FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended SEC Commission File
March 31, 1996 Docket Number 0-15334
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PALFED, INC.
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(Exact name of registrant as specified in its
charter)
South Carolina 57-0821295
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification number)
107 Chesterfield Street South
Aiken, South Carolina 29801
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(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
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There were 5,221,962 shares of Common Stock outstanding on March 31, 1996.
PALFED, Inc.
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Quarterly Report on Form 10-Q
For The Quarter Ended March 31, 1996
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item Page
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1. Financial Statements
Consolidated Statements of Financial
Condition as of March 31, 1996
and December 31, 1995. 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1996 and 1995. 4
Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1996 and 1995. 5
Notes to Consolidated Financial Statements 6
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 20
(b) Reports on Form 8-K 20
SIGNATURES 21
2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
PALFED, INC.
AND SUBSIDIARIES
MARCH 31 DECEMBER 31
1996 1995
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(in thousands, except share data)
ASSETS
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Cash and due from banks $ 8,256 $ 15,471
Interest-bearing deposits with other banks 5,193 5,854
Investment and mortgage-backed securities:
Available-for-sale 32,779 55,550
Held-to-maturity 58,661 62,293
Loans receivable, net 476,119 464,281
Investment in real estate, net 15,613 14,448
Investment in Federal Home Loan Bank stock 10,884 10,884
Premises and equipment, net 5,433 5,350
Accrued interest, net of allowance of $589 and $1,052,
respectively 4,026 4,256
Other assets 6,589 7,637
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$623,553 $646,024
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Noninterest-bearing accounts $ 31,156 $ 27,333
Savings and NOW accounts 105,862 105,329
Certificates of deposit 365,250 363,193
Accrued interest payable 3,161 891
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Total deposits 505,429 496,746
Federal Home Loan Bank advances 61,400 91,500
Other liabilities 4,018 6,293
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Total liabilities 570,847 594,539
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Commitments and contingencies
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Stockholders' equity:
Common stock, $1.00 par value; authorized 10,000,000
shares; 5,221,962 and 5,142,166 shares issued;
5,221,962 and 5,107,297 shares outstanding,
respectively 5,222 5,142
Additional paid-in capital 28,054 26,904
Retained earnings 21,616 20,626
Unamortized deferred compensation relating to
incentive stock grants (1,238)
Unrealized loss on debt securities, net of income tax
benefit of $488 and $456, respectively (948) (884)
Treasury stock, at cost (40,869 shares) (303)
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Total stockholders' equity 52,706 51,485
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$623,553 $646,024
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
PALFED, INC.
AND SUBSIDIARIES
For the three months ended March 31, 1996 1995
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(in thousands, except per share data)
Interest income:
Loans receivable $10,390 $9,749
Mortgage-backed securities 1,158 1,726
Investment securities 692 797
Other 75 75
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Total interest income 12,315 12,347
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Interest expense:
Deposits 6,002 5,348
Other borrowings 1,260 2,063
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Total interest expense 7,262 7,411
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Net interest income 5,053 4,936
Provision for estimated losses on loans 339 238
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Net interest income after provision
for estimated loan losses 4,714 4,698
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Noninterest income:
Checking transaction fees 604 687
Financial services fees 235 158
Late charge and other fees 155 145
Gain on sales of investment and
mortgage-backed securities and loans 495 34
Real estate operations (154) (370)
Other 196 249
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Total noninterest income 1,531 903
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Noninterest expenses:
Compensation and employee benefits 2,524 2,226
Occupancy and equipment 753 643
Federal insurance premiums and assessments 354 342
Professional and outside service fees 282 277
Data processing 167 223
Advertising and public relations 198 172
Other 268 258
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Total noninterest expenses 4,546 4,141
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Income before provision for income taxes 1,699 1,460
Provision for income taxes 607 495
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Net income $ 1,092 $ 965
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Earnings per share $0.21 $0.19
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PALFED, INC.
AND SUBSIDIARIES
For the three months ended March 31, 1996 1995
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(in thousands)
OPERATING ACTIVITIES:
Cash flows from operating activities:
Net income $1,092 $965
Adjustments to reconcile net income to cash
provided by operations:
Depreciation 190 187
Amortization of goodwill and intangibles, loan fees,
deferred income, and premiums and discounts (6) 97
Provision for estimated losses on loans, real estate and
accrued interest receivable 675 582
(Gain) loss on sales of real estate (58) 94
Gain on sales of loans (255) (30)
Gain on sale of assets available for sale (240) (3)
Changes in:
Accrued interest receivable, net (51) (227)
Accrued interest payable 2,270 2,064
Other assets 1,208 577
Other liabilities (excluding deferred income) (2,279) 60
Other, net 218 16
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Net cash provided by operating activities 2,764 4,382
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INVESTING ACTIVITIES:
Cash flows from investing activities:
Purchases of investment and mortgage-backed securities - -
Principal payments and maturities of investment and
mortgage-backed securities 3,674 2,602
Purchases of assets available-for-sale (2,023) (1,833)
Principal collections on assets available-for-sale 6,015 586
Proceeds from sales of assets available-for-sale 29,994 5,121
Loans originated (net of payments received) (24,470) (6,623)
Proceeds from sales of foreclosed real estate 365 1,086
Purchase of premises and equipment (274) (372)
Other, net (238) (418)
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Net cash provided by investing activities 13,043 149
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FINANCING ACTIVITIES:
Cash flows from financing activities:
Net increase in deposit accounts 6,413 16,527
Proceeds from FHLB advances and other borrowed money 17,000 12,300
Repayments of FHLB advances and other borrowed money (47,100) (38,100)
Payment of cash dividend (102)
Treasury stock sold 83
Other, net 23 447
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Net cash used by financing activities (23,683) (8,826)
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Net decrease in cash and cash equivalents (7,876) (4,295)
Cash and cash equivalents, beginning of period 21,325 18,331
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Cash and cash equivalents, end of period $13,449 $14,036
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Supplemental disclosures of cash flow information:
Cash paid for:
Interest $3,732 $5,347
Income taxes 17 300
Supplemental schedule of noncash investing and
financing activities:
Securitizations of mortgage loans $6,476
Real estate acquired through foreclosure 1,959 $1,497
Financed sales of foreclosed real estate 669 2,041
Issuance of treasury stock as compensation 47 40
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
PALFED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accounting and reporting policies of PALFED, Inc. and Subsidiaries (the
"Company") conform to generally accepted accounting principles and to general
practice within the thrift industry. They reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
consolidated financial position and results of operations for the interim
periods presented. These adjustments are of a normal and recurring nature.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements, the related notes, and the report of
independent accountants included in the Company's Annual Report to
Shareholders for the year ended December 31, 1995. The year end consolidated
statement of financial condition data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the three
months ended March 31, 1996 are not necessarily indicative of the results to
be expected for a full year.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The adoption of SFAS No. 121
did not have a significant effect on the financial condition or results of
operations of the Company.
Also effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 establishes optional alternative
accounting methods for stock-based compensation as well as new required
disclosures. The Company has elected to account for stock-based compensation
under previously existing accounting guidance and as such, the adoption of
SFAS No. 123 will provide enhanced year end disclosures and does not affect the
financial condition or results of operations of the Company.
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
2. EARNINGS PER COMMON SHARE
The following tables illustrate the calculation of earnings per share for the
three months ended March 31:
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Quarters Ended
March 31,
--------------
1996 1995
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Income before provision for income taxes $ 0.33 $ 0.28
Provision for income taxes (0.12) (0.09)
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Net income $ 0.21 $ 0.19
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6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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(UNAUDITED)
CALCULATION OF COMMON AND COMMON EQUIVALENT SHARES:
Quarters Ended
March 31,
----------------
(in thousands)
1996
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Weighted average shares outstanding 5,122
Stock options outstanding 216
Shares assumed repurchased (131) 85
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Average common and common equivalent shares 5,207
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------
1995
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Weighted average shares outstanding 5,084
Stock options outstanding 185
Shares assumed repurchased (153) 32
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Average common and common equivalent shares 5,116
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3. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are summarized as follows:
March 31, 1996 December 31, 1995
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Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(in thousands)
AVAILABLE-FOR-SALE
Investment securities $ 24,199 $ 23,909 $ 31,230 $ 31,060
Mortgage-backed securities 8,811 8,870 24,383 24,490
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$ 33,010 $ 32,779 $ 55,613 $ 55,550
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--------- -------- --------- --------
HELD-TO-MATURITY
Investment securities $ 6,949 $ 6,963 $ 8,940 $ 8,879
Mortgage-backed securities 51,712 52,078 53,353 54,691
--------- -------- --------- --------
$ 58,661 $ 59,041 $ 62,293 $ 63,570
--------- -------- --------- --------
--------- -------- --------- --------
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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(UNAUDITED)
4. LOANS RECEIVABLE
Loans receivable are summarized as follows at the indicated dates:
March 31 December 31
1996 1995
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(in thousands)
Loan collateralized by real estate:
Permanent residential mortgage $217,008 $207,671
Construction 44,082 38,114
Second mortgage 53,356 52,313
Commercial 125,238 128,051
Loans collateralized by other property:
Consumer 38,776 39,585
Commercial 16,023 16,080
Loans collateralized by savings accounts 4,997 4,769
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499,480 486,583
Less:
Loans in process (14,276) (13,141)
Unamortized yield adjustments (891) (744)
Allowance for estimated losses (8,194) (8,417)
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$476,119 $464,281
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Changes in the allowance for estimated loan losses are summarized as follows for
the three months ended March 31:
1996 1995
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(in thousands)
Balance, beginning of period $ 8,417 $ 8,213
Provisions 339 238
Charge-offs (733) (266)
Recoveries 172 71
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Balance, end of period $ 8,195 $ 8,256
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At March 31, 1996, the recorded investment in loans for which impairment has
been recognized totalled approximately $10.4 million, of which $5.6 million
related to loans with a corresponding valuation allowance of $0.8 million. The
impaired loans at March 31, 1996, 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, 1996, the average recorded investment
in impaired loans was approximately $11.9 million and the interest income
recognized on impaired loans was $232,000. Impaired loans are summarized as
follows at March 31:
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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(UNAUDITED)
1996 1995
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(in thousands)
Construction loans $ 436 $ 1,303
Commercial real estate loans 9,230 14,684
Commercial loans 250
Residential mortgage 781 509
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$ 10,447 $ 16,746
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5. 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
$2.5 million at March 31, 1996.
Concurrent with the 1990 sale of the Woodside Plantation Country Club
("WPCC"), the Company entered into an agreement with WPCC to purchase club
memberships through December 31, 2000. The amount of the remaining commitment
is directly related to the number of future lots sales in Woodside
Plantation, subject to an annual limitation, and depends upon whether full or
partial memberships are purchased. The maximum liability over the remaining
term of the agreement, assuming lot sales reach the annual limitation and
partial memberships are purchased, is approximately $1.5 million. In 1993,
the Company sold the remaining lots and certain other real estate at Woodside
Plantation. The purchaser assumed the Company's obligations under this
agreement. The Company remains contingently liable under this agreement.
The deposits of Palmetto Federal are insured under the Savings Association
Insurance Fund ("SAIF") of the FDIC. In 1995, members of the Banking
Committees of the U.S. House of Representatives and the Senate agreed on a
proposal to recapitalize the SAIF. Under the proposal, which was part of the
budget bill, all SAIF-member institutions will pay a special assessment to
the SAIF of approximately 80 basis points (80 cents per $100 of deposits),
the amount that would enable the SAIF to attain its designated reserve ratio
of 1.25%. The special assessment would be based on the assessable deposits
held as of March 31, 1995. If an 80 basis point assessment were levied on the
assessable deposits of the Bank held at March 31, 1995, the special
assessment of Palmetto Federal would total $3.9 million. The Company cannot
predict either the final details of any legislation or the effective dates
thereof.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------------------------------------------------
(unaudited)
The Company has entered into an agreement to purchase a branch building
location in Lexington, South Carolina, and has applied for regulatory
approval to establish a branch at this location.
6. STOCK OPTIONS AND STOCK GRANTS
On February 15, 1996, PALFED granted awards for 106,345 restricted shares of
common stock to certain officers under the Company's Restricted Stock
Incentive Award Plan. The restricted shares were granted at $12.75, the
market price on the date of grant. Approximately 6,345 restricted shares relate
to bonuses based on 1995 performance and will vest one year from the grant date.
The remaining 100,000 restricted shares relate to grants that will vest over the
next five to ten years depending on the individual employee. These awards are
contingent upon and subject to each employee's continued employment and
annual qualification for incentive bonuses, which are granted at the
discretion of the Personnel and Compensation Committee of the Board of
Directors and are contingent upon both Company and employee performance.
7. 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
1996 1995
-------- -----------
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate loans: $ 26,922 $ 13,460
-------- --------
-------- --------
Unused lines of credit: $ 33,390 $ 31,639
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-------- --------
Standby letters of credit $ 982 $ 713
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10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's net earnings for the three months ended March 31, 1996 were
$1.1 million or $0.21 per common share compared to net earnings of $965,000
or $0.19 per common share for the three months ended March 31, 1995. The
increase of $127,000 is primarily attributable to an increase of $461,000 in
gains on sale of investment and mortgage-backed securities and loans and a
decrease of $216,000 in losses from real estate activities. These factors
were offset by an increase of $405,000 in noninterest expenses and an
increase in the effective income tax rate to 35.7%.
On March 4, 1996, Palmetto Federal opened its nineteenth branch on Meeting
Street in Charleston, South Carolina. This branch is the Bank's second in the
Charleston area and joins the West Ashley branch which opened in March 1995.
The Company has entered into an agreement to purchase a branch building
location in Lexington, South Carolina, and has applied for regulatory
approval to establish a branch at this location.
COMPARISON OF 1996 AND 1995 OPERATING RESULTS
NET INTEREST INCOME
During the quarter ended March 31, 1996, net interest income increased from
$4.9 million in 1995 to $5.1 million in 1996. Total interest income in the
first quarter of 1996 was virtually unchanged from the first quarter of 1995
due to an increase in the yield on average interest-earning assets from 7.98%
in 1995 to 8.38% in 1996, offset by a decrease of 5.0% in the level of
average interest-earning assets caused by increased sales of investment and
mortgage-backed securities. Total interest expense decreased due to a
decrease of 38.0% in average FHLB advances, which the Bank repaid with
proceeds from new lower costing deposits and sales of investment and
mortgage-backed securities.
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
Interest Interest
Income/ Yield/ Income/ Yield/
1996 Expense Rate 1995 Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
Average Interest-Earning:
Assets:
Interest bearing deposits $ 4,419 $ 75 5.25% $ 4,430 $ 75 6.76%
Loans receivable 467,892 10,390 8.88 452,614 9,749 8.62
Mortgage-backed securities 68,439 1,158 6.77 106,196 1,726 6.50
Total investments 36,060 496 5.50 44,556 602 5.41
FHLB stock 10,884 196 7.21 10,884 195 7.15
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Total $ 587,694 $ 12,315 8.38% $ 618,680 $ 12,347 7.98%
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Liabilities:
Retail savings deposits $ 31,230 $ 199 2.56% $ 32,278 $ 215 2.70%
Retail time deposits 365,751 5,398 5.94 365,838 4,701 5.21
Demand deposits 99,316 405 1.64 85,469 432 2.05
FHLB advances 76,950 1,260 6.59 124,025 2,063 6.74
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Total $ 573,247 $ 7,262 5.10% $ 607,610 $ 7,411 4.95%
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Net interest income $ 5,053 $ 4,936
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Net interest margin 3.28% 3.03%
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- -----------------------------------------------------------------------------------------------------------------------------
Net yield 3.44% 3.19%
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The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Palmetto Federal's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) change in
volume (change in volume multiplied by old rate); (2) change in rates (change in
rate multiplied by old volume); (3) change in rate-volume (change in rate
multiplied by the change in volume).
March 1996 versus March 1995
Increase (Decrease)
- ----------------------------------------------------------------------
Rate/
Volume Rate Volume Total
- ----------------------------------------------------------------------
(in thousands)
Changes in:
Interest income:
Loans receivable $ 351 $ 279 $ 11 $ 641
Mortgage-backed securities (615) 72 (25) (568)
Investments (117) 15 (3) (105)
- ----------------------------------------------------------------------
Total interest income (381) 366 (17) (32)
- ----------------------------------------------------------------------
Interest expense:
Deposits 128 512 14 654
Other borrowed money (774) (47) 18 (803)
- ----------------------------------------------------------------------
Total interest expense (646) 465 32 (149)
- ----------------------------------------------------------------------
Net interest income (expense) $ 265 $ (99) $ (49) $ 117
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- ----------------------------------------------------------------------
12
PROVISION FOR ESTIMATED LOSSES ON LOANS
The provision for estimated losses on loans was $339,000 in 1996 compared to
$238,000 in 1995. Net charge-offs for the 1996 quarter were $561,000 compared to
$195,000 for the 1995 quarter. The increase in charge-offs resulted primarily
from one commercial real estate loan which was foreclosed during the quarter.
The allowance of $300,000 related to the loan was charged off. The resulting
allowance for estimated losses on loans at March 31, 1996 and 1995 was $8.2
million and $8.3 million, respectively. See Nonperforming Assets and
Restructured Loans.
NONINTEREST INCOME
Noninterest income increased by $628,000 or 69.5% from $903,000 for the 1995
quarter to $1.5 million for the quarter ended March 31, 1996. The increase was
primarily attributable to an increase of $461,000 in gain on sale of investment
and mortgage-backed securities, a decrease of $216,000 in the loss from real
estate operations and an increase of $77,000 in financial services fees,
partially offset by a decrease of $83,000 in checking transaction fees and a
decrease of $53,000 in other income.
The increase in gain on sale of investment and mortgage-backed securities and
loans resulted from: the sale of a nonperforming commercial real estate loan
resulting in a gain of $191,000; a $150,000 gain from the sale of Federal
National Mortgage Association ("FNMA") stock; and a $67,000 gain on mortgage
loan sales resulting from the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights",
initially adopted October 1, 1995.
The 58.4% decline in loss from real estate operations resulted primarily from a
decrease of $150,000 in net losses on sales of foreclosed real estate. The
reduction in losses resulted from a decline in sales of foreclosed real estate
from $3.2 million in the 1995 quarter to $1.0 million in the 1996 quarter.
Additionally, expenses related to the upkeep and sale of foreclosed real estate
declined $95,000 or 36.7% due to a decrease of $33,000 in sales commissions
because of reduced sales. Also, the 1995 quarter included approximately $41,000
in expenses related to an auction of foreclosed property in Columbia, South
Carolina.
The 48.7% increase in financial services fees resulted primarily from
increased securities brokerage activity over the 1995 level. Sales activity
for the quarter ended March 31, 1996 was $6.4 million compared to $5.5
million during the 1995 quarter. Management believes the higher sales
activity was caused in part by the continued strength in the stock market.
Additionally, the Company's income from the insurance company who provides
credit life insurance and annuities increased $35,000 over the comparable
quarters.
13
Management believes the 12.1% decrease in checking transaction fees resulted
from customers managing their accounts so as to avoid service charges combined
with the closing of certain low balance checking accounts which typically
generate higher fee income. The number of checking accounts rose 1%, net, to
approximately 37,000 during the first quarter of 1996.
NONINTEREST EXPENSES
Noninterest expenses were $4.5 million and $4.1 million for the quarters ended
March 31, 1996 and 1995, respectively. Compensation and employee benefits
expense was $2.5 million for the 1996 quarter compared to $2.2 million for the
1995 quarter. Occupancy and equipment expense increased by 17.1% from $643,000
in 1995 to $753,000 in 1996 and advertising and public relations expense
increased by 15.1% from $172,000 in 1995 to $198,000 in 1996.
The primary components of compensation and employee benefits for the three
months ended March 31 follow:
1996 1995
------- -------
(in thousands)
Salaries and commissions $ 2,090 $ 1,894
Incentive programs 254 128
Medical and retirement expenses 213 217
Payroll and other taxes 207 189
Other expenses 23 24
------- -------
2,787 2,452
Capitalized costs of loan originations (263) (226)
------- -------
Compensation and employee benefits $ 2,524 $ 2,226
------- -------
------- -------
The 10.4% increase in salaries and commissions resulted from average merit wage
increases of 4.5% and increased commissions paid to mortgage loan originators
and financial services sales persons resulting from increased loan originations
and financial products sales, respectively. The increase of 98.4% in incentive
program costs results from a higher accrual rate based on a certain level of
anticipated earnings. The increase in loan originations during the 1996 quarter
resulted in increased capitalized costs of origi-nations which partially offset
the increased compensation and benefits.
The 17.1% increase in occupancy and equipment expense resulted from an increase
of $35,000 related to costs of new branches, an increase of $29,000 in telephone
expenses and an increase of $27,000 in postage costs.
The 15.1% increase in advertising and public relations expense resulted from an
increase of $34,000 in general advertising costs as the Company expands the
campaign to position Palmetto Federal as "THE BANK OF CHOICE" into areas served
by new branches.
14
LENDING ACTIVITIES
Loan originations increased significantly during the 1996 quarter. In the first
quarter of 1996, the Bank originated loans of $54.4 million, compared to $29.3
million in the comparable 1995 period.
Residential mortgage loan originations were $22.4 million in 1996 compared to
$10.5 million in 1995, an increase of $11.9 million. Approximately
91.1% of the 1996 originations were fixed rate loans as customers took advantage
of the decline in market interest rates which occurred during the quarter.
Refinancings of Palmetto Federal loans amounted to $4.7 million and $1.5 million
during the 1996 and 1995 quarters, respectively.
Second mortgage loan originations increased from $583,000 during the 1995
quarter to $5.1 million during 1996, primarily as a result of a promotion
featuring the CashLine II product at a low introductory rate and at loan-to-
value ratios up to 90%. Construction loan originations increased by $5.0 million
or 53.3% to $14.3 million during the 1996 quarter. Commercial real estate loans
increased by $1.8 million or 70.9% to $4.4 million during the 1996 quarter.
Consumer and commercial originations increased 29.7% to $8.2 million during the
1996 quarter.
Palmetto Federal's expansion into new markets provided strong growth in mortgage
and construction loan originations to supplement the growth in the traditional
market areas of the Central Savannah River Area ("CSRA") and the Lowcountry.
The Lexington and Charleston offices originated $6.9 million in loans in 1996
compared to $3.9 million in 1995. Additionally, the CSRA and Lowcountry
increased mortgage and construction loan originations by 78.4% and 120.8%,
respectively, during the 1996 quarter.
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, 1996, the total carrying value of these components decreased from $13.9
million to $13.3 million, primarily due to loan payments resulting from lot
sales.
The Company has completed discussions with Woodside Plantation Country Club to
modify its loans from amortizing to interest-only payments for one year,
effective April 1, 1996.
15
ASSET/LIABILITY MANAGEMENT
During the quarter ended March 31, 1996, management used funds from increased
retail deposits and sales of lower yielding investment and mortgage-backed
securities to reduce Federal Home Loan Bank ("FHLB") advances by $30.1 million.
Due to the decline in market interest rates during the quarter ended March 31,
1996, Palmetto Federal extended the weighted average maturity of these advances
from 6 months at December 31, 1995 to 9 months at March 31, 1996. Management
believes these actions have improved the net interest margin while improving the
Bank's interest rate risk profile. Palmetto Federal has $15.0 million of
advances maturing in the next three months with a weighted average interest rate
of 8.18%. These maturities will be repaid to the extent possible with funds
provided by operations, principal payments on loans and securities and deposit
growth. Any remaining maturities will be refinanced by new FHLB advances.
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets (nonaccrual loans and foreclosed real estate ("REO")) and
restructured loans, net of specific allowances, decreased from $27.4 million or
4.2% of total assets at December 31, 1995 to $25.8 million or 4.1% of total
assets at March 31, 1996. The table below sets forth the amounts and categories
of Palmetto Federal's nonaccrual and restructured loans and REO at the dates
indicated.
March 31 December 31 March 31
1996 1995 1995
-------- ----------- --------
(dollars in thousands)
Nonaccrual loans $ 6,249 $ 7,856 $ 12,226
Foreclosed real estate 9,112 8,015 6,888
Restructured loans 10,472 11,553 15,214
-------- ----------- --------
$ 25,833 $ 27,424 $ 34,328
-------- ----------- --------
-------- ----------- --------
General loan loss allowance
as a percentage of the total 27.8% 26.3% 20.2%
------ ------ ------
------ ------ ------
Total as a percentage of loans
receivable, net 5.4% 5.9% 7.6%
------ ------ ------
------ ------ ------
Total as a percentage of total assets 4.1% 4.2% 5.2%
------ ------ ------
------ ------ ------
16
Changes in the components of nonperforming assets and restructured loans during
the three months ended March 31, 1996 were as follows:
Nonaccrual REO Restructured Total
Loans Loans
---------- --------- ---------- ---------
(in thousands)
December 31, 1995 $ 7,856 $ 8,015 $ 11,553 $27,424
Performing loans which
became nonperforming 1,947 451 2,398
Upgrades due to performance (656) (163) (819)
Sales (1,419) (1,015) (2,434)
Net principal collections (368) (244) (612)
Restructured loans which
became REO 120 (120)
Restructured loans which
became nonaccrual 1,007 (1,007)
Nonaccrual loans which
were restructured (577) 577
Net change in valuation allowances (124) (124)
Nonaccrual loans which became REO (1,541) 1,541 0
------- ------- -------- -------
March 31, 1996 $ 6,249 $ 9,112 $ 10,472 $25,833
------- ------- -------- -------
------- ------- -------- -------
The $1.9 million of new nonaccrual loans consists of several loans none of which
exceeds $370,000. Restructured loans which became nonaccrual consist primarily
of a $1.0 million commercial loan to a grading and asphalt company in Aiken,
South Carolina. This loan is collateralized by 97 acres and an asphalt plant and
other land totalling 101.26 acres. During the quarter, Palmetto Federal sold a
$1.4 million nonperforming loan for a gain of approximately $180,000. The loan
was collateralized by a 100 acre commercial site in Macon, Georgia.
The $1.0 million of REO sold consisted of several properties, none of which had
a carrying value greater than $176,000. The $1.5 million of nonaccrual loans
which became REO consisted primarily of a commercial real estate loan with a
carrying value of $1.2 million collateralized by a 26,000 square foot office
building within a commercial office park in Aiken, South Carolina.
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
$9.4 million at March 31, 1996 and December 31, 1995, respectively.
The Bank's total criticized assets include its nonperforming assets and
restructured loans of $25.8 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:
17
March 31 December 31 March 31
1996 1995 1995
-------- ----------- --------
(in thousands)
Special mention $14,437 $ 9,867 $ 9,324
Substandard 24,665 25,450 28,396
Doubtful 116 0 0
Loss 1,266 1,462 3,287
------- ------- -------
$40,484 $36,779 $41,007
------- ------- -------
------- ------- -------
The increase in special mention assets during 1996 resulted from the inclusion
of $4.5 million of WPCC loans due to the change in membership sales volume from
fixed to variable and the restructuring of the loans.
LIQUIDITY
Palmetto Federal's principal sources of funds are deposits, loan repayments,
proceeds from sales and principal payments of investment and mortgage-backed
securities and loans, FHLB advances, other borrowings, and retained earnings.
The liquidity of Palmetto Federal's operations is measured by the ratio of cash
and short-term investments as defined by the Office of Thrift Supervision
("OTS") regulations to the sum of savings and borrowings payable in one year,
less loans on savings. The Bank's average liquidity level for March 1996 of 7.4%
was in excess of the required amount of 5.0%.
REGULATORY MATTERS
As of March 31, 1996 Palmetto Federal's regulatory capital was 7.2% tangible
capital, 7.2% core capital and 11.6% risk-based capital, exceeding both the
regulatory minimum levels and the well capitalized standards. On July 1, 1996,
the deduction to regulatory capital for the investment in nonincludable
subsidiaries increases from 60% to 100%. Management expects Palmetto Federal
will continue to be well capitalized after this change.
RECENT ACCOUNTING AND REPORTING CHANGES
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. The
adoption of SFAS No. 121 did not have a significant effect on the financial
condition or results of operations of the Company.
Also effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 establishes optional alternative
accounting methods for stock-based compensation as well as new required
disclosures. The Company has elected to account for stock-based compensation
under previously existing accounting guidance and as such, the adoption of
SFAS No. 123 will provide enhanced year end disclosures and does not affect the
financial condition or results of operations of the Company.
18
Part II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1996 PALFED Annual Meeting of Shareholders held on April 23, 1996,
the Company's shareholders elected R. Bruce McBratney, Albert H. Peters,
Jr. and Ambrose L. Schwallie as directors of the Company for three year
terms 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. Of the 5,222,142 shares entitled to vote, there were 4,529,613
shares present in person or in proxy. The shareholders approved the
director nominees with the following votes:
Number of Votes
----------------------------
For Withheld
--------- --------
R. Bruce McBratney 4,483,959 45,654
Albert H. Peters, Jr. 4,482,248 47,365
Ambrose L. Schwallie 4,474,910 54,703
Additionally, the shareholders approved the proposals for amendments to the
1993 Stock Option Plan (Proposal 2), for amendments to the 1993 Restricted
Stock Incentive Award Plan (Proposal 3) and for amendments to the Amended
and Restated Directors Stock Plan (Proposal 4), by the following vote
totals:
Number of Votes
---------------------------------------------
For Withheld Against
--------- -------- -------
Proposal 2 3,888,070 598,336 43,207
Proposal 3 3,718,447 767,072 44,094
Proposal 4 3,764,057 726,866 38,690
Votes withheld include abstentions and broker nonvotes.
ITEM 5. OTHER INFORMATION
(a) On February 15, 1996, PALFED granted awards for 106,345 restricted
shares of common stock to certain officers under the Company's
Restricted Stock Incentive Award Plan. Approximately 6,345 restricted
shares relate to bonuses based on 1995 performance and will vest one
year from the grant date. The remaining 100,000 restricted shares
relate to grants that will vest over the next five to ten years
depending on the individual employee. These awards are contingent upon
and subject to each employee's continued employment and annual
qualification for incentive bonuses, which are granted at the
discretion of the Personnel and Compensation Committee of the Board of
Directors and are contingent upon both Company and employee
performance.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.10 Form of Restricted Stock Award Agreement dated as of
February 15, 1996 between PALFED, Inc. and employees of the
Company.
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, 1996.
20
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 14, 1996 /s/ John C. Troutman
--------------- ------------------------
John C. Troutman
President and Chief Executive
Officer
Date: May 14, 1996 /s/ Darrell R. Rains
--------------- ------------------------
Darrell R. Rains
Executive Vice President
and Chief Financial Officer
Date: May 14, 1996 /s/ Michael B. Smith
--------------- ------------------------
Michael B. Smith
Senior Vice President
and Controller