<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
June 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
Aiken, South Carolina 29801
- -------------------------------- ------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (803) 642-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X NO
----- -----
There were 5,284,113 shares of Common Stock outstanding on June 30, 1997.
<PAGE>
PALFED, Inc.
Quarterly Report on Form 10-Q
For The Quarter Ended June 30, 1997
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
ITEM PAGE
- ---- -------
1. Financial Statements
Consolidated Statements of Financial
Condition as of June 30, 1997 and
December 31, 1996. 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1997 and 1996. 4
Consolidated Statements of Cash
Flows for the Six Months Ended
June 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
- ----
4. Submission of Matters To a Vote of
Security Holders 19
5. Other Information 19
6. (a) Exhibits 19
(b) Reports on Form 8-K 19
Exhibit 10.1 20
Exhibit 11.1 21
SIGNATURES 22
2
<PAGE>
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
PALFED, INC. JUNE 30 DECEMBER 31
AND SUBSIDIARIES 1997 1996
---------- ------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks................................................................. $ 12,748 $ 16,942
Interest-bearing deposits with other banks.............................................. 4,345 3,465
Investment and mortgage-backed securities:
Available-for-sale................................................................... 25,719 24,007
Held-to-maturity..................................................................... 52,453 58,700
Loans held-for-sale..................................................................... 7,227 11,241
Loans receivable, net................................................................... 534,056 512,879
Investment in real estate, net.......................................................... 11,709 13,501
Investment in Federal Home Loan Bank stock.............................................. 3,479 10,884
Premises and equipment, net............................................................. 5,943 5,958
Accrued interest receivable............................................................. 3,987 3,835
Other assets............................................................................ 3,197 3,845
---------- ------------
$ 664,863 $ 665,257
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing accounts...................................................... $ 33,523 $ 30,577
Savings and NOW accounts.......................................................... 122,759 121,432
Certificates of deposit........................................................... 400,494 384,678
Accrued interest payable.......................................................... 5,456 3,441
---------- ------------
Total deposits................................................................ 562,232 540,128
Federal Home Loan Bank advances......................................................... 42,600 68,400
Other liabilities....................................................................... 5,258 4,906
---------- ------------
Total liabilities....................................................................... 610,090 613,434
---------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; authorized 10,000,000 shares; 5,284,113 and 5,231,317
shares issued and outstanding, respectively......................................... 5,284 5,231
Additional paid-in capital............................................................ 28,343 28,115
Retained earnings..................................................................... 22,811 20,320
Unearned compensation................................................................. (1,048) (1,128)
Net unrealized loss on securities, net of tax benefit of $318 and $369, respectively.. (617) (715)
---------- ------------
Total stockholders' equity.......................................................... 54,773 51,823
---------- ------------
$ 664,863 $ 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 SIX MONTHS ENDED
-------------------- --------------------
PALFED, INC. JUNE 30 JUNE 30 JUNE 30 JUNE 30
AND SUBSIDIARIES 1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable.................................................... $ 12,184 $ 10,764 $ 23,911 $ 21,154
Mortgage-backed securities.......................................... 1,034 1,005 2,084 2,163
Investment securities............................................... 355 595 725 1,287
Other............................................................... 52 49 117 124
--------- --------- --------- ---------
Total interest income......................................... 13,625 12,413 26,837 24,728
--------- --------- --------- ---------
Interest expense:
Deposits............................................................ 6,594 6,038 12,981 12,040
Other borrowings.................................................... 642 970 1,433 2,230
--------- --------- --------- ---------
Total interest expense........................................ 7,236 7,008 14,414 14,270
--------- --------- --------- ---------
Net interest income................................................... 6,389 5,405 12,423 10,458
Provision for estimated losses on loans............................... 287 247 624 586
--------- --------- --------- ---------
Net interest income after provision for estimated loan losses......... 6,102 5,158 11,799 9,872
Noninterest income:
Checking transaction fees........................................... 523 597 1,075 1,201
Financial services fees............................................. 121 220 370 455
Late charge and other fees.......................................... 109 121 253 276
Net trading account gains and losses................................ 89 (15) 208 132
Gain on sales of available-for-sale securities...................... 15 60 15 174
Gain on sales of loans.............................................. 63 49 116 283
Real estate operations.............................................. (328) (21) (480) (175)
Other............................................................... 213 193 370 389
--------- --------- --------- ---------
Total noninterest income...................................... 805 1,204 1,927 2,735
--------- --------- --------- ---------
Noninterest expenses:
Compensation and employee benefits.................................. 2,672 2,456 5,460 4,980
Occupancy and equipment............................................. 785 711 1,585 1,464
Federal insurance premiums and assessments.......................... 162 353 319 707
Professional and outside service fees............................... 388 418 733 700
Data processing..................................................... 229 251 434 418
Advertising and public relations.................................... 212 225 361 423
Other............................................................... 157 222 368 490
--------- --------- --------- ---------
Total noninterest expenses.................................... 4,605 4,636 9,260 9,182
--------- --------- --------- ---------
Income before provision for income taxes.............................. 2,302 1,726 4,466 3,425
Provision for income taxes............................................ 845 595 1,659 1,202
--------- --------- --------- ---------
Net income............................................................ $ 1,457 $ 1,131 $ 2,807 $ 2,223
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share.................................................... $ 0.27 $ 0.22 $ 0.53 $ 0.43
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends per share................................................... $ 0.03 $ 0.02 $ 0.06 $ 0.04
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
PALFED, INC. --------------------
AND SUBSIDIARIES 1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Operating Activities:
Cash flows from operating activities :
Net income.............................................................................. $ 2,807 $ 2,223
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization......................................................... 378 402
Provision for estimated losses on loans and real estate............................... 849 655
Other gains, net...................................................................... (169) (603)
Proceeds from sales of loans held-for-sale............................................ 6,115 12,118
Originations of loans held-for-sale................................................... (18,816) (24,348)
Proceeds from sales of trading account securities..................................... 24,016 9,542
Gain on sale of available-for-sale securities......................................... (15) (174)
Changes in:
Accrued interest receivable, net.................................................. (152) 252
Accrued interest payable.......................................................... 2,015 2,860
Other assets...................................................................... 598 944
Other liabilities (excluding deferred income)..................................... (434) (2,265)
Other, net............................................................................ 114 702
--------- ---------
Net cash provided by operating activities............................................. 17,306 2,308
--------- ---------
Investing activities:
Cash flows from investing activities:
Proceeds from sale of FHLB stock........................................................ 7,405
Proceeds from sales of available-for-sale securities.................................... 2,708 19,001
Principal collections on available-for-sale securities.................................. 736 11,992
Purchases of available-for-sale securities.............................................. (5,131) (2,572)
Net increase in loans receivable........................................................ (28,543) (28,427)
Purchases of held-to-maturity securities................................................ (4,068)
Principal collections and maturities of held-to-maturity securities..................... 6,350 5,732
Proceeds from sales of foreclosed real estate........................................... 1,182 1,857
Purchase of premises and equipment...................................................... (449) (921)
Other, net.............................................................................. 13 1,024
--------- ---------
Net cash provided by investing activities............................................. (15,729) 3,618
--------- ---------
</TABLE>
5
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS
ENDED JUNE 30,
PALFED, INC. 1997 1996
AND SUBSIDIARIES -------- --------
(IN THOUSANDS)
Financing activities:
Cash flows from financing activities :
Net increase in deposit accounts.................... 20,090 18,062
Proceeds from FHLB advances......................... 56,150 50,800
Repayments of FHLB advances......................... (81,950) (79,900)
Payment of cash dividend............................ (317) (209)
Other, net.......................................... 1,136 427
------- -------
Net cash used by financing activities................. (4,891) (10,820)
------- -------
Net decrease in cash and cash equivalents............. (3,314) (4,894)
Cash and cash equivalents, beginning of period....... 20,407 21,325
------- -------
Cash and cash equivalents, end of period.............. $ 17,093 $16,431
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest.......................................... $ 12,400 $10,345
Income taxes...................................... 1,200 797
Supplemental schedule of noncash investing and
financing activities:
Securitizations of mortgage loans.................. $ 23,808 $ 9,411
Conversion of adjustable rate and construction
loans receivable to 30 year fixed rate mortgage
loans held-for-sale.............................. 6,955 6,125
Real estate acquired through foreclosure........... 1,282 2,677
Financed sales of foreclosed real estate........... 1,498 1,042
Issuance of common stock as compensation........... 36 81
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
six months ended June 30, 1997 are not necessarily indicative of the results
to be expected for a full year.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended
by SFAS No. 127, "Deferral of Certain Provisions of FASB Statement No. 125".
SFAS No. 125 establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and also
provides consistent standards for distinguishing financial asset sales from
secured borrowings. Finally, SFAS No. 125 amended certain other standards
related to extinguishments of debts, transfers of receivables with recourse,
accounting for certain investments, mortgage servicing rights and mortgage
banking activities. The adoption of SFAS No. 125 did not have a material
impact on the financial condition or results of operations of the Company.
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 six months
ended June 30, 1997 and 1996 if SFAS No. 128 had been in
7
<PAGE>
effect:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
1997 1996 1997 1996
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share....................................................... $ 0.28 $ 0.22 $ 0.54 $ 0.43
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share..................................................... $ 0.27 $ 0.22 $ 0.53 $ 0.43
--------- --------- --------- ---------
--------- --------- --------- ---------
</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-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 $2.4 million, relating to loans held-for-sale and
trading securities.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- ----------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale
Investment securities................................................ $ 16,911 $ 16,735 $ 15,964 $ 15,768
Mortgage-backed securities........................................... 8,929 8,984 8,161 8,239
--------- --------- ----------- ---------
$ 25,840 $ 25,719 $ 24,125 $ 24,007
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Held-to-maturity
Investment securities................................................ $ 3,966 $ 3,919 $ 6,962 $ 6,947
Mortgage-backed securities........................................... 48,487 49,029 51,738 52,275
--------- --------- ----------- ---------
$ 52,453 $ 52,948 $ 58,700 $ 59,222
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
3. LOANS RECEIVABLE
Loans receivable are summarized as follows at the indicated dates:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Loans collateralized by real estate:
Permanent residential mortgage........................................................ $ 230,801 $ 224,955
Construction.......................................................................... 64,520 54,816
Second mortgage....................................................................... 55,025 56,022
Commercial............................................................................ 155,006 145,685
Loans collateralized by other property:
Consumer.............................................................................. 33,489 34,903
Commercial............................................................................ 17,522 16,209
Loans collateralized by savings accounts.............................................. 4,504 4,725
---------- ------------
560,867 537,315
Less:
Loans in process...................................................................... (18,393) (16,263)
Unamortized yield adjustments......................................................... (1,203) (1,190)
Allowance for estimated losses........................................................ (7,215) (6,983)
---------- ------------
$ 534,056 $ 512,879
---------- ------------
---------- ------------
</TABLE>
Changes in the allowance for estimated loan losses are summarized as follows
for the quarters and six months ended June 30:
<TABLE>
<CAPTION>
QUARTERS SIX MONTHS
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period............................................... $ 6,961 $ 8,195 $ 6,983 $ 8,417
Provisions................................................................. 287 247 624 586
Charge-offs................................................................ (105) (613) (650) (1,346)
Recoveries................................................................. 72 85 258 257
--------- --------- --------- ---------
Balance, end of period.................................................... $ 7,215 $ 7,914 $ 7,215 $ 7,914
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
At June 30, 1997, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totalled approximately $2.9
million, of which $190,000 related to loans with a corresponding valuation
allowance of $70,000. The
9
<PAGE>
impaired loans at June 30, 1997, were measured for impairment using the fair
value of the collateral as substantially all such loans were collateral
dependent. For the six months ended June 30, 1997, the average recorded
investment in impaired loans was approximately $5.1 million. The interest
income recognized on impaired loans during the six months ended June 30, 1997
was $89,000. Impaired loans are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Construction loans........................................................................ $ 402 $ 557
Commercial real estate loans.............................................................. 2,013 7,150
Residential mortgage...................................................................... 514 515
--------- ------
$ 2,929 $ 8,222
--------- ------
--------- ------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company has salary continuation agreements with nine officers which grant
these officers the right to receive up to three times their average annual
compensation for the five years preceding a change of control of the Company
and a change of duties or salary for such officers. The maximum contingent
liability for salary continuation under these agreements is approximately
$2.9 million at June 30, 1997.
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 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>
JUNE 30 DECEMBER 31
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans:....................................................... $ 16,705 $ 32,908
--------- ----------
--------- ----------
Unused lines of credit:............................................................... $ 37,041 $ 35,560
--------- ----------
--------- ----------
Letters of credit..................................................................... $ 611 $ 1,004
--------- ------------
--------- ------------
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net earnings for the three months ended June 30, 1997 were $1.5
million or $0.27 per common share compared to $1.1 million or $0.22 per
common share in 1996, a 29% increase. The net earnings for the six months
ended June 30, 1997 were $2.8 million or $0.53 per common share compared to
$2.2 million or $0.43 per common share in 1996, an increase of 26%. The
increases in earnings for both the three and six month periods resulted
primarily from increases in net interest income resulting from a wider net
interest spread and increased levels of interest-earning assets.
In July, the Company announced that Palmetto Federal Savings Bank will open
its fourth banking center in Charleston, South Carolina, in the WalMart
center on Rivers Avenue in North Charleston. This will be the Bank's 23rd
banking center.
COMPARISON OF 1997 AND 1996 OPERATING RESULTS
NET INTEREST INCOME
Net interest income was $6.4 million for the quarter ended June 30, 1997, an
increase of $984,000 or 18.2% compared to the quarter ended June 30, 1996.
For the six months ended June 30, 1997, net interest income increased by $2.0
million or 18.8% to $12.4 million compared to the six months ended June 30,
1996. Several balance sheet changes contributed to the improvement. Although
total assets remained virtually unchanged, the loan portfolio grew by $21.2
million and deposits grew by $22.1 million, mostly in certificates of
deposit. Offsetting these increases were decreases in investments, including
Federal Home Loan Bank ("FHLB") stock which shrunk $11.9 million, cash
which shrunk $4.2 million, and FHLB advances which declined $25.8 million.
The net interest spread resulting from the investments and advances (which were
paid off) was very thin, 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 six 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
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.
11
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----------------------- ----------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE RATE
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Interest-bearing deposits............................................... $ 4,352 5.39% $ 3,433 5.23%
Loans receivable........................................................ 533,894 8.96 476,663 8.88
Mortgage-backed securities.............................................. 60,041 6.94 65,019 6.65
Total investments....................................................... 20,950 5.64 32,512 5.50
FHLB stock.............................................................. 3,748 7.25 10,884 7.20
---------- ----- ---------- -----
Total interest-earning assets........................................... $ 622,985 8.62% $ 588,511 8.40%
---------- ----- ---------- -----
---------- ----- ---------- -----
Liabilities:
Retail savings deposits................................................. $ 34,235 2.75% $ 31,885 2.55%
Retail time deposits.................................................... 398,228 5.76 369,116 5.87
Demand deposits......................................................... 118,773 1.94 102,722 1.68
FHLB advances........................................................... 51,700 5.59 70,357 6.38
---------- ----- ---------- -----
Total interest-bearing liabilities...................................... $ 602,936 4.82% $ 574,080 5.00%
---------- ----- ---------- -----
---------- ----- ---------- -----
Net interest spread................................................ 3.80% 3.40%
----- -----
----- -----
Net yield.......................................................... 3.99% 3.55%
----- -----
----- -----
</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
periods indicated.
<TABLE>
<CAPTION>
JUNE 1997 VERSUS JUNE 1996
INCREASE (DECREASE)
--------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
--------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Changes in:
Interest income:
Loans receivable......................................................... $ 2,551 $ 184 $ 22 $ 2,757
Mortgage-backed securities............................................... (166) 95 (8) (79)
Investments.............................................................. (534) (54) 19 (569)
--------- --------- --------- ---------
Total interest income..................................................... 1,851 225 33 2,109
--------- --------- --------- ---------
Interest expense:
Deposits................................................................. 1,109 (154) (14) 941
Other borrowed money..................................................... (592) (279) 74 (797)
--------- --------- --------- ---------
Total interest expense.................................................... 517 (433) 60 144
--------- --------- --------- ---------
Net interest income (expense)............................................... $ 1,334 $ 658 $ (27) $ 1,965
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NONINTEREST INCOME
Noninterest income was $805,000 for the quarter ended June 30, 1997, a
decrease of $399,000 or 33.1% from the 1996 quarter. The decline was primarily
attributable to increased real estate operations losses which resulted from an
increase of $211,000 in provisions for estimated losses related to unsold
property acquired through foreclosure. Additionally, repairs, maintenance,
insurance and tax costs on such properties increased by $95,000.
Financial services fees decreased by 45.0% due to lower sales and checking
transaction fees decreased by 12.4% during the 1997 quarter. 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 increases in higher average balance checking accounts.
12
<PAGE>
The Company experienced gains of $167,000 on sales of investment and
mortgage-backed securities available-for-sale and loans held-for-sale during
the 1997 quarter compared to $94,000 for the 1996 quarter. The increase
resulted from an increase of 39.2% in the volume of loans and securities
sold. For the comparable six month periods, gains totalled $339,000 for 1997
and $589,000 for 1996.
For the six months ended June 30, 1997, noninterest income decreased by
$808,000 or 29.5% to $1.9 million from the 1996 period. For the comparable
six month periods: losses from real estate operations increased by $305,000
due primarily to an increase in the provision for loss on foreclosed real
estate, and; checking transaction fees decreased $126,000 or 10.5%.
NONINTEREST EXPENSES
Noninterest expenses were $4.6 million for the quarters ended June 30, 1997
and 1996. For the six months ended June 30, 1997, noninterest expenses
increased by $78,000 to $9.3 million. The Company has experienced increased
costs associated with the expansion of its branch network. Full-time
equivalent employees increased from 280 at June 30, 1996 to 304 at June 30,
1997. In addition, occupancy and equipment expense increased over the
comparable quarters. These increases were offset by decreases in FDIC deposit
insurance premiums and amortization of intangible assets.
The primary components of compensation and employee benefits are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and commissions................................................... $ 2,293 $ 2,138 $ 4,575 $ 4,228
Incentive programs......................................................... 265 219 520 473
Medical and retirement..................................................... 239 272 486 485
Payroll and other taxes.................................................... 171 157 406 364
Other expenses............................................................. 28 26 56 49
--------- --------- --------- ---------
2,996 2,812 6,043 5,599
Capitalized costs of loan originations..................................... (323) (356) (583) (619)
--------- --------- --------- ---------
$ 2,673 $ 2,456 $ 5,460 $ 4,980
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Salaries and commissions increased by 7.2% during the quarter ended June 30,
1997, due to average merit wage increases and additional employees at the new
Palmetto Federal offices. Medical and retirement costs decreased due to
decreased medical claims under the Company's self-funded group insurance plan.
Federal insurance premiums and assessments declined by $191,000 in
13
<PAGE>
the 1997 quarter, despite the increase in insurable deposits, due to the
decreased FDIC premiums following the September 1996 Savings Association
Insurance Fund recapitalization. Other noninterest expenses during the 1996
quarter included $62,000 in goodwill and core deposit intangible
amortization. These remaining intangible assets were written off in December
1996.
For the six months ended June 30, 1997, noninterest expense increased by
$78,000 from the 1996 period, despite a $480,000 increase in compensation and
employee benefits. This increase was offset by a decrease of $388,000 in
federal deposit insurance premiums, a decrease of $62,000 in advertising and
public relations and a decrease of $122,000 in other expenses due to the
aforementioned intangible asset write-off in December 1996.
LENDING ACTIVITIES
During the quarter ended June 30, 1997, the Company originated $65.7 million
in loans compared to $63.2 million for the quarter ended June 30, 1996.
Year-to-date originations were $118.4 million in 1997 compared to $117.6
million in 1996. Loans receivable were $534.1 million at June 30, 1997,
compared to $512.9 million at December 31, 1996, an increase of 4.1%.
Residential mortgage loan originations were $40.0 million in the 1997
quarter compared to $43.9 million for the quarter ended June 31, 1996. The
decline resulted principally from an increase in quoted interest rates for
mortgage loans which were higher in 1997 than in the second quarter of 1996. The
lower rates in 1996 resulted in $8.2 million of loan refinancings compared to
$4.4 million in 1997.
Commercial real estate loan originations in 1997 continued to exceed 1996
levels. During the 1997 quarter, $11.0 million of these loans were originated
compared to $5.5 million in the second quarter of 1996. The 1997 originations
included 3 loans of $1.0 million or more, compared to 2 loans of this size
in 1996. Consumer loan originations increased 56% to $9.7 million for the 1997
quarter. Originations of second mortgage loans declined 72% to $1.5 million for
the 1997 quarter. During 1996, the Bank promoted the new CashLine II product at
an introductory interest rate resulting in origination levels which exceeded
both 1995 and 1997 levels.
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'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
14
<PAGE>
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.
In January 1997, the FHLB of Atlanta redeemed all stock held by member
institutions in excess of their minimum required amount. Palmetto Federal used
these funds, approximately $7.0 million, along with increased retail deposits to
reduce FHLB advances by $25.8 million. This reduction in FHLB advances
contributed to the reduction in the cost of funds for the 1997 period.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
The provision for estimated losses on loans was $287,000 for the quarter
ended June 30, 1997, compared to $247,000 for the 1996 quarter. Net charge-offs
for the 1997 quarter were $33,000 compared to $528,000 for the 1996 quarter. For
the comparable six month periods, the provision for estimated loan losses
increased from $586,000 in 1996 to $624,000 in 1997 while net charge-offs
decreased from $1.1 million in 1996 to $392,000 in 1997.
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 $14.1 million or 2.1% of total
assets at June 30, 1997. The table below sets forth the amounts and categories
of Palmetto Federal's nonperforming assets and restructured loans at the dates
indicated.
<TABLE>
<CAPTION>
JUNE 30 MARCH 31 DECEMBER 31 JUNE 30
1997 1997 1996 1996
--------- ----------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans.................................................. $ 2,867 $ 3,308 $ 3,971 $ 5,342
Foreclosed real estate............................................ 6,155 7,006 7,187 8,310
Restructured loans................................................ 5,065 6,211 6,533 10,409
--------- ----------- ------------ ---------
$ 14,087 $ 16,525 $ 17,691 $ 24,061
--------- ----------- ------------ ---------
--------- ----------- ------------ ---------
General loan loss allowance as a percentage of the total.......... 50.1% 40.9% 36.2% 28.4%
--------- ----------- ------------ ---------
--------- ----------- ------------ ---------
Total as a percentage of loans receivable, net.................... 2.6% 3.1% 3.4% 4.9%
--------- ----------- ------------ ---------
--------- ----------- ------------ ---------
Total as a percentage of total assets............................. 2.1% 2.5% 2.7% 3.8%
--------- ----------- ------------ ---------
--------- ----------- ------------ ---------
</TABLE>
Although the allowance for estimated loan losses of $7.2 million at June 30,
1997 had declined from the June 30, 1996 level of $7.9 million, the coverage
ratio in the table above increased from 28.4% at June 30, 1996 to 50.1% at June
30, 1997.
15
<PAGE>
Changes in the components of nonperforming assets and restructured loans
during the three months ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
NONACCRUAL RESTRUCTURED
LOANS REO LOANS TOTAL
----------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
March 31, 1997.................................................... $ 3,308 $ 7,006 $ 6,211 $ 16,525
Performing loans which became nonperforming....................... 1,206 243 1,449
Upgrades due to performance....................................... (925) (1,171) (2,096)
Sales............................................................. (1,137) (1,137)
Net principal collections......................................... (380) (24) (404)
Charge-offs, provisions and write downs........................... (1) (248) (249)
Net changes in allowances......................................... (50) 49 (1)
Nonaccrual loans which became REO................................. (291) 291 0
----------- --------- --------- ---------
June 30, 1997..................................................... $ 2,867 $ 6,155 $ 5,065 $ 14,087
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
The $1.2 million of new nonaccrual loans is comprised of several loans, none
of which individually exceed $300,000. The nonaccrual loans which became REO
consists primarily of several loans collateralized by single family houses, none
exceeding $150,000. Although total nonaccrual loans have decreased 27.8% since
December 31, 1996, the consumer loan segment of the total has increased by
approximately 93% to $726,000. This increase parallels trends seen throughout
the banking industry and management continues to analyze this trend.
The Company sold $1.1 million of foreclosed real estate which consisted
of one commercial parcel of 13.9 acres in Aiken, South Carolina, adjacent to
the Woodside Plantation project, with a carrying value of $417,000, and
several other properties, none of which had a carrying value greater than
$135,000. Palmeto Federal did not provide financing for the sale of the
commercial parcel.
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 are not included in
the above table of nonperforming assets and restructured loans. These loans,
primarily commercial real estate loans, totalled approximately $14.0 million and
$14.5 million at June 30, 1997 and December 31, 1996, respectively.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $14.1 million as well as its potential problem loans of
$14.0 million. The following table summarizes the Bank's criticized assets as of
the dates indicated:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31 DECEMBER 31 JUNE 30
1997 1997 1996 1996
--------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Special mention................................................... $ 13,392 $ 14,813 $ 13,278 $ 15,173
Substandard....................................................... 14,198 15,113 17,702 23,912
Doubtful.......................................................... 364 364 29
Loss.............................................................. 479 913 1,220 1,331
--------- ----------- ------------ ---------
$ 28,069 $ 31,203 $ 32,564 $ 40,445
--------- ----------- ------------ ---------
--------- ----------- ------------ ---------
</TABLE>
16
<PAGE>
REAL ESTATE DEVELOPMENT ACTIVITY
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners, consisting
of real estate held for development, acquisition and development loans,
foreclosed real estate and a 50% interest in a partnership. During the six
months ended June 30, 1997, the total carrying value of these components
decreased from $12.5 million to $11.7 million, primarily due to loan payments
resulting from lot sales and the sale of houses on the lots received in the
1995 restructuring.
LIQUIDITY
Palmetto Federal's principal sources of funds are deposits, loan repayments,
proceeds from sales and principal payments of invest- ment and mortgage-backed
securities and loans, FHLB advances, other borrowings, and retained earnings.
The liquidity of Palmetto Federal's operations is measured by the ratio of cash
and short-term investments as defined by the 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 June 1997 of 5.9%
was in excess of the required amount of 5.0%.
REGULATORY MATTERS
Under current OTS regulations, savings associations must satisfy three
minimum capital requirements: tangible, core and risk-based. At June 30, 1997,
Palmetto Federal's regulatory capital was 7.1% for both tangible and core
capital and 11.1% 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.
As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized. There are no conditions or
events since that notification that management believes have changed the
Bank's category. OTS is scheduled to begin their regular examination of
Palmetto Federal and PALFED, Inc. on September 1, 1997.
RECENT ACCOUNTING AND REPORTING CHANGES
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
as amended by SFAS No. 127, "Deferral of Certain Provisions of FASB Statement
No. 125". SFAS No. 125 establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and also provides consistent standards for distinguishing financial asset sales
from secured borrowings. Finally, SFAS No. 125 amended certain other standards
related to extinguishments of debts, transfers of receivables with recourse,
accounting for certain investments, mortgage servicing rights and mortgage
banking activities. The adoption of SFAS No. 125 did not have a material impact
on the financial condition or results of operations of the Company.
17
<PAGE>
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.
18
<PAGE>
PART II. Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the 1997 PALFED Annual Meeting of Shareholders held on April
22, 1997, were previously reported in the Form 10-Q for the quarter ended March
31, 1997.
ITEM 5. OTHER INFORMATION
(a) Pursuant to the Amended and Restated Directors Stock Plan, on April 23,
1997, PALFED granted an award for 1,000 restricted shares of common
stock to Edwin S. Pearlstine, Jr., a newly elected director. The
restricted shares vest on April 23, 1998 and are contingent upon and
subject to Mr. Pearlstine's continued directorship.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Form of PALFED, Inc./Palmetto Federal Executive Salary
Continuation Agreement between PALFED, Inc./Palmetto Federal
and certain officers, dated as of May 1, 1997.
Exhibit 11.1 Statement regarding computation of per share data.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALFED, INC.
--------------
(REGISTRANT)
DATE: AUGUST 12, 1997 /S/ JOHN C. TROUTMAN
--------------- ---------------------
JOHN C. TROUTMAN
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
DATE: AUGUST 12, 1997 /S/ DARRELL R. RAINS
--------------- ---------------------
DARRELL R. RAINS
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL
OFFICER
DATE: AUGUST 12, 1997 /S/ MICHAEL B. SMITH
--------------- ---------------------
MICHAEL B. SMITH
SENIOR VICE PRESIDENT
AND CONTROLLER
20
<PAGE>
Form of PALFED, Inc./Palmetto Federal
Salary Continuation and Noncompetition Agreement
(Amended and Restated Effective as of May 1, 1997)
<PAGE>
PALFED/PALMETTO FEDERAL
SALARY CONTINUATION AND NONCOMPETITION AGREEMENT
THIS IS A SALARY CONTINUATION AND NONCOMPETITION AGREEMENT (this
"Agreement") effective as of May 1, 1997, by and among PALFED, Inc., a South
Carolina corporation (the "Company"), Palmetto Federal Savings Bank of South
Carolina, a wholly-owned subsidiary of the Company ("Palmetto Federal" or the
"Bank"), and ___________________ (the "Officer").
Background Statement
The Company considers the establishment and maintenance of a sound and
effective group of management personnel for the Company and its subsidiaries to
be essential to protecting and enhancing the best interests of the Company and
its shareholders. In this connection, the Company recognizes that, as is the
case with many publicly-held corporations, the possibility of a change in
control of the Company may exist and that such possibility, and the uncertainty
and concerns which it may raise among management personnel, may result in the
departure or distraction of management personnel to the detriment of the Company
and its shareholders. Accordingly, the Company's and the Bank's Boards of
Directors have determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of key management members
of the Company and its subsidiaries, including the Officer, to their assigned
duties without distraction in the face of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company, and to assure fair treatment of management of the Company and the Bank
in the event of a change in control.
The Company further considers that certain restrictions on the
Officer's ability to solicit employees and customers of the Company and its
subsidiaries (including the Bank) following the Officer's termination of
employment with the Company are reasonable, appropriate and advisable, would be
beneficial to the Company and the Bank, could increase the potential franchise
value of the Company to a future acquiror of the Company and are in the best
interests of the Company and its shareholders.
In connection therewith and to induce the Officer to remain in his
present employment with the Bank and the Company and possible future employment
with other subsidiaries of the Company, to retain the Officer's services during
any actual or threatened change in control, and in consideration of the
Officer's agreement to continue such employment and to certain restrictions on
the Officer's activities following termination of employment, this Agreement
sets forth the severance and other benefits which the Company and the Bank agree
shall be provided to the Officer in the event of a "Change in Control" as
defined in Section 3 and a termination of employment or a "Change in Duties or
Salary" of the Officer as defined in Section 4 .
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 2
Agreement
1. Term. This Agreement shall commence as of May 1, 1997 and shall
continue for a three (3) year term unless extended as provided herein. On each
monthly anniversary date beginning with the first month following the date of
this Agreement, the term of this Agreement shall automatically be extended for
one additional month, unless prior to any monthly anniversary date, the Company
shall give written notice to the Officer to fix the term of this Agreement to a
definite three (3) year term from the date of such notice and no further
automatic monthly extensions shall occur. This Agreement shall not be extended
beyond the first month on which the Officer attains age sixty-five (65).
Notwithstanding any notice by the Company not to extend this Agreement or the
expiration of the term of this Agreement, this Agreement shall continue in
effect for a period of twenty-four (24) months beyond the expiration of this
Agreement if a Change in Control of the Company or the Bank shall have occurred
during the term of this Agreement. If the Officer voluntarily terminates his
employment with the Company or the Bank prior to a Change in Control, then this
Agreement shall terminate.
2. Payments. No salary continuation payments or noncompetition payments
(as hereinafter defined) shall be paid to or provided for the Officer pursuant
to this Agreement unless the following shall have occurred during the term of
this Agreement: (a) a "Change in Control" of the Company or the Bank, and (b) a
termination of employment or a "Change in Duties or Salary" of the Officer. Any
payments made to the Officer pursuant to this Agreement are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
3. Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean a change in control of either the Company or the Bank, or
the execution of a definitive agreement or the acceptance of an offer by the
Company contemplating a change in control of either the Company or the Bank
(other than the acquisition of the Bank by the Company), (i) within the meaning
of Office of Thrift Supervision ("OTS") Regulations Part 574, or any successor
regulations, or (ii) of a nature that would be required to be reported in
response to Item 6(e) of Schedule l4A of Regulation l4A promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that,
without limitation, a Change in Control shall be deemed to have occurred if any
of the following events occur: (a) any person, entity or group of persons (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act) together
with any affiliates, is or becomes the "beneficial owner" (as defined in Rule
l3d-3 under the Exchange Act), directly or indirectly, of securities of the
Company or the Bank representing 15 percent or more of the combined voting power
of the Company's or the Bank's then outstanding voting securities; or (b) during
the term of this Agreement as a result of a tender or exchange offer, proxy
contest, merger or consolidation, or as a result of any combination of the
foregoing,
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 3
individuals who at the beginning of any two-year period constitute the Board of
Directors of the Company (the "Incumbent Directors") cease for any reason during
such two-year period to constitute at least two-thirds of the members of the
Board of Directors, unless the election or the nomination for election by the
Company's shareholders of each new director is approved by vote of at least
two-thirds of the Incumbent Directors then still in office other than in
connection with an actual or threatened proxy contest; or (c) the shareholders
of the Company approve a plan of complete liquidation or winding-up of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of its assets; or (d) any other event not specified above
which the Company's Board of Directors determines in its sole discretion should
constitute a Change in Control.
4. Change in Duties or Salary. For purposes of this Agreement, "Change
in Duties or Salary" of the Officer shall mean any one of the following: (a) a
change in the nature or scope of the duties, authority, supervision, status,
title or responsibilities of the Officer, which change results in the diminution
in any respect of the Officer's then current duties, authority, status or
responsibilities to those duties, authority, status and responsibilities of the
Officer immediately prior to the time such Change in Control occurs; (b) a
reduction in the overall level of the Officer's current compensation and
benefits, including bonuses, or exclusion from participation in the Company's or
the Bank's employee benefit plans, or the Company's or the Bank's failure to
increase (within 12 months of the Officer's last increase in base salary) the
Officer's base salary in an amount which at least equals, on a percentage basis,
the average percentage increase in base salary for all executives entitled to
participate in the Bank's or the Company's executive incentive plans for which
the Officer was eligible during the preceding 12 months; (c) a change in the
place of the Officer assignment of the Officer from Aiken, South Carolina, to
any other city or geographical location that is located further than 25 miles
from the principal office of the Company in Aiken, South Carolina; (d) any
purported termination of the employment of the Officer by the Company or the
Bank which is not effected in accordance with this Agreement; or (e) the failure
of the Company to comply with and satisfy Section 7 of this Agreement.
Notwithstanding any provision of this Agreement to the contrary, a Change in
Duties or Salary shall be deemed to have occurred in the event of: a merger or
combination of the Company with any other corporation or entity (regardless of
which entity is the survivor) or the acquisition by any other corporation or
entity of more than eighty percent (80%) of the outstanding voting securities of
the Bank or the Company; except that the preceding provision shall not apply in
the event of a merger, combination or acquisition of voting securities of the
Company or the Bank pursuant to which, immediately following such transaction,
the Company's voting securities outstanding immediately prior to such
transaction continue to represent (either by remaining outstanding or being
converted into voting securities of the surviving entity) at least fifty-one
percent (51%) of the combined voting power of the voting securities of the
Company or surviving entity.
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 4
5. Salary Continuation Payment. In the event that: (i) a Change in
Control and Change in Duties or Salary occur during the term of this Agreement,
but before the Officer reaches the age of 65, or (ii) the Officer's employment
is terminated except for cause at any time within twenty-four (24) months
following a Change in Control, but before the Officer reaches the age of 65,
then the Officer shall be entitled to receive, in addition to any other benefits
payable to the Officer under any other agreements or arrangements (or any other
provisions of this Agreement), an aggregate amount equal to two (2) times the
Officer's average annual taxable compensation from the Company and the Bank (and
their affiliates determined pursuant to Section 280G(d)(5) of the Internal
Revenue Code of 1986, as amended (the "Code")) for the most recent five taxable
years ending before the Change in Duties or Salary or the termination of the
Officer's employment (or for the period during which the Employee was employed
by the Bank if the Officer has been employed by the Bank for less than five (5)
years) less one dollar ($1.00) (such amount is hereinafter referred to as the
"Salary Continuation Payment").
The Salary Continuation Payment shall be payable either in a lump sum
or, at the Officer's written election filed with the Company on or before 30
days following the effective date of this Agreement (the "Election") in monthly
or quarterly installments, the aggregate amount of which has a total present
value (determined by using a discount rate equal to 120% of the "applicable
federal rate" determined under section 1274(d) of the Code, compounded
semi-annually) equal to the aggregate amount calculated for determining a lump
sum payment. The Officer may modify the Election at any time prior to the
Salary Continuation Payment becoming due and payable, provided that any such
modification is consistent with the terms of this Agreement and provided further
that any such modification shall not become effective and binding on the Company
until the calendar year following the year in which such modified Election is
delivered to the Company. Some or all of the Salary Continuation Payment may,
at the Officer's election, be applied to the cost of group-term life insurance
and long-term disability benefits for the Officer on the basis that such
benefits are being provided by the Bank and the Company for the Officer
immediately prior to any Change in Control, and any balance of the Salary
Continuation Payment shall be paid to the Officer in cash in accordance with the
Election.
6. Noncompetition. In the event that: (a) a Change in Control and
Change in Duties or Salary occur during the term of this Agreement, but before
the Officer reaches the age of 65, or (b) the Officer's employment is terminated
except for cause at any time within twenty-four (24) months following a Change
in Control, but before the Officer reaches the age of 65, then the Officer shall
not for a period of eighteen (18) months following his resignation or
termination of employment (i) solicit, attempt to solicit, divert or take away
the banking customers of the Bank, or encourage or solicit the Bank's customers
to discontinue their banking relationships with Bank and its affiliates, or
attempt or seek to cause any of the Bank's customers to refrain from doing
business with the Bank and its affiliates, or (ii) request, induce or solicit
any employee of
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 5
Company and its subsidiaries to terminate his or her employment with the Company
and its subsidiaries. Nothing in this Section shall be construed as preventing
the Officer from accepting employment with a competitor of the Company and the
Bank, provided that the Officer does not breach the covenants set forth in this
Section 6 not to solicit customers or employees of the Company and the Bank to
terminate their business or employment relationships with the Company or the
Bank. In consideration of the foregoing covenants and agreements not to solicit
the employees and customers of the Company following the Officer's resignation
or termination of employment, if the events specified in subsections 6(a) or
6(b) occur, the Officer shall be entitled to receive an aggregate payment equal
to one (1) times the Officer's average annual taxable compensation from the
Company and the Bank (and their affiliates determined pursuant to Section
280G(d)(5) of the Code) for the most recent five taxable years ending before the
Change in Duties or Salary or the termination of the Officer's employment (or
for the period during which the Employee was employed by the Bank if the Officer
has been employed by the Bank for less than five (5) years) (such amount is
hereinafter referred to as the "Noncompetition Payment"). The Noncompetition
Payment shall be payable in addition to and in the same time and manner as the
Salary Continuation Payment, and shall be due and payable whether or not the
Officer's employment is terminated or the officers resigns following a Change in
Control and a Change in Duties or Salary.
7. Transfer of Employment to Other Subsidiaries. The Company hereby
agrees that in the event that the Officer should, at any time or from time to
time, hereafter become an Officer of any subsidiary of the Company, the Company
will cause such subsidiary to promptly become an obligor of the Agreement with
respect to such employment. In addition, as agent of its subsidiaries, the
Company, on behalf of its subsidiaries, hereby obligates such subsidiaries with
respect to the terms hereof as to any such employment of the Officer. Further,
the Company hereby unconditionally guarantees the performance by any of its
subsidiaries of such subsidiary's obligations under this Agreement. Any
business entity succeeding to substantially all of the business of the Company
or the Bank by purchase, merger, consolidation, sale or assets or otherwise,
shall be bound by and shall adopt and assume this Agreement and the Company and
the Bank shall obtain the assumption of this Agreement by such successor.
8. No Obligation of Continued Employment. While it is the intent of this
Agreement to induce the Officer to continue employment with the Bank and the
Company at the pleasure of the Company during the term of this Agreement, this
Agreement does not in any way obligate either the Company or the Bank to
continue the Officer's employment or any specific level of salary or benefits in
connection therewith except as specifically provided herein, and the Officer
shall not be entitled to any benefits hereunder in the event of termination of
his employment prior to a Change in Control. The Officer agrees, however, in
the event of exercise of his right to resign following a Change in Control and a
Change in Duties or Salary, that, at the request of the
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 6
Company or the Bank made within five (5) days of notice of resignation, the
Officer will enter into an employment contract to continue employment for a
specified period, up to six months, at the then existing compensation and
benefits and in accordance with historical working conditions, for the purpose
of maintaining the continuity of his job function during such period for the
benefit of the Company and its subsidiaries; it being acknowledged and agreed
that the Salary Continuation Payment and Noncompetition Payment and benefits set
forth in this Agreement shall be paid in the time and manner provided above and
without regard to the Officer's continued employment at the request of the
Company.
9. Termination for Cause. Notwithstanding any other provision of this
Agreement:
(a) The Bank's Board of Directors may terminate the Officer's
employment at any time, but any termination by the Bank's Board of Directors
other than termination for "cause", shall not prejudice the Officer's right to
compensation or other benefits under this Agreement. The Officer shall have no
right to receive compensation or other benefits for any period after termination
for "cause". Termination for "cause" shall include termination because of the
Officer's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement.
(b) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act (12 U.S.C. Section
1818(e)(3) and (g)(1)), the Bank's obligations under this Agreement shall be
suspended as of the date of service unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Officer all or part of the compensation withheld while its contract
obligations were suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(c) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default (as defined in section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this Agreement shall
terminate as of the date of default, but this paragraph (b)(4) shall not affect
any vested rights of the contracting parties.
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 7
(e) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Bank:
(i) by the Director of the OTS or his or her designee, at the
time the Federal Deposit Insurance Corporation or Resolution Trust
Corporation enters into an agreement to provide assistance to or on
behalf of the association under the authority contained in 13(c) of
the Federal Deposit Insurance Act; or
(ii) by the Director of the OTS or his or her designee, at the
time the Director or his or her designee approves a supervisory merger
to resolve problems related to operation of the association or when
the association is determined by the Director to be in an unsafe or
unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by such action.
10. Tax Equalization Payment. It is intended that the payments to be made
to the Officer hereunder shall not constitute "parachute payments" within the
meaning of Section 280G(b)(2)(A) of the Code and this Agreement shall be
construed to effect such intent. Payments to the Officer pursuant to this
Agreement shall be in addition to any compensation due but not paid through the
date of the Officer's termination or resignation and all other benefits or
compensation to which the Officer is entitled under the Company's stock option,
restricted stock and other employee benefit plans.
Notwithstanding the foregoing, if Sections 280G or 4999 of the Code
apply to any of the payments to be made pursuant to this Agreement or to any
compensation received by the Officer under the Company's stock option,
restricted stock or other employee benefit plans as a result of a Change in
Control of the Company or the Bank, then in addition to any amounts payable to
the Officer in accordance with Sections 5 and 6 of this Agreement, the Company
also shall pay the Officer a tax equalization payment in an amount which, when
added together with any other amounts payable to the Officer, will place the
Officer in the same after-tax position as if the excise taxes imposed by Section
4999 of the Code, or any successor statute of similar import, had never been
enacted and, therefore, did not apply. This Agreement shall apply and, if
necessary, the tax equalization payment shall be made regardless of whether or
not the Officer's employment is terminated by the Company. The amount of this
tax equalization payment shall be determined by the Company's independent
accountants and shall be payable to the Officer at the same time and in the same
manner as amounts to which the payment relates are paid to the Officer.
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 8
11. Notices.
(a) Notice of Termination. Any termination of the Officer's
employment by the Bank or the Company or by resignation of the Officer shall be
communicated by a written notice of termination or resignation to the other
party, and shall specify the provision of this Agreement relied upon and shall
set forth in reasonable detail the circumstances claimed to provide a basis for
termination. The date of termination shall be the date on which the notice of
termination is delivered if by the Officer or thirty (30) days after the date of
the notice of termination if given by the Bank or the Company. If the Officer's
employment is terminated by death, disability or retirement, the date of
termination shall be the date provided in any other written contract or, in the
absence of any such contractual provision, by the policy of the Company or the
Bank at the time of the occurrence of such event.
(b) General. All notices and other communications, including notice
of resignation or dismissal, shall be in writing and shall be deemed to have
been duly given when mailed by the United States certified or registered mail,
return receipt requested, postage prepaid, addressed to the respective addresses
set forth hereafter, provided that all notices to the Bank or the Company shall
be directed to the attention of the Boards of Directors of such corporate
entities with copies to both the Secretary of the Company and the Bank, or to
such other addresses as either party may have furnished the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
If to the Company or the Bank: PALFED, Inc.
107 Chesterfield Street South
Aiken, SC 29801
Attn: Chairman
If to the Officer: _____________________________
_____________________________
_____________________________
12. Miscellaneous.
(a) Reimbursement of Expenses; Interest. The Company shall pay all
legal fees and expenses incurred by the Officer as a result of any contest
following any Change in Control (regardless of the outcome thereof) by the
Company or others of the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof, including
any legal fees and expenses and other out-of-pocket expenses incurred by the
Officer relating to or as a result of the enforcement or contest by the Officer
of any provision of this
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 9
Agreement. Such reimbursement shall be paid within thirty (30) days of the
Officer furnishing to the Company or the Bank written evidence of any costs or
expenses incurred by the Officer. In addition, the Company or the Bank shall
pay the Officer interest on any payments pursuant to this Agreement that are not
paid when due at a rate equal to the prime rate as announced by the Bank or its
successors from time to time.
(b) No Duty to Mitigate. The Officer shall not be required to
mitigate the amount of any payments provided for in this Agreement by seeking
other employment or otherwise, nor shall the amount of any Salary Continuation
Payment or Noncompetition Payment be reduced by any compensation earned by the
Officer as the result of employment by the Company and its subsidiaries or by
another employer after the date of the Officer's termination or resignation, or
otherwise.
(c) Other Benefits and Accrued Compensation. Payments to the Officer
pursuant to this Agreement shall be in addition to any compensation due but not
yet paid through the date of the Officer's termination or resignation and all
other benefits or compensation to which the Officer is entitled under the
Company's stock option, restricted stock or other employee benefit plans.
(d) Successors; Severability. All benefits of this Agreement shall
accrue to, and be payable to, the Officer's heirs, executors, administrators or
assigns. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid, but if any one or more
of the provisions contained in this Agreement shall be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions of this Agreement shall not be in any way impaired.
(e) Entire Agreement; Prior Agreements. This Agreement constitutes
the entire understanding and agreement among the Company, the Bank and the
Officer with regard to all matters herein. There are no other agreements,
conditions or representations, oral or written, express or implied, with regard
thereto. This Agreement may be amended, modified or renewed only in writing
signed by both parties hereto. Any and all executive salary continuation or
severance agreements or change of control agreements previously entered into
between the Officer and the Company or the Bank are hereby terminated and
canceled as of the date of this Agreement.
(f) Governing Law; Joint and Several. This Agreement shall be
construed and enforced in accordance with the laws of the State of South
Carolina. To the extent permitted by applicable law, all obligations of the
Company and the Bank shall be joint and several.
<PAGE>
PALFED/Palmetto Federal
Salary Continuation Agmt (May 1997)
page 10
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
PALFED, INC.
Attest: By:______________________________
Title:___________________________
_______________________
Title:_________________
PALMETTO FEDERAL SAVINGS BANK
OF SOUTH CAROLINA
Attest: By:_____________________________
Title:__________________________
________________________
Title:__________________
_________________________________
Officer
Address:_________________________
_________________________
* * *
<PAGE>
Exhibit 11.1
PALFED, Inc.
STATEMENT REGARDING COMPUTATION OF PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
--------------- -------------
<S> <C> <C>
(IN THOUSANDS)
1997
- ----
Weighted average shares outstanding.......................................... 5,205 5,193
Stock options outstanding.................................................... 304 324
Shares assumed repurchased................................................... (191) (201)
----- -----
Average common and common equivalent shares (1).............................. 5,318 5,316
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
--------------- -------------
<S> <C> <C>
(IN THOUSANDS)
1996
- ----
Weighted average shares outstanding.......................................... 5,136 5,126
Stock options outstanding.................................................... 230 230
Shares assumed repurchased................................................... (135) (136)
----- -----
Average common and common equivalent shares (1).............................. 5,231 5,220
----- -----
----- -----
</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 INFORMATINO EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL POSITION FOR PALFED, INC. AND SUBSIDIARIES
AS OF JUNE 30, 1997 AND THE RELATED CONSOLIDATED STATE OF INCOME FOR THE THREE
MONTHS THEN ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,748
<INT-BEARING-DEPOSITS> 4,345
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,719
<INVESTMENTS-CARRYING> 52,453
<INVESTMENTS-MARKET> 52,948
<LOANS> 548,498
<ALLOWANCE> 7,215
<TOTAL-ASSETS> 664,863
<DEPOSITS> 562,232
<SHORT-TERM> 40,100
<LIABILITIES-OTHER> 5,258
<LONG-TERM> 2,500
0
0
<COMMON> 54,773
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 664,863
<INTEREST-LOAN> 12,184
<INTEREST-INVEST> 1,389
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 13,625
<INTEREST-DEPOSIT> 6,594
<INTEREST-EXPENSE> 7,236
<INTEREST-INCOME-NET> 6,389
<LOAN-LOSSES> 287
<SECURITIES-GAINS> 104
<EXPENSE-OTHER> 4,605
<INCOME-PRETAX> 2,302
<INCOME-PRE-EXTRAORDINARY> 1,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,457
<EPS-PRIMARY> $.270
<EPS-DILUTED> $.270
<YIELD-ACTUAL> 3.99
<LOANS-NON> 2,867
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,065
<LOANS-PROBLEM> 13,982
<ALLOWANCE-OPEN> 6,961
<CHARGE-OFFS> 105
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 7,215
<ALLOWANCE-DOMESTIC> 7,215
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,056
</TABLE>
