER: JACQUELINE P. RAMSEY
(803) 259-5541
BEAUFORT
916 Bay Street
BRANCH SUPERVISOR: MARY ANN WASHINGTON
(803) 525-8400
BURTON
Highway 170 at Salem Road
MANAGER: RUMELL Y. LADSON
(803) 525-8400
BEAUFORT MORTGAGE CENTER
146 Sea Island Parkway
MANAGER: REID DAVIS
(803) 525-8400
COLUMBIA HARBISON WAL-MART
360 Harbison Boulevard
MANAGER: RHONDA J. HUGHEY
(803) 781-6160
COLUMBIA MORTGAGE CENTER
9308-B Two Notch Road
MANAGER: DORIS D. BLOCKER
(803) 736-0390
CHARLESTON - WEST ASHLEY
1545 Savannah Highway
MANAGER: D. TED HONNEY
(803) 852-7020
CHARLESTON - MEETING STREET
170 Meeting Street
BRANCH SUPERVISOR: DONNA L. ROBINSON
(803) 937-4140
CHARLESTON MORTGAGE CENTER
170 Meeting Street
(803) 937-4151
CLEARWATER
1 Midland Valley Plaza
MANAGER: CHERYL A. IAUKEA
(803) 593-4421
EDGEFIELD
201 Columbia Road
MANAGER: PATRICIA A. ALTMAN
(803) 637-5316
HAMPTON
406 First Street
MANAGER: PHYLLIS H. HARVEY
(803) 943-3021
HILTON HEAD
77 Pope Avenue
MANAGER: JOHN F. DAY
(803) 785-4249
HILTON HEAD MAIN STREET
200 Main Street
Opening March 1997
HILTON HEAD MORTGAGE CENTER
The Coastal Building
1036 Highway 278
(803) 785-7989
JOHNSTON
303 Lee Street
MANAGER: JOHN M. DELAUGHTER
(803) 275-3236
LADY'S ISLAND
146 Sea Island Parkway
MANAGER: M. ROBERT STEVENS, JR.
(803) 525-8400
LEXINGTON
216 E. Main Street
MANAGER: CLIFFORD B. SHEALY
(803) 957-9558
LEXINGTON MORTGAGE CENTER
216 E. Main Street
MANAGER: MARION H. MCDONALD
(803) 951-1977
MCCORMICK
407 East Gold Street
MANAGER: DOROTHY J. BANDY
(864) 465-2046
MT. PLEASANT
1210 Ben Sawyer Boulevard
MANAGER: PATRICIA AUSTIN
(803) 971-1117
NORTH AUGUSTA
432 West Avenue
MANAGER: KATHY S. GILLILAND
(803) 279-6250
NORTH AUGUSTA - KROGER
400 East Martintown Road at Crossroads Market
MANAGER: BEVERLY GUNN
(803) 279-050
NORTH AUGUSTA MORTGAGE CENTER
106-B East Martintown Road
MANAGER: FRANK L. CUNNINGHAM III
(803) 278-0183
RIDGELAND
312 North Jacob Smart Boulevard
MANAGER: HELEN RIVERS
(803) 726-8186
46
<PAGE>
CORPORATE INFORMATION
- -------------------------------------------------------------------------
CORPORATE OFFICE
- ---------------
PALFED, INC.
107 CHESTERFIELD STREET SOUTH
P.O. BOX 1116
AIKEN, SOUTH CAROLINA 29802
(803) 642-1400
STOCK LISTING
- ------------
THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER THE COUNTER MARKET AND IS
QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PALM" AND LISTED IN THE
WALL STREET JOURNAL UNDER THE NAME "PALFED". THE FOLLOWING FIRMS ARE MARKET
MAKERS IN THE COMPANY'S COMMON STOCK:
HERZOG, HEINE, GEDULD, INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
MAYER & SCHWEITZER INC.
KEEFE, BRUYETTE & WOODS, INC.
SCOTT & STRINGFELLOW, INC.
FOX-PITT, KELTON, INC.
WHEAT FIRST SECURITIES INC.
DEAN WITTER REYNOLDS INC.
RAYMOND JAMES & ASSOCIATES, INC.
STERNE, AGEE & LEACH, INC.
INTERSTATE/JOHNSON LANE CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
PRICE RANGE OF COMMON STOCK
- ---------------------------
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUARY - MARCH 13 1/4 11 1/4 9 5/8 7
APRIL - JUNE 13 1/2 11 7/8 11 1/4 8 5/8
JULY - SEPTEMBER 14 3/4 11 5/8 12 1/4 11
OCTOBER - DECEMBER 15 1/4 13 13 1/4 11
- ----------------------------------------------------------------------------------
</TABLE>
TRANSFER AGENT
- --------------
THE BANK OF NEW YORK
RECEIVE AND DELIVER DEPARTMENT-11W
P.O. BOX 11002
CHURCH STREET STATION
NEW YORK, NY 10286
FOR SHAREHOLDER INQUIRIES:
THE BANK OF NEW YORK
SHAREHOLDER RELATIONS DEPARTMENT - 11E
P.O. BOX 11258
CHURCH STREET STATION
NEW YORK, NY 10286
ANNUAL REPORT
- --------------
ADDITIONAL COPIES OF THE COMPANY'S ANNUAL REPORT AND 1996 SEC FORM 10-K REPORT
(WITHOUT EXHIBITS) MAY BE OBTAINED WITHOUT COST UPON WRITTEN REQUEST TO:
PALFED, INC.
DARRELL R. RAINS
P.O. BOX 1116
AIKEN, SOUTH CAROLINA 29802
47
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PALFED, INC.
----------------------------
JURISDICTION OF
NAME INCORPORATION
- ---- ----------------
Palmetto Federal Savings Bank of South Carolina..... Federally-chartered
PALFED Investment Services, Inc..................... South Carolina
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements on Form S-8 (File Nos. 333-00615, 33-23667, 33-33097, 33-39700,
33-48334, 33-65480, 33-65482, 33-65484 and 33-93276) of our report, which
includes an explanatory paragraph concerning changes in methods of accounting
for impaired loans and mortgage servicing rights in 1995, dated February
22, 1997, on our audits of the consolidated financial statements of PALFED,
Inc. and subsidiaries as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 26, 1997
<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
DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATE OF INCOME FOR THE YEAR THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,942
<INT-BEARING-DEPOSITS> 3,465
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,007
<INVESTMENTS-CARRYING> 58,700
<INVESTMENTS-MARKET> 59,222
<LOANS> 531,103
<ALLOWANCE> 6,983
<TOTAL-ASSETS> 665,257
<DEPOSITS> 540,128
<SHORT-TERM> 57,900
<LIABILITIES-OTHER> 4,906
<LONG-TERM> 10,500
0
0
<COMMON> 51,823
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 665,257
<INTEREST-LOAN> 43,756
<INTEREST-INVEST> 6,746
<INTEREST-OTHER> 233
<INTEREST-TOTAL> 50,735
<INTEREST-DEPOSIT> 24,412
<INTEREST-EXPENSE> 28,517
<INTEREST-INCOME-NET> 22,218
<LOAN-LOSSES> 1,154
<SECURITIES-GAINS> 574
<EXPENSE-OTHER> 24,095
<INCOME-PRETAX> 1,461
<INCOME-PRE-EXTRAORDINARY> 112
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> 0.021
<EPS-DILUTED> 0.021
<YIELD-ACTUAL> 3.70
<LOANS-NON> 3,971
<LOANS-PAST> 0
<LOANS-TROUBLED> 6,533
<LOANS-PROBLEM> 14,500
<ALLOWANCE-OPEN> 8,417
<CHARGE-OFFS> 3,044
<RECOVERIES> 456
<ALLOWANCE-CLOSE> 6,983
<ALLOWANCE-DOMESTIC> 6,983
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,517
</TABLE>
