<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended SEC Commission File
September 30, 1997 Docket Number 0-15334
- ---------------------- -----------------------
PALFED, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0821295
- ------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification number)
107 Chesterfield Street South 29801
Aiken, South Carolina (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (803) 642-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes..X... NO......
There were 5,299,201 shares of Common Stock outstanding on September 30, 1997.
<PAGE>
PALFED, Inc.
---------------------------------------------------
Quarterly Report on Form 10-Q
For The Quarter Ended September 30, 1997
Table of Contents
PART I--FINANCIAL INFORMATION
ITEM PAGE
------
1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 1997
and December 31, 1996....................................... 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1997 and 1996................................. 4
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1997 and 1996................................. 5
Notes to Consolidated Financial Statements.................. 7
2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................. 11
PART II--OTHER INFORMATION
Item
5. Other Information............................................. 16
6. (a) Exhibits.................................................. 16
(b) Reports on Form 8-K....................................... 16
Exhibit 11.1...................................................... 17
SIGNATURES........................................................ 18
<PAGE>
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
PALFED, Inc. September 30 December 31
and subsidiaries 1997 1996
------------ ------------
<S> <C> <C>
(in thousands, except
share data)
ASSETS
Cash and due from banks.............................................................. $ 9,855 $ 16,942
Interest-bearing deposits with other banks........................................... 6,613 3,465
Investment and mortgage-backed securities:
Available-for-sale............................................................... 22,925 24,007
Held-to-maturity................................................................. 50,682 58,700
Loans held-for-sale.................................................................. 9,327 11,241
Loans receivable, net................................................................ 540,712 512,879
Investment in real estate, net....................................................... 11,278 13,501
Investment in Federal Home Loan Bank stock........................................... 3,479 10,884
Premises and equipment, net.......................................................... 5,837 5,958
Accrued interest receivable.......................................................... 3,920 3,835
Other assets......................................................................... 3,876 3,845
------------ ------------
$ 668,504 $ 665,257
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing accounts................................................. $ 33,597 $ 30,577
Savings and NOW accounts..................................................... 126,976 121,432
Certificates of deposit...................................................... 406,339 384,678
Accrued interest payable..................................................... 6,499 3,441
------------ ------------
Total deposits........................................................... 573,411 540,128
Federal Home Loan Bank advances...................................................... 32,500 68,400
Other liabilities.................................................................... 5,665 4,906
------------ ------------
Total liabilities.................................................................... 611,576 613,434
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; authorized 10,000,000 shares; 5,299,201 and
5,231,317 shares issued and outstanding, respectively.......................... 5,299 5,231
Additional paid-in capital....................................................... 28,500 28,115
Retained earnings................................................................ 23,593 20,320
Unearned compensation............................................................ (1,128)
Net unrealized loss on securities, net of tax benefit of $261 and $369,
respectively................................................................... (464) (715)
------------ ------------
Total stockholders' equity................................................... 56,928 51,823
------------ ------------
$ 668,504 $ 665,257
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
<S> <C> <C> <C> <C>
PALFED, Inc. September 30 September 30 September 30 September 30
and subsidiaries 1997 1996 1997 1996
------------ ------------ ------------ ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable..................................... $ 12,338 $ 11,055 $ 36,249 $ 32,209
Mortgage-backed securities........................... 998 1,081 3,082 3,244
Investment securities................................ 321 570 1,046 1,857
Other................................................ 88 58 205 182
------------ ------------ ------------ ------------
Total interest income.......................... 13,745 12,764 40,582 37,492
------------ ------------ ------------ ------------
Interest expense:
Deposits............................................. 6,829 6,159 19,810 18,199
Other borrowings..................................... 512 870 1,945 3,100
------------ ------------ ------------ ------------
Total interest expense......................... 7,341 7,029 21,755 21,299
------------ ------------ ------------ ------------
Net interest income.................................... 6,404 5,735 18,827 16,193
Provision for estimated losses on loans................ 41 313 665 899
------------ ------------ ------------ ------------
Net interest income after provision for estimated loan
losses............................................... 6,363 5,422 18,162 15,294
------------ ------------ ------------ ------------
Noninterest income:
Checking transaction fees............................ 528 611 1,603 1,812
Financial services fees.............................. 228 209 598 664
Late charge and other fees........................... 123 77 376 353
Net trading account gains and losses................. 110 87 318 219
Gain on sales of available-for-sale securities....... 19 23 34 197
Gain on sales of loans held-for-sale................. 108 67 224 350
Real estate operations............................... (423) (288) (903) (463)
Other................................................ 206 288 576 677
------------ ------------ ------------ ------------
Total noninterest income....................... 899 1,074 2,826 3,809
------------ ------------ ------------ ------------
Noninterest expenses:
Compensation and employee benefits................... 4,043 2,449 9,504 7,429
Occupancy and equipment.............................. 784 764 2,369 2,228
Federal insurance premiums and assessments........... 163 3,657 482 4,364
Professional and outside service fees................ 316 335 1,049 1,035
Data processing...................................... 220 208 654 626
Advertising and public relations..................... 120 139 481 562
Other................................................ 146 375 513 864
------------ ------------ ------------ ------------
Total noninterest expenses..................... 5,792 7,927 15,052 17,108
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes........ 1,470 (1,431) 5,936 1,995
Provision (benefit) for income taxes................... 529 (453) 2,188 749
------------ ------------ ------------ ------------
Net income (loss)...................................... $ 941 $ (978) $ 3,748 $ 1,246
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per share.............................. $ 0.18 $ (0.19) $ 0.70 $ 0.24
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Dividends per share.................................... $ 0.03 $ 0.02 $ 0.09 $ 0.06
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
PALFED, Inc. --------------------
and subsidiaries 1997 1996
--------- ---------
<S> <C> <C>
(in thousands)
Operating Activities:
Cash flows from operating activities :
Net income........................................................................ $ 3,748 $ 1,246
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization................................................. 520 642
Recognition of unearned compensation.......................................... 1,123
Provision for estimated losses on loans and real estate....................... 1,000 1,076
Other gains, net.............................................................. (404) (647)
Proceeds from sales of loans held-for-sale.................................... 13,330 18,303
Originations of loans held-for-sale........................................... (33,150) (33,332)
Proceeds from sales of trading account securities............................. 35,001 17,532
Gain on sale of available-for-sale securities................................. (34) (350)
Changes in:
Accrued interest receivable, net........................................ (85) 312
Accrued interest payable................................................ 3,058 5,536
Other assets............................................................ (81) 954
Other liabilities (excluding deferred income)........................... (407) 5,161
Other, net.................................................................... 274 712
--------- ---------
Net cash provided by operating activities..................................... 23,893 17,145
--------- ---------
Investing activities:
Cash flows from investing activities:
Net sales of FHLB stock......................................................... 7,405
Proceeds from sales of available-for-sale securities............................ 7,128 19,198
Principal collections on available-for-sale securities.......................... 1,345 12,641
Purchases of available-for-sale securities...................................... (7,183) (7,998)
Net increase in loans receivable................................................ (40,932) (52,685)
Purchases of held-to-maturity securities........................................ (6,852)
Principal collections and maturities of held-to-maturity securities............. 8,176 8,005
Proceeds from sales of foreclosed real estate................................... 1,432 2,419
Purchase of premises and equipment.............................................. (583) (1,143)
Other, net...................................................................... (46) 1,561
--------- ---------
Net cash used by investing activities....................................... (23,258) (24,854)
--------- ---------
</TABLE>
5
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
PALFED, Inc. --------------------
and subsidiaries 1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Financing activities:
Cash flows from financing activities :
Net increase in deposit accounts.................................................. 30,225 19,077
Proceeds from FHLB advances....................................................... 61,850 84,900
Repayments of FHLB advances....................................................... (97,750) (102,700)
Payment of cash dividend.......................................................... (475) (313)
Other, net........................................................................ 1,576 844
--------- ---------
Net cash provided (used) by financing activities.............................. (4,574) 1,808
--------- ---------
Net decrease in cash and cash equivalents........................................... (3,939) (5,901)
Cash and cash equivalents, beginning of period...................................... 20,407 21,325
--------- ---------
Cash and cash equivalents, end of period............................................ $ 16,468 $ 15,424
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest...................................................................... $ 18,697 $ 15,763
Income taxes.................................................................. 2,147 1,217
Supplemental schedule of noncash investing and financing activities:
Securitizations of mortgage loans............................................... $ 34,683 $ 17,312
Conversion of adjustable rate and construction loans receivable to 30
year fixed rate mortgage loans held-for-sale.................................. 12,695 7,918
Real estate acquired through foreclosure........................................ 1,750 4,471
Financed sales of foreclosed real estate........................................ 2,123 1,677
Issuance of common stock as compensation........................................ 36 81
</TABLE>
The accompanying notes are an integral part of these financial
statements.
6
<PAGE>
PALFED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. summary of Significant Accounting Policies
General
The accounting and reporting policies of PALFED, Inc. and Subsidiaries (the
"Company") conform to generally accepted accounting principles and to general
practice within the thrift industry. They reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows for the
interim periods presented. These adjustments are of a normal and recurring
nature. These consolidated financial statements should be read in conjunction
with the consolidated financial statements, the related notes, and the report
of independent accountants included in the Company's Annual Report to
Shareholders for the year ended December 31, 1996. The year end consolidated
statement of financial condition data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the three and
nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for a full year.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 128,
"Earnings Per Share", which simplifies the present standards for computing
earnings per share ("EPS"). SFAS No. 128 replaces primary EPS with basic EPS
which excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. SFAS No.
128 replaces fully diluted EPS with diluted EPS which reflects the potential
dilution that would occur if securities or other contracts to issue common
stock were exercised. SFAS No. 128 is effective for the Company as of
December 31, 1997. The following presents EPS for the three and nine months
ended September 30, 1997 and 1996 if SFAS No. 128 had been in effect:
<TABLE>
<CAPTION>
Three Months Nine Months
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share....................... $ 0.18 $ (0.19) $ 0.72 $ 0.24
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share..................... $ 0.18 $ (0.19) $ 0.70 $ 0.24
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which consolidates the existing requirements to
disclose certain information about an entity's capital structure and is not
expected to change the Company's current capital structure disclosures. SFAS
No. 129 is effective for the Company for the year ending December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-
7
<PAGE>
purpose financial statements. The purpose of reporting comprehensive income
is to present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than investments
by owners and distributions to owners. The FASB believes that SFAS No. 130
should help investors, creditors and others in assessing a company's
activities and the timing and magnitude of its future cash flows. For the
Company, the primary difference between net income and comprehensive income
is the change in unrealized gains and losses on securities
available-for-sale. SFAS No. 130 is not expected to have a materially adverse
impact on the consolidated financial position of the Company and is effective
for the year ending December 31, 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes new standards
for public companies to report information about operating segments in annual
financial statements and also requires that those companies report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Management has
not yet determined the impact of SFAS No. 131 on the Company's future
disclosures. SFAS No. 131 is effective for the Company beginning January 1,
1998.
Reclassifications
Certain accounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation. Included in these accounts
are net reclassifications between operating and investing activities in the
statements of cash flows of $2.6 million, relating to loans held-for-sale and
trading securities.
2. Merger with Regions Financial Corporation
On September 23, 1997, PALFED, Inc. and Regions Financial Corporation
("Regions") entered into an Agreement and Plan of Merger ("Agreement")
pursuant to which PALFED will merge with and into Regions. Regions is a
multi-bank holding company located in Birmingham, Alabama, with total assets
of approximately $22 billion. Under the terms of the Agreement, each
outstanding share of PALFED common stock will be converted into 0.70 shares
of Regions common stock, subject to adjustment. The Agreement is subject to
PALFED shareholder approval, appropriate regulatory approvals and other
customary closing conditions. The transaction is intended to qualify as a
tax-free reorganization. The transaction will be accounted for as a pooling
of interests.
PALFED and a subsidiary of Regions are currently finalizing the terms of
mortgage loan sub-servicing agreements in anticipation of the merger between
these companies. Under this agreement, Regions will service approximately
$490 million in first mortgage loans which PALFED either owns or services for
others. The agreement is expected to provide for the nullification of this
arrangement in the event the merger is not consummated.
3. Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
---------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale
Investment securities................................................ $ 12,448 $ 12,361 $ 15,964 $ 15,768
Mortgage-backed securities........................................... 10,442 10,564 8,161 8,239
----------- --------- --------- ---------
$ 22,890 $ 22,925 $ 24,125 $ 24,007
----------- --------- --------- ---------
----------- --------- --------- ---------
Held-to-maturity
Investment securities................................................ $ 3,969 $ 3,969 $ 6,962 $ 6,947
Mortgage-backed securities........................................... 46,713 47,450 51,738 52,275
----------- --------- --------- ---------
$ 50,682 $ 51,419 $ 58,700 $ 59,222
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
8
<PAGE>
3. Loans Receivable
Loans receivable are summarized as follows at the indicated dates:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ ------------
<S> <C> <C>
(in thousands)
Loan collateralized by real estate:
Permanent residential mortgage..................................................... $ 230,685 $ 224,955
Construction....................................................................... 72,610 54,816
Second mortgage.................................................................... 55,197 56,022
Commercial......................................................................... 158,455 145,685
Loans collateralized by other property:
Consumer........................................................................... 32,529 34,903
Commercial......................................................................... 16,661 16,209
Loans collateralized by savings accounts............................................. 4,780 4,725
------------ ------------
570,917 537,315
Less:
Loans in process................................................................... (20,280) (16,263)
Unamortized yield adjustments...................................................... (2,658) (1,190)
Allowance for estimated losses..................................................... (7,267) (6,983)
------------ ------------
$ 540,712 $ 512,879
------------ ------------
------------ ------------
</TABLE>
Changes in the allowance for estimated loan losses are summarized as follows
for the quarters and nine months ended September 30:
<TABLE>
<CAPTION>
Quarters Nine Months
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period............................................... $ 7,215 $ 7,914 $ 6,983 $ 8,417
Provisions................................................................. 41 313 665 899
Charge-offs................................................................ (156) (521) (806) (1,867)
Recoveries................................................................. 167 92 425 349
--------- --------- --------- ---------
Balance, end of period..................................................... $ 7,267 $ 7,798 $ 7,267 $ 7,798
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
At September 30, 1997, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totalled approximately
$3.0 million, of which $190,000 related to loans with a corresponding
valuation allowance of $70,000. The impaired loans at September 30, 1997,
were measured for impairment using the fair value of the collateral as
substantially all such loans were collateral dependent. For the nine months
ended September 30, 1997, the average recorded investment in impaired loans
was approximately $4.6 million. The interest income recognized on impaired
loans during the nine months ended September 30, 1997 was $140,000. Impaired
loans are summarized as follows:
<TABLE>
<CAPTION>
September 30 december 31
1997 1996
------------- -------------
(in thousands)
<S> <C> <C>
Construction loans........................................ $ 155 $ 557
Commercial real estate loans.............................. 2,303 7,150
Residential mortgage...................................... 513 515
------ ------
$ 2,971 $ 8,222
------ ------
------ ------
</TABLE>
9
<PAGE>
4. Commitments and Contingencies
The Company has salary continuation and noncompete 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
estimated contingent liability under these agreements is approximately $4.1
million at September 30, 1997. Upon the effective date of the merger between
PALFED and Regions (as discussed in Note 2), the obligation under these
agreements will be fixed and payable to these officers.
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 $1.1 million. In 1993, the Company sold the
remaining lots and certain 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.
5. Financial Instruments With Off-Balance-Sheet Risk
The amounts of financial instruments with off-balance-sheet risk are as
follows at the dates indicated:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate loans:............................. $ 33,242 $ 32,908
------------ ------------
------------ ------------
Unused lines of credit:..................................... $ 39,137 $ 35,560
------------ ------------
------------ ------------
Letters of credit........................................... $ 1,083 $ 1,004
------------ ------------
------------ ------------
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On September 23, 1997, PALFED, Inc. and Regions Financial Corporation
("Regions") entered into an Agreement and Plan of Merger (the "Agreement")
pursuant to which PALFED will merge with and into Regions. Under the terms of
the Agreement, each outstanding share of PALFED common stock will be
converted into the right to receive 0.70 shares of Regions common stock,
subject to adjustment. The Agreement is subject to PALFED shareholder
approval, appropriate regulatory approvals and other customary closing
conditions. The transaction is intended to qualify as a pooling of interests
and is expected to close during the first quarter of 1998.
The Company's net earnings for the three months ended September 30, 1997 were
$941,000 or $0.18 per common share compared to a loss of $978,000 or $0.19
per common share in 1996. The net earnings for the nine months ended
September 30, 1997 were $3.7 million or $0.70 per common share compared to
$1.2 million or $0.24 per common share in 1996. Earnings for the 1997 periods
were reduced by $1.1 million (before tax) due to recognition of additional
compensation expense related to accelerated amortization of stock grants.
Results of operations for both the three and nine month periods in 1996 were
significantly affected by the special assessment of $3.3 million to
recapitalize the Savings Association Insurance Fund.
PALFED and a subsidiary of Regions are currently finalizing the terms of
mortgage loan sub-servicing agreements in anticipation of the merger between
these companies. Under this agreement, Regions will service approximately
$490 million in first mortgage loans which PALFED either owns or services for
others. The agreement is expected to provide for the nullification of this
arrangement in the event the merger is not consummated.
COMPARISON OF 1997 AND 1996 OPERATING RESULTS
Net Interest Income
Net interest income was $6.4 million for the quarter ended September 30,
1997, an increase of $669,000 or 11.7% compared to the quarter ended
September 30, 1996. For the nine months ended September 30, 1997, net
interest income increased by $2.6 million or 16.3% to $18.8 million compared
to the nine months ended September 30, 1996. Several balance sheet changes
contributed to the improvement. Although total assets remained virtually
unchanged, the loan portfolio grew by $25.9 million and deposits grew by
$33.3 million, mostly in certificates of deposit. Offsetting these increases
were decreases in investments, including Federal Home Loan Bank ("FHLB")
stock, cash, and FHLB advances. The net interest spread resulting from the
investments and advances (which were paid off) was very small, while the loan
and deposit growth produced both an increase in earning asset yield and a
decline in cost of funds. As a result, the net interest spread and the net
yield on average interest-earning assets improved for both the three and nine
month periods.
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 nine
months ended September 30, 1997 and 1996. 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.
11
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Average Yield/ Average Yield/
Balance Rate Balance Rate
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Assets:
Interest-bearing deposits............................................... $ 5,043 5.42% $ 3,482 5.17%
Loans receivable........................................................ 537,890 8.99 483,393 8.88
Mortgage-backed securities.............................................. 59,245 6.94 64,741 6.68
Total investments....................................................... 20,009 5.65 30,574 5.52
FHLB stock.............................................................. 3,658 7.25 10,884 7.20
---------- ----- ---------- -----
Total interest-earning assets........................................... $ 625,845 8.65% $ 593,074 8.43%
---------- ----- ---------- -----
---------- ----- ---------- -----
Liabilities:
Retail savings deposits................................................. $ 33,611 2.74% $ 32,103 2.58%
Retail time deposits.................................................... 402,400 5.75 372,286 5.82
Demand deposits......................................................... 121,562 1.98 104,621 1.72
FHLB advances........................................................... 46,290 5.62 68,590 6.04
---------- ----- ---------- -----
Total interest-bearing liabilities...................................... $ 603,863 4.82% $ 577,600 4.93%
---------- ----- ---------- -----
---------- ----- ---------- -----
Net interest spread............................................... 3.83% 3.50%
---------- ----- ---------- -----
---------- ----- ---------- -----
Net yield......................................................... 4.01% 3.64%
---------- ----- ---------- -----
---------- ----- ---------- -----
</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 net interest income during the
nine month periods indicated.
<TABLE>
<CAPTION>
September 1997 versus September 1996
Increase (Decrease)
--------------------------------------------
Rate/
Volume Rate Volume Total
--------- --------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Changes in:
Interest income:
Loans receivable........................................................... $ 3,615 $ 382 $ 43 $ 4,040
Mortgage-backed securities................................................. (275) 124 (11) (162)
Investments................................................................ (736) (84) 32 (788)
--------- --------- --- ---------
Total interest income....................................................... 2,604 422 64 3,090
--------- --------- --- ---------
Interest expense:
Deposits................................................................... 1,736 (114) (11) 1,611
Other borrowed money....................................................... (1,008) (218) 71 (1,155)
--------- --------- --- ---------
Total interest expense...................................................... 728 (332) 60 456
--------- --------- --- ---------
Net interest income (expense)................................................ $ 1,876 $ 754 $ 4 $ 2,634
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>
Noninterest Income
Noninterest income was $899,000 for the quarter ended September 30, 1997, a
decrease of $175,000 or 16.3% from the 1996 quarter. The decline was
primarily attributable to increased real estate operations losses which
resulted from an increase of $95,000 in provisions for estimated losses
related to real estate held for development and sale. Additionally, repairs
and maintenance on such properties increased by $55,000.
Checking fees continued to decline primarily due to decreased nonsufficient
funds charges related to a previously discontinued "no minimum balance"
product line. The number of such accounts continues to decrease, but this
decrease has been offset by an increase in a higher average balance checking
account.
The Company experienced gains of $237,000 on sales of investment and
mortgage-backed securities available-for-sale and loans held-for-sale during
the 1997 quarter compared to $177,000 for the 1996 quarter. For the
comparable nine month periods, gains totalled $576,000 for 1997 and $766,000
for 1996.
For the nine months ended September 30, 1997, noninterest income decreased by
$983,000 or 25.8% to $2.8 million from the 1996 period. For the comparable
nine month periods: losses from real estate operations increased by $440,000
due
12
<PAGE>
primarily to an increase in the provision for loss on foreclosed real estate,
and; checking transaction fees decreased $209,000 or 11.5% due to decreases
in fee generating accounts.
Noninterest Expenses
Noninterest expenses were $5.8 million for the quarter ended September 30,
1997 compared to $7.9 million for the comparable 1996 quarter. The 1997
quarter included additional compensation expense of $1.1 million related to
certain common stock grants. Upon the signing of the definitive merger
agreement with Regions, restrictions on 88,049 shares of restricted stock
lapsed. These shares were issued in February 1996 pursuant to the 1993
Restricted Stock Incentive Award Plan. The 1996 quarter included a special
assessment of $3.3 million to recapitalize the SAIF which was enacted by the
United States Congress on September 30, 1996.
Compensation and employee benefits also increased during the 1997 quarter due
to average merit salary increases of 4%, additional employees staffing new
offices and additional incentive compensation.
Other noninterest expenses decreased by 61% during the 1997 quarter. The 1996
quarter included an estimated loss of $145,000 on a commercial checking
account and $62,000 in goodwill and core deposit intangible amortization.
These remaining intangible assets were written off in December 1996.
For the nine months ended September 30, 1997, noninterest expense decreased
by $2.1 million from the 1996 period. The $2.1 million increase in
compensation and employee benefits in 1997 was offset by the $3.3 million
SAIF special assessment in 1996.
LENDING ACTIVITIES
During the quarter ended September 30, 1997, the Company originated $65.2
million in loans compared to $56.3 million for the quarter ended September
30, 1996. Year-to-date originations were $183.7 million in 1997 compared to
$173.9 million in 1996. Loans receivable were $540.7 million at September 30,
1997, compared to $512.9 million at December 31, 1996, an increase of 5.4%.
Residential mortgage loan originations were $25.0 million in the 1997 quarter
compared to $20.6 million for the quarter ended September 30, 1996.
Construction loan originations increased by 29.3% to $18.9 million in the
1997 quarter. Consumer loan originations increased by 34.7% to $8.9 million
for the 1997 quarter.
CREDIT QUALITY
During the quarter ended September 30, 1997, nonperforming assets and
restructured loans continued to decline. Additionally, charge-offs during the
quarter were $156,000 compared to $521,000 during the 1996 quarter and
recoveries were $167,000 during the 1997 quarter compared to $92,000 in 1996.
Consequently, the provision for estimated losses on loans was $41,000 for the
1997 quarter compared to $313,000 for the 1996 quarter. For the comparable
nine month periods, the provision for estimated loan losses decreased from
$899,000 in 1996 to $665,000 in 1997 while net charge-offs decreased from
$1.5 million in 1996 to $381,000 in 1997. The allowance for estimated loan
losses of $7.3 million resulted in a coverage ratio of 52.4% at September 30,
1997 compared to 29.6% at September 30, 1996.
Nonperforming assets (nonaccrual loans and foreclosed real estate ("REO"))
and restructured loans, net of specific allowances, decreased from $17.7
million or 2.7% of total assets at December 31, 1996 to $13.6 million or 2.0%
of total assets at September 30, 1997. The table below sets forth the amounts
and categories of Palmetto Federal's nonperforming assets and restructured
loans at the dates indicated.
13
<PAGE>
<TABLE>
<CAPTION>
Sept. 30 June 30 December 31 Sept. 30
1997 1997 1996 1996
--------- --------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans................................................... $ 3,412 $ 2,867 $ 3,971 $ 3,309
Foreclosed real estate............................................. 5,908 6,155 7,187 8,884
Restructured loans................................................. 4,296 5,065 6,533 10,532
--------- --------- ------------ ---------
$ 13,616 $ 14,087 $ 17,691 $ 22,725
--------- --------- ------------ ---------
--------- --------- ------------ ---------
General loan loss allowance as a percentage of the total........... 52.4% 50.1% 36.2% 29.6%
--------- --------- ------------ ---------
--------- --------- ------------ ---------
Total as a percentage of loans receivable, net..................... 2.5% 2.6% 3.4% 4.5%
--------- --------- ------------ ---------
--------- --------- ------------ ---------
Total as a percentage of total assets.............................. 2.0% 2.1% 2.7% 3.4%
--------- --------- ------------ ---------
--------- --------- ------------ ---------
</TABLE>
The quarterly increase in nonaccrual loans resulted primarily from
lines-of-credit totalling $375,000 to a local retailer and an increased level
of delinquent consumer loans. The decrease in foreclosed real estate resulted
primarily from sales of $763,000 offset by new foreclosures of $472,000. New
foreclosures consist primarily of single family houses, none exceeding
$275,000.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $13.6 million as well as its potential problem loans of
$6.8 million. The following table summarizes the Bank's criticized assets as
of the dates indicated:
<TABLE>
<CAPTION>
Sept. 30 June 30 December 31 Sept. 30
1997 1997 1996 1996
--------- --------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C>
Special mention.................................................... $ 14,627 $ 13,392 $ 13,278 $ 14,523
Substandard........................................................ 5,786 14,198 17,702 22,181
Doubtful........................................................... 364
Loss............................................................... 659 479 1,220 1,438
--------- --------- ------------ ---------
$ 21,072 $ 28,069 $ 32,564 $ 38,142
--------- --------- ------------ ---------
--------- --------- ------------ ---------
</TABLE>
REAL ESTATE DEVELOPMENT ACTIVITY
The purchaser of certain real estate at the Woodside Plantation project has
an option to acquire parcels of the remaining undeveloped land at Woodside
Plantation which option expires December 31, 1997. The Company is presently
negotiating terms for this purchaser to acquire all the remaining undeveloped
land. These terms may include but are not limited to a lower sales price than
included in the option agreement and providing financing for the Purchaser.
At this time the Company doesn't expect this sale to result in a loss to the
Company. There are no assurances the purchaser will exercise its option by
its expiration date.
LIQUIDITY
Palmetto Federal's principal sources of funds are deposits, loan repayments,
proceeds from sales and principal payments of investment and mortgage-backed
securities and loans, FHLB advances, other borrowings, and retained earnings.
The liquidity of Palmetto Federal's operations is measured by the ratio of
cash and short-term investments as defined by the Office of Thrift
Supervision ("OTS") regulations to the sum of savings and borrowings payable
in one year, less loans on savings. The Bank's average liquidity level for
September 1997 of 5.9% was in excess of the required amount of 5.0%.
REGULATORY MATTERS
At September 30, 1997,
14
<PAGE>
Palmetto Federal's regulatory capital was 6.6 % for both tangible and core
capital and 10.6% for risk-based capital, exceeding both the regulatory
minimum levels and the well capitalized standards under the Prompt Corrective
Action regulations adopted by the OTS under the FDIC Improvement Act of 1991.
The most recent notification from the OTS categorized the Bank as well
capitalized. The OTS completed its regular examination of Palmetto Federal
and PALFED during the third quarter.
RECENT ACCOUNTING AND REPORTING CHANGES
The FASB has issued SFAS No. 128, "Earnings Per Share", which simplifies the
present standards for computing earnings per share ("EPS"). SFAS No. 128
replaces primary EPS with basic EPS which excludes dilution and is computed
by dividing net income by the weighted average number of common shares
outstanding for the period. SFAS No. 128 also replaces fully diluted EPS with
diluted EPS which reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised. SFAS No.
128 is effective for the Company as of December 31, 1997.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", which consolidates the existing requirements to
disclose certain information about an entity's capital structure and is not
expected to change the Company's current capital structure disclosures. SFAS
No. 129 is effective for the Company for the year ending December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to present a measure of all changes in equity that result from
recognized transactions and other economic events of the period other than
investments by owners and distributions to owners. The FASB believes that
SFAS No. 130 should help investors, creditors and others in assessing a
company's activities and the timing and magnitude of its future cash flows.
For the Company, the primary difference between net income and comprehensive
income is the change in unrealized gains and losses on securities
available-for-sale. SFAS No. 130 is not expected to have a materially adverse
impact on the consolidated financial position of the Company and is effective
for the year ending December 31, 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes new standards
for public companies to report information about operating segments in annual
financial statements and also requires that those companies report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Management has
not yet determined the impact of SFAS No. 131 on the Company's future
disclosures. SFAS No. 131 is effective for the Company beginning January 1,
1998.
15
<PAGE>
PART II. Other Information
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 Statement regarding computation of per share data.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated August 26, 1997, regarding
changes made to the bylaws of PALFED, Inc. The Company also filed a report
dated September 23, 1997, announcing that PALFED, Inc. and Regions Financial
Corporation ("Regions") had entered into an Agreement and Plan of Merger
("Agreement") pursuant to which PALFED will merge with and into Regions.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALFED, Inc.
(Registrant)
Date: November 13, 1997 /s/ John C. Troutman
----------------------------
John C. Troutman
President and Chief
Executive Officer
Date: November 13, 1997 /s/ Darrell R. Rains
----------------------------
Darrell R. Rains
Executive Vice President
and Chief Financial
Officer
Date: November 13, 1997 /s/ Michael B. Smith
----------------------------
Michael B. Smith
Senior Vice President
and Controller
17
<PAGE>
Exhibit 11.1
PALFED, Inc.
Statement Regarding Computation of Per Share Data
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
--------------- ---------------
(in thousands)
<S> <C> <C>
1997
Weighted average shares outstanding........................... 5,208 5,198
Stock options outstanding..................................... 337 303
Shares assumed repurchased.................................... (180) (150)
----- -----
Average common and common equivalent shares (1)............... 5,365 5,351
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
--------------- ---------------
(in thousands)
<S> <C> <C>
1996
Weighted average shares outstanding........................... 5,136 5,126
Stock options outstanding..................................... 230 230
Shares assumed repurchased.................................... (135) (136)
----- -----
Average common and common equivalent shares (1)............... 5,231 5,220
----- -----
----- -----
</TABLE>
(1) Stock options outstanding less shares assumed repurchased are common stock
equivalents.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION FOR PALFED, INC. AND SUBSIDIARIES
AS OF SEPTEMBER 30, 1997 AND THE RELATED CONSOLIDATED DATE OF OPERATIONS FOR THE
THREE MONTHS THEN ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,855
<INT-BEARING-DEPOSITS> 6,613
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,925
<INVESTMENTS-CARRYING> 50,682
<INVESTMENTS-MARKET> 51,419
<LOANS> 557,306
<ALLOWANCE> 7,267
<TOTAL-ASSETS> 668,504
<DEPOSITS> 573,411
<SHORT-TERM> 27,500
<LIABILITIES-OTHER> 5,665
<LONG-TERM> 5,000
0
0
<COMMON> 56,928
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 668,504
<INTEREST-LOAN> 12,338
<INTEREST-INVEST> 1,319
<INTEREST-OTHER> 88
<INTEREST-TOTAL> 13,745
<INTEREST-DEPOSIT> 6,829
<INTEREST-EXPENSE> 7,341
<INTEREST-INCOME-NET> 6,404
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 237
<EXPENSE-OTHER> 5,792
<INCOME-PRETAX> 1,470
<INCOME-PRE-EXTRAORDINARY> 941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 941
<EPS-PRIMARY> $0.180
<EPS-DILUTED> $0.180
<YIELD-ACTUAL> 4.010
<LOANS-NON> 3,412
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,296
<LOANS-PROBLEM> 6,797
<ALLOWANCE-OPEN> 7,215
<CHARGE-OFFS> 156
<RECOVERIES> 167
<ALLOWANCE-CLOSE> 7,267
<ALLOWANCE-DOMESTIC> 7,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,138
</TABLE>
