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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended SEC Commission File
March 31, 1997 Docket Number 0-15334
- --------------------- ----------------------
PALFED, INC.
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(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 5,278,237 shares of Common Stock outstanding on March 31, 1997.
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PALFED, Inc.
---------------------------------
Quarterly Report on Form 10-Q
For The Quarter Ended March 31, 1997
TABLE OF CONTENTS
-----------------
PART I--FINANCIAL INFORMATION
- -----------------------------
ITEM PAGE
- ---- ----
1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1997 and December 31, 1996. 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1997 and 1996. 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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
6. (a) Exhibits 19
(b) Reports on Form 8-K 19
Exhibit 11.1 20
SIGNATURES 21
2
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Consolidated Statements of Financial Condition
(Unaudited)
PALFED, INC. MARCH 31 DECEMBER 31
AND SUBSIDIARIES 1997 1996
--------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and due from banks........................ $ 11,808 $ 16,942
Interest-bearing deposits with other banks..... 3,607 3,465
Investment and mortgage-backed securities:
Available-for-sale........................... 24,804 24,007
Held-to-maturity............................. 54,143 58,700
Loans held-for-sale............................ 6,485 11,241
Loans receivable, net.......................... 525,908 512,879
Investment in real estate, net................. 12,673 13,501
Investment in Federal Home Loan Bank stock..... 3,479 10,884
Premises and equipment, net.................... 6,006 5,958
Accrued interest receivable.................... 3,744 3,835
Other assets................................... 3,050 3,845
---------- ----------
$ 655,707 $ 665,257
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing accounts................. $ 31,651 $ 30,577
Savings and NOW accounts..................... 120,985 121,432
Certificates of deposit...................... 394,233 384,678
Accrued interest payable..................... 4,568 3,441
---------- ----------
Total deposits.......................... 551,437 540,128
---------- ----------
Federal Home Loan Bank advances................ 47,400 68,400
Other liabilities.............................. 3,709 4,906
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Total liabilities.............................. 602,546 613,434
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; authorized
10,000,000 shares; 5,278,237 and 5,231,317
shares issued and outstanding,
respectively............................... 5,278 5,231
Additional paid-in capital................. 28,301 28,115
Retained earnings.......................... 21,512 20,320
Unearned compensation...................... (1,086) (1,128)
Net unrealized loss on securities, net of tax
benefit of $435 and $369, respectively.... (844) (715)
---------- ----------
Total stockholders' equity.............. 53,161 51,823
---------- ----------
$ 655,707 $ 665,257
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---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
3
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Consolidated Statements of Income
(Unaudited)
FOR THE THREE MONTHS ENDED
PALFED, INC. MARCH 31 MARCH 31
AND SUBSIDIARIES 1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income:
Loans receivable.............................. $ 11,727 $ 10,390
Mortgage-backed securities.................... 1,050 1,158
Investment securities......................... 370 692
Other......................................... 65 75
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Total interest income.................... 13,212 12,315
--------- ---------
Interest expense:
Deposits...................................... 6,387 6,002
Other borrowings.............................. 791 1,260
--------- ---------
Total interest expense................... 7,178 7,262
--------- ---------
Net interest income............................. 6,034 5,053
Provision for estimated losses on loans......... 337 339
--------- ---------
Net interest income after provision for
estimated loan losses......................... 5,697 4,714
Noninterest income:
Checking transaction fees..................... 552 604
Financial services fees....................... 249 235
Late charge and other fees.................... 144 155
Net trading account gains and losses.......... 119 147
Gain on sales of available-for-sale securities 114
Gains on sales of loans....................... 53 234
Real estate operations........................ (152) (154)
Other......................................... 157 196
--------- ---------
Total noninterest income................. 1,122 1,531
--------- ---------
Noninterest expenses:
Compensation and employee benefits............ 2,787 2,524
Occupancy and equipment....................... 800 712
Federal insurance premiums and assessments.... 157 354
Professional and outside service fees......... 345 282
Data processing............................... 205 208
Advertising and public relations.............. 149 198
Other......................................... 212 268
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Total noninterest expenses............... 4,655 4,546
--------- ---------
Income before provision for income taxes........ 2,164 1,699
Provision for income taxes...................... 814 607
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Net income...................................... $ 1,350 $ 1,092
--------- ---------
--------- ---------
Earnings per share.............................. $ 0.25 $ 0.21
--------- ---------
--------- ---------
Dividends per share............................. $ 0.03 $ 0.02
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--------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
4
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Consolidated Statements of Cash Flows
(Unaudited)
FOR THE THREE MONTHS ENDED
PALFED, INC. MARCH 31 MARCH 31
AND SUBSIDIARIES 1997 1996
-------- --------
(IN THOUSANDS)
Operating Activities:
Cash flows from operating activities :
Net income................................... $ 1,350 $ 1,092
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization............. 213 184
Provision for estimated losses on
loans and real estate................... 337 394
Other gains, net.......................... (253) (439)
Proceeds from sales of loans held-for-sale 2,766 3,061
Originations of loans held-for-sale....... (8,050) (10,915)
Proceeds from sales of trading account
securities.............................. 13,015 6,623
Gain on sale of available-for-sale
securities.............................. (114)
Changes in:
Accrued interest receivable, net........ 91 230
Accrued interest payable................ 1,127 2,270
Other assets............................ 862 1,208
Other liabilities (excluding deferred
income)............................... (1,509) (2,279)
Other, net................................ 102 447
--------- ---------
Net cash provided by operating activities 10,051 1,762
--------- ---------
Investing activities:
Cash flows from investing activities:
Proceeds from sale of FHLB stock........... 7,405
Proceeds from sales of available-for-sale
securities............................... 18,723
Principal collections on available-for-sale
securities.............................. 345 6,015
Purchases of available-for-sale securities (1,408) (2,023)
Net increase in loans receivable.......... (16,163) (13,593)
Principal collections and maturities of
held-to-maturity securities............. 4,606 3,674
Proceeds from sales of foreclosed
real estate............................. 941 365
Purchase of premises and equipment........ (275) (274)
Other, net................................ (83) 1,158
--------- ---------
Net cash provided by investing
activities............................ (4,632) 14,045
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5
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Consolidated Statements of Cash Flows
(Unaudited)
FOR THE THREE MONTHS ENDED
PALFED, INC. MARCH 31 MARCH 31
AND SUBSIDIARIES 1997 1996
-------- --------
(IN THOUSANDS)
Financing activities:
Cash flows from financing activities :
Net increase in deposit accounts........... 10,182 6,413
Proceeds from FHLB advances................ 22,300 17,000
Repayments of FHLB advances................ (43,300) (47,100)
Payment of cash dividend................... (159) (102)
Other, net................................. 566 106
--------- ---------
Net cash used by financing activities.... (10,411) (23,683)
--------- ---------
Net decrease in cash and cash equivalents.... (4,992) (7,876)
Cash and cash equivalents,
beginning of period........................ 20,407 21,325
--------- ----------
Cash and cash equivalents, end of period..... $ 15,415 $13,449
--------- ----------
--------- ----------
Supplemental disclosures of cash flow
information:
Cash paid for:
Interest................................. $ 6,051 $3,732
Income taxes............................. 16 17
Supplemental schedule of noncash
investing and financing activities:
Securitizations of mortgage loans........ $ 12,899 $6,476
Conversion of adjustable rate and
construction loans receivable to 30
year fixed rate mortgage loans
held-for-sale.......................... 2,800 3,519
Real estate acquired through
foreclosure............................ 884 1,959
Financed sales of foreclosed real
estate................................. 941 669
Issuance of common stock as
compensation........................... 12 47
The accompanying notes are an integral part of these financial
statements.
6
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PALFED, INC. AND SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
GENERAL
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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
months ended March 31, 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 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
7
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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 quarters ended March 31, 1997 and 1996 if
SFAS No. 128 had been in effect:
1997 1996
---- ----
Basic earnings per share............... $0.26 $0.21
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----- -----
Diluted earnings per share............. $0.25 $0.21
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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 $1.0 million, relating to loans held-for-sale and
trading securities.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
-----------------------------------------
Investment and mortgage-backed securities are summarized as follows:
MARCH 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
Available-for-sale
- -------------------
Investment securities........... $ 15,937 $ 15,591 $ 15,964 $ 15,768
Mortgage-backed securities...... 9,359 9,213 8,161 8,239
--------- --------- --------- ---------
$ 25,296 $ 24,804 $ 24,125 $ 24,007
--------- --------- --------- ---------
--------- --------- --------- ---------
Held-to-maturity
- ----------------
Investment securities........... $ 3,964 $ 3,867 $ 6,962 $ 6,947
Mortgage-backed securities...... 50,179 49,856 51,738 52,275
--------- --------- --------- ---------
$ 54,143 $ 53,723 $ 58,700 $ 59,222
--------- --------- --------- ---------
--------- --------- --------- ---------
8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------------------------------------------
(Unaudited)
3. LOANS RECEIVABLE
----------------
Loans receivable are summarized as follows:
MARCH 31 DECEMBER 31
1997 1996
---------- ------------
(IN THOUSANDS)
Loan collateralized by real estate:
Permanent residential mortgage.............. $ 226,350 $ 224,955
Construction................................ 57,806 54,816
Second mortgage............................. 54,980 56,022
Commercial.................................. 153,403 145,685
Loans collateralized by other property:
Consumer.................................... 36,630 34,903
Commercial.................................. 16,096 16,209
Loans collateralized by savings accounts...... 4,726 4,725
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549,991 537,315
Less:
Loans in process............................ (15,905) (16,263)
Unamortized yield adjustments............... (1,217) (1,190)
Allowance for estimated losses.............. (6,961) (6,983)
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$ 525,908 $ 512,879
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Changes in the allowance for estimated loan losses are summarized as follows
for the three months ended March 31:
1997 1996
--------- ---------
(IN THOUSANDS)
Balance, beginning of period........... $ 6,983 $ 8,417
Provisions............................. 337 339
Charge-offs............................ (545) (733)
Recoveries............................. 186 172
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Balance, end of period................. $ 6,961 $ 8,195
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At March 31, 1997, the recorded investment in loans for which impairment has
been recognized totalled approximately $4.2 million, of which $459,000
related to loans with a corresponding valuation allowance of $139,000. The
impaired loans at March 31, 1997, were measured for impairment using the fair
value of the collateral as substantially all of these loans were collateral
dependent. For the quarter ended March 31, 1997, the average recorded
investment in impaired loans was approximately $6.2 million and the interest
income recognized on impaired loans was $97,000. Impaired loans are
summarized as follows at March 31:
1997 1996
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(IN THOUSANDS)
Construction loans..................... $ 443 $ 436
Commercial real estate loans........... 3,049 9,230
Consumer loans......................... 190
Residential mortgage................... 515 781
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$ 4,197 $ 10,447
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9
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
(Unaudited)
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 March 31, 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:
MARCH 31 DECEMBER 31
1997 1996
----------- ------------
(IN THOUSANDS)
Financial instruments whose contract amounts
represent credit risk:
Commitments to originate loans................... $ 34,374 $ 32,908
----------- ------------
----------- ------------
Unused lines of credit........................... $ 36,290 $ 35,560
----------- ------------
----------- ------------
Standby letters of credit........................ $ 1,156 $ 1,004
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10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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OVERVIEW
- --------
The Company's net earnings for the three months ended March 31, 1997 were
$1.3 million or $0.25 per common share compared to $1.1 million or $0.21 per
common share for the three months ended March 31, 1996. The increase of
$260,000 is primarily attributable to an increase of $983,000 in net interest
income offset in part by a decrease of $409,000 in noninterest income and an
increase in the provision for income tax.
The Company's annualized return on equity increased to 10.3% from 8.4% in the
quarter ended March 31, 1996. The Company's efficiency ratio also improved to
65.2% from 71.8% in the prior year's quarter.
In March 1997, Palmetto Federal opened its 22nd branch on Hilton Head Island,
South Carolina. This branch is the Bank's second on the Island.
COMPARISON OF 1997 AND 1996 OPERATING RESULTS
- ---------------------------------------------
NET INTEREST INCOME
- -------------------
Net interest income was $6.0 million for the quarter ended March 31, 1997, an
increase of $983,000 or 19.4% compared to the quarter ended March 31, 1996.
The improvement was primarily due to increased interest-earning assets caused
principally by a $63.0 million increase in average loans receivable. In
addition, rates paid on time deposits and Federal Home Loan Bank advances
decreased as did the average balances of the advances, which offset the
additional interest expense paid on increased levels of deposits.
The following table summarizes rates, yields and average interest-earning
assets and interest-bearing liabilities for the three months ended March 31,
1997 and 1996 (dollars in thousands).
11
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<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCE YIELD/ RATE BALANCE YIELD/ RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing deposits................................................. $ 4,955 5.22% $ 4,419 5.25%
Loans receivable.......................................................... 530,849 8.84 467,892 8.88
Mortgage-backed securities................................................ 60,089 6.99 68,439 6.77
Total investments......................................................... 21,164 5.64 36,060 5.50
FHLB stock................................................................ 4,021 7.25 10,884 7.21
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets............................................. $ 621,078 8.51% $ 587,694 8.38%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Retail savings deposits................................................. $ 34,178 2.67% $ 31,230 2.56%
Retail time deposits.................................................... 393,975 5.78 365,751 5.94
Demand deposits......................................................... 115,978 1.91 99,316 1.64
FHLB advances........................................................... 57,675 5.56 76,950 6.59
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities...................................... $ 601,806 4.84% $ 573,247 5.10%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin.................................................. 3.67% 3.28%
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- ------------------------------------------------------------------------------------------------------------------------------
Net yield............................................................ 3.89% 3.44%
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</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>
MARCH 1997 VERSUS MARCH 1996
INCREASE (DECREASE)
- --------------------------------------------------------------------------------------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Changes in:
Interest income:
Loans receivable................................................. $ 1,395 $ (51) $ (7) $ 1,337
Mortgage-backed securities....................................... (139) 37 (5) (107)
Investments...................................................... (317) (27) 12 (332)
- --------------------------------------------------------------------------------------------------------------------------
Total interest income.............................................. 939 (41) 0 898
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits......................................................... 503 (108) (10) 385
Other borrowed money............................................. (321) (197) 49 (469)
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense............................................. 182 (305) 39 (84)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)........................................ $ 757 $ 264 $ (39) $ 982
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
- ------------------
Noninterest income was $1.1 million for the quarter ended March 31, 1997, a
decrease of $409,000 or 26.7% from the 1996 quarter. The decrease was
primarily attributable to a decrease of $323,000 in gains on sales of
securities and loans. The 1996 quarter included a gain of $191,000 from the
sale of a nonperforming commercial real estate loan and a $150,000 gain from
the sale of Federal National Mortgage Association ("FNMA") stock. Other
noninterest income decreased $39,000, due primarily to a decrease in
insurance commissions on consumer life products.
12
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NONINTEREST EXPENSES
- --------------------
Noninterest expenses were $4.7 million and $4.5 million for the quarters
ended March 31, 1997 and 1996, respectively. The Company has experienced
increased costs associated with the expansion of its branch network.
Full-time equivalent employees increased from 277 at March 31, 1996 to 301 at
March 31, 1997. In addition, occupancy and equipment and professional fees
increased over the comparable quarters. These increases were offset by
decreases in FDIC deposit insurance premiums and decreased amortization of
intangible assets.
The primary components of compensation and employee benefits for the three
months ended March 31 follow:
1997 1996
--------- ---------
(IN THOUSANDS)
Salaries and commissions.................... $ 2,282 $ 2,090
Incentive programs.......................... 255 254
Medical and retirement expenses............. 247 213
Payroll and other taxes..................... 235 207
Other expenses.............................. 28 23
--------- ---------
3,047 2,787
Capitalized costs of loan originations...... (260) (263)
--------- ---------
Compensation and employee benefits.......... $ 2,787 $ 2,524
--------- ---------
--------- ---------
Salaries and commissions increased by 9.2% due to average merit wage
increases and additional employees at 5 new Palmetto Federal offices. Medical
and retirement expenses and payroll and other taxes also increased in 1997
due primarily to increased numbers of employees.
Professional and outside service fees increased due primarily to increased
expenses associated with the Company's 1997 annual shareholders' meeting.
Occupancy and equipment expense increased 12.4% due primarily to expenses
related to the Company's new branches and offices.
Federal insurance premiums and assessments declined by $197,000 in 1997,
despite the increase in insurable deposits, due to the decreased FDIC
premiums following the September 1996 Savings Association Insurance Fund
recapitalization. The 24.7% decrease in advertising and public relations
expense resulted from decreased expenses related to special events and public
relations. However, management expects general marketing expenses to increase
in the quarter ending June 30, 1997, as the Company introduces a print and
television campaign to position Palmetto Federal as "South Carolina's Bank".
13
<PAGE>
Other noninterest expenses during the 1996 quarter included $62,000 in
goodwill and core deposit intangible amortization. As these assets were written
off in December 1996, the 1997 amount includes no amortization expense.
LENDING ACTIVITIES
- ------------------
During the quarter ended March 31, 1997, the Company originated $52.7 million
in loans compared to $54.4 million for the quarter ended March 31, 1996.
Residential mortgage loan originations were $31.0 million in 1997 compared to
$36.8 million for the quarter ended March 31, 1996. The decline resulted
principally from an increase in quoted interest rates for mortgage loans
which were higher in 1997 than in the first quarter of 1996. The lower rates
in 1996 resulted in $10.0 million of loan refinancings compared to $5.2
million in 1997. The Company's newer markets continued to contribute to
residential loan originations. The Lexington, Columbia and Charleston offices
originated 44.6% of these loans in 1997 compared to 22.4% during the first
quarter of 1996.
Commercial real estate loan originations increased to $13.1 million during
the 1997 quarter, compared to $4.4 million in the first quarter of 1996. The
1997 originations included 6 loans of $1.0 million or more, although only 3
of these were fully funded during the quarter.
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 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 Federal Home Loan Bank ("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 $21.0 million. This
reduction in FHLB advances contributed to the reduction in the cost of funds
for the 1997 quarter.
14
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NONPERFORMING ASSETS AND RESTRUCTURED LOANS
- -------------------------------------------
The provision for estimated losses on loans during the 1997 quarter was
virtually unchanged from the 1996 quarter. Net charge-offs for the 1997
quarter were $359,000 compared to $561,000 for the 1996 quarter. Charge-offs
decreased in 1997 because the 1996 charge-offs included one $300,000 entry
related to a commercial real estate loan which was foreclosed during the
quarter.
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 $16.5 million or 2.5%
of total assets at March 31, 1997. The table below sets forth Palmetto
Federal's nonaccrual and restructured loans and foreclosed real estate at the
dates indicated.
MARCH 31 DECEMBER 31 MARCH 31
1997 1996 1996
----------- ------------ -----------
(DOLLARS IN THOUSANDS)
Nonaccrual loans........................ $ 3,308 $ 3,971 $ 6,249
Foreclosed real estate.................. 7,006 7,187 9,112
Restructured loans...................... 6,211 6,533 10,472
--------- ---------- ---------
$ 16,525 $ 17,691 $ 25,833
--------- ---------- ---------
--------- ---------- ---------
General loan loss allowance as a
percentage of the total............... 40.9% 36.2% 27.8%
--------- ---------- ---------
Total as a percentage of
loans receivable, net................. 3.1% 3.4% 5.4%
--------- ---------- ---------
--------- ---------- ---------
Total as a percentage of total assets... 2.5% 2.7% 4.1%
--------- ---------- ---------
--------- ---------- ---------
Although the allowance for estimated loan losses of $7.0 million at March 31,
1997 had declined from the March 31, 1996 level of $8.2 million, the coverage
ratio in the table above increased from 27.8% at March 31, 1996 to 40.9% at
March 31, 1997.
Changes in the components of nonperforming assets and restructured loans
during the three months ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
NONACCRUAL RESTRUCTURED
LOANS REO LOANS TOTAL
----------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
December 31, 1996................................................. $ 3,971 $ 7,187 $ 6,533 $ 17,691
Performing loans which became nonperforming....................... 1,464 474 611 2,549
Upgrades due to performance....................................... (340) (1,562) (1,902)
Sales............................................................. (1,334) (1,334)
Net principal collections......................................... (64) (515) (579)
Nonaccrual loans restructured..................................... (1,023) 1,023 0
Net change in allowances.......................................... 121 121
Charge-offs and write downs....................................... (21) (21)
Nonaccrual loans which became REO................................. (679) 679 0
----------- --------- ------ ---------
March 31, 1997.................................................... $ 3,308 $ 7,006 $ 6,211 $ 16,525
----------- --------- ------ ---------
----------- --------- ------ ---------
</TABLE>
15
<PAGE>
New nonaccrual loans consist of a loan of $300,000 collateralized by a
restaurant and lounge in Beaufort, South Carolina and several other loans
none of which exceeds $165,000. Nonaccrual loans restructured consists of a
$1.0 million commercial real estate loan collateralized by a townhouse
apartment complex in Charleston, South Carolina. The Bank upgraded this loan
because it was brought current during the quarter, however because the loan
had been previously restructured, it was returned to this category.
Palmetto Federal sold $1.3 million of foreclosed real estate which consisted
primarily of residential homes, none of which had a carrying value greater
than $275,000. The Bank had new foreclosures which consisted primarily of a
commercial real estate loan with a carrying value of $250,000 collateralized
by a manufacturing plant and equipment in Beaufort, South Carolina, and 10
other properties, none of which exceeded $222,000.
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 $14.7
million and $14.5 million at March 31, 1997 and December 31, 1996,
respectively.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $16.5 million as well as its potential problem loans of
$14.7 million. The following table summarizes the Bank's criticized assets as
of the dates indicated:
MARCH 31 DECEMBER 31 MARCH 31
1997 1996 1996
----------- ------------ -----------
(IN THOUSANDS)
Special mention........................ $ 14,813 $ 13,278 $ 14,437
Substandard............................ 15,113 17,702 24,665
Doubtful............................... 364 364 116
Loss................................... 913 1,220 1,266
----------- ------------ -----------
$ 31,203 $ 32,564 $ 40,484
----------- ------------ -----------
----------- ------------ -----------
REAL ESTATE DEVELOPMENT ACTIVITY
- --------------------------------
The Company continues to have a significant concentration of risk related to
Woodside Plantation, exclusive of loans to individual homeowners, consisting
of real estate held for development, acquisition and development loans,
foreclosed real estate and a 50% interest in a partnership. During the
quarter ended March 31, 1997, the total carrying value of these components
decreased from $12.5 million to $11.9 million, primarily due to loan payments
resulting from lot sales and the sale of a house on one of the lots received
in the 1995 restructuring.
16
<PAGE>
Effective April 1, 1996, the Company modified the Woodside Plantation Country
Club loans from amortizing to interest-only payments for one year. Effective
April 1, 1997, these loans resumed amortization of principal.
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
March 1997 of 6.1% 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 March 31,
1997, Palmetto Federal's regulatory capital was 6.9% for both tangible and
core capital and 10.7% 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.
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 exludes 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.
18
<PAGE>
PART II. Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1997 PALFED Annual Meeting of Shareholders held on April 22,
1997, there were 5,196,205 shares present in person or in proxy of the
5,286,554 shares of common stock entitled to vote at the Annual Meeting.
Proposal 1- Election of Directors. The shareholders elected William F.
Cochrane, Edward Larry Hutto, and Charles E. Simons, III as directors of
the Company for three year terms ending in 2000 and elected Edwin S.
Pearlstine, Jr. for a two year term ending in 1999. Pursuant to
Regulation 14 of the Securities Exchange Act of 1934, as amended,
management solicited proxies for the Annual Meeting and there were no
solicitations in opposition to management's nominees. The director
nominees received the following votes:
NUMBER OF VOTES
---------------------
FOR WITHHELD
---------- ---------
William F. Cochrane......................... 4,646,283 549,922
Edward Larry Hutto.......................... 4,646,142 550,063
Charles E. Simons, III...................... 4,645,942 550,263
Edwin S. Pearlstine, Jr. ................... 4,830,251 365,954
There were no broker nonvotes on Proposal 1. The continuing directors
for the Company are Patrick D. Cunning, Harold D. Kingsmore, R. Bruce
McBratney, Albert H. Peters, Jr., Ambrose L. Schwallie and John C.
Troutman.
Proposal 2--Nonbinding Shareholder Resolution. The vote on a nonbinding,
advisory shareholder resolution proposing that the board of directors
immediately take the necessary steps to achieve a sale, merger or other
acquisition of the Company was as follows:
NUMBER OF VOTES
---------------
For:............................................. 2,546,983
Against:......................................... 1,882,018
Abstain:......................................... 39,792
Broker Nonvotes:................................. 727,412
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 Statement regarding computation of per share
data is included in Item 1 and incorporated herein
by reference.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 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: MAY 13, 1997 /S/ JOHN C. TROUTMAN
-------------------- --------------------------------------------
JOHN C. TROUTMAN
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
DATE: MAY 13, 1997 /S/ DARRELL R. RAINS
-------------------- --------------------------------------------
DARRELL R. RAINS
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL
OFFICER
DATE: MAY 13, 1997 /S/ MICHAEL B. SMITH
-------------------- --------------------------------------------
MICHAEL B. SMITH
SENIOR VICE PRESIDENT
AND CONTROLLER
<PAGE>
Exhibit 11.1
PALFED, Inc.
STATEMENT REGARDING COMPUTATION OF PER SHARE DATA
THREE MONTHS
ENDED
MARCH 31
-------------
(IN THOUSANDS)
1997
- -----
Weighted average shares outstanding................... 5,180
Stock options outstanding............................. 371
Shares assumed repurchased............................ (231)
-------
Average common and common equivalent shares (1)....... 5,320
-------
-------
THREE MONTHS
ENDED
MARCH 31
--------------
(IN THOUSANDS)
1996
- -----
Weighted average shares outstanding.................. 5,122
Stock options outstanding............................ 216
Shares assumed repurchased........................... (131)
-------
Average common and common equivalent shares (1)...... 5,207
-------
-------
- ------------------------
(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 statement of financial position for PALFED, Inc. and Subsidiaries
as of March 31, and the related consolidated state of income for the three
months then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,808
<INT-BEARING-DEPOSITS> 3,607
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,804
<INVESTMENTS-CARRYING> 54,143
<INVESTMENTS-MARKET> 53,723
<LOANS> 539,354
<ALLOWANCE> 6,961
<TOTAL-ASSETS> 655,707
<DEPOSITS> 551,437
<SHORT-TERM> 41,900
<LIABILITIES-OTHER> 3,709
<LONG-TERM> 5,500
0
0
<COMMON> 53,161
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 655,707
<INTEREST-LOAN> 11,727
<INTEREST-INVEST> 1,420
<INTEREST-OTHER> 65
<INTEREST-TOTAL> 13,212
<INTEREST-DEPOSIT> 6,387
<INTEREST-EXPENSE> 7,178
<INTEREST-INCOME-NET> 6,034
<LOAN-LOSSES> 337
<SECURITIES-GAINS> 119
<EXPENSE-OTHER> 4,655
<INCOME-PRETAX> 2,164
<INCOME-PRE-EXTRAORDINARY> 1,350
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,350
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.89
<LOANS-NON> 3,308
<LOANS-PAST> 0
<LOANS-TROUBLED> 6,211
<LOANS-PROBLEM> 14,678
<ALLOWANCE-OPEN> 6,983
<CHARGE-OFFS> 545
<RECOVERIES> 186
<ALLOWANCE-CLOSE> 6,961
<ALLOWANCE-DOMESTIC> 6,961
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,757
</TABLE>
